Friday, September 14, 2007

Choosing a Biotech Stock 3: Biogen Idec

In the first installment of this series I explained the situation that led me to decide to add another biotechnology stock to my portfolio. In the second installment I reviewed Gilead since it is a stock that I think is worth buying. Today I am going to analyse Biogen Idec (BIIB). Much of the information for the analysis I have already accumulated in my analyst conference summaries (See my BIIB page). Both Gilead and Biogen are in the Nasdaq 100.

Biogen is now a well-established company with healthy revenues ($773 in Q2 2007, up 8% sequentially and up 17% from year-earlier) and net income (GAAP $186 million, up 41% sequentially and up from a loss of $171 million year-earlier). Avonex for multiple sclerosis revenues were $462 million. Another blockbuster drug is Rituxan, which is sold by Genentech. Its revenues from that venture were $230 million in the quarter. Tysabri is a newer drug with $48 million in revenues in the quarter. Fumaderm showed its first revenues at $5 million, and BIIB garnered another $23 million from royalties.

Research and development costs are significant at $218 million as numerous clinical studies are underway to increase the scope of the Tysabri label. A setback was Europe disallowing Tysabri for Crone's Disease, which Biogen plans to appeal.

So aside from possible future growth in Avonex, Rituxan, and Tysabri sales, and its pipeline of possible new drugs, how does today's price look? Biogen Idec stock ended today at $65.42; the company has a market capitalization of $18.75 billion. The 52 week low for the stock is $42.51, so anyone who bought at that price should be pretty happy. If I buy at today's price, how happy might I be 52 weeks from now?

Divide Q2 earnings times four into market capitalization and you get a current P/E ratio of 25, which is pretty cheap for a rapidly growing company. You can use non-GAAP earnings to make the ratio look better, but I don't like to do that unless there is a very compelling reason. The company's guidance is to non-GAAP EPS for all 2007 of $2.65 per share. Use that and P/E is 24.7

Which is not just reasonable. It is a steal, so long as you are thinking long term. So what is happening here? Earnings are growing faster than revenue, which is growing fast. This is often true once a biotech company has sales of a blockbuster well underway. Earlier in the curve research is the main expense. If a company is lucky enough to get a drug approved, at first marketing eats up most of the profits. Also usually companies try for a narrow scope for initial FDA approval. If that is accomplished they can often expand the scope of the label, but that takes more clinical trials and so more R&D dollars.

And what about the Biogen Idec pipeline? Wow, they have a very strong pipeline (See BIIB pipeline page). Lots of Phase I and II stuff. Cancer drugs, neurology drugs, immune system disorders, and an area where they have no present drugs, cardio. While a significant portion of drugs fail to get FDA approval, Biogen has a good track record. It looks likely that something or another will succeed from their present pipeline.

So in the 2008 to 2010 period the continued revenue growth from currently approved indications plus likely expansion of the Tysabri label should certainly justify investing in BIIB at today's price.

Downside risks are the usual for drug companies at this stage: macroeconomic; decisions by governments or insurers not to pay; and unexpected side effects that scare away patients or force the drug off the market. Plus competition from new or existing drugs made by other companies. Not to be discounted, but I see no clear danger on the horizon. That is why we diversify portfolios, right? No matter how good your analysis is, you can be wrong on a given stock because of unexpected future events.

So I like both Gilead and Biogen Idec. The rule for my portfolio is I can only buy one right now. Which do I buy (and this exercise is not yet over; I have more companies to look at)?

Using Q2 to run a P/E ratio, Gilead is the cheaper stock (P/E = 22) than Biogen's (P/E = 25), but not by much. Biogen has a more diverse pipeline, and its drugs are for more diverse indications. But Gilead's year-over-year revenue growth rate is much higher at 52% than BIIB's at 17%.

I think Gilead is a riskier bet than Biogen, but not a lot riskier, and it is a lot less risky than two stocks I own, ANSV and DNDN. But because it is both cheaper and growing at a faster rate, I am picking Gilead (GILD), from the two candidates.

Again, this is an exercise for a specific portfolio. It may not be right for your portfolio. Also, I have a lot more looking to do before I make my final decision. I have plenty of other work on my plate right now, so the process could take weeks.

And the decision is for specific stock prices. Even if GILD wins out, I'll be checking the its price, and BIIB's, before I buy. And BIIB will stay on my short list for when I have some more cash for investing.

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