Biogen Idec: Will it Recover?

Biogen Idec has a remarkably low PE (price to earnings) ratio of 15.9 (per Nasdaq BIIB summary page, which uses non-GAAP numbers) for a biotechnology stock. The reason is simple: it was announced on July 31, 2008, that two patients taking Tysabri for Multiple Sclerosis (MS) had developed PML (progressive multifocal leukoencephalopathy). In 2005 Tysabri had been taken off the market after it was associated with 3 previous cases of PML. It was allowed back on the market in 2006 with a warning about PML in its label.

Tysabri accounted for $147 million out of $993 million total Q2 2008 revenues for Biogen Idec [See my summary of Biogen Idec Q2 2008 analyst conference]. In addition, it had the fastest growing revenues, up 210% from year earlier.

In a market where there are thousands of undervalued stocks to choose from, it is easy to understand a rapid exit from a stock based on any bad news, especially if the extent of the damage is unknown. But did that leave the stock fairly priced?

What is the downside from the new PML cases? First, more PML cases were expected when Tysabri was re-introducted to the market. No PML at all would have been the surprise. There is a warning about PML on the Tysabri label, and a monitoring program in place to catch PML early if it occurs. Which is exactly what happened. However, if there are a lot more PML cases, this still could cause the FDA to take the drug off the market.

Why has the FDA even allowed Tysabri to continue? Because it is remarkably effective in treating MS compared to other available treatments. Many patients and doctors feel this increased effectiveness makes it worth the risk of PML.

So far, the risk of PML, while undeniable, is minimal. There are currently about 30,000 Tysabri patients, and 2 got PML, and both have been improving since they were diagnosed (PML can cause death).

Biogen continues to work with the FDA to make the drug label clear. Without a doubt some doctors and patients will decide the benefits are not worth the known risks. However, that is against a backdrop of rapid switching to Tysabri from less effective therapies.

With Rituxan for NHL (non-Hodgkin Lymphoma) and Avonex for MS both producing more revenue for Biogen than Tysabri does, and with the stock price so low, I think the risk for investors is not particularly great. Avonex revenue grew 14% y/y, and Rituxan grew 21%. While the removal of Tysabri from the market cannot be entirely discounted, that is a risk that has to be weighed against the likelihood that Tysabri will remain on the market, and that Biogen's revenues and profits will continue to grow rapidly with or without Tysabri.

Take into account BIIB's pipeline of drugs in clinical trials, and you have a company that is likely to be much more valuable a few years from now than it is today.

I own Biogen Idec stock and, as a long-term investor, see no reason to sell it. Like all biotech stocks, there is risk involved in this investment.

So keep diversified!