BIIB : Value in a biotechniology company

Biogen Idec (BIIB) is a biotechnology company with two major products, Avonex (an interferon), which treats multiple sclerosis, and Rituxan (a monoclonal antibody), which treats non-Hodgkin’s lymphoma. Near-term growth is likely to come from the drug Tysabri, another monoclonal antibody meant for treatment of multiple sclerosis. Tysabri was withdrawn from the market after several clinical trial patients developed progressive multifocal leukoencephalopathy (PML), but was later reintroduced into the market when FDA determined that the benefits outweighed the risks. Despite a few additional reports of PML, sales of Tysabri have grown rapidly, and the company has a robust pipeline of potential drugs. During the wave of pharmaceutical-biotech mergers that took place in 2008, BIIB’s stock was driven into the $80s as its acquisition by a major pharmaceutical company was widely anticipated. BIIB plummeted when it’s CEO revealed that there were no buyers willing to bid for Biogen. A major factor for the lack of bids is believed to be the complicated contracts covering its two main products. Both products were co-owned or co-marketed with other major pharmaceutical companies, which means that much of the value will be derived from the pipeline of drugs, which is highly uncertain. However, I believe that the decline has overshot, and based on the cash flow potential of Biogen’s 3 major drugs, even assuming a zero value for the pipeline, the stock is siginificantly underpriced. With analysts estimating an EPS of $3.70-$4.30 for the current year, and minimal 10% growth in profits year over year, BIIB is trading at a conservative PE of 11-12 at a share price $45-46. Furthermore, BIIB is in the drug industry, which tends to perform adequately even in recession. The biotechnology industry in particular is a coveted segment of the drug industry, as FDA has not provided a process for the testing and manufacture of biotechnology drugs, which are significantly more complicated to manufacture than simple chemical drugs. This makes it very likely that even off-patent biotechnology drugs will remain very lucrative, which is a major reason for the recent acquisition of biotech companies by traditional pharmaceuticals.