Biogen Idec Too High Too Fast?

Biogen Idec (BIIB) is now off its 52-week high of $226.18 (reached earlier today) but up from a 52 week low of $126.39 (of June 4, 2012). At $218.84 it has risen 73% off the low.

I began following BIIB in the first quarter of 2006, but did not acquire stock until February 2008, when I picked it up at $61.57 per share. In the short run I overpaid, but I picked up more later that year at $46.97. I person with perfect timing could have picked up shares at $40.27 on November 28, 2008. Biogen then  rose to $67.05 by the end of 2010, and looks like it invented an anti-gravity machine this January.

Biogen did so well that it became too large a percentage of my portfolio (according to my portfolio rules) so I sold half of my position on May 16, 2012 for $137.19. Now of course I wish I had violated my portfolio rules and kept the stock longer, but I had other situations where those same rules kept me out of major trouble (they were the main reason I sold most of my Dendreon stake before the price collapsed).

Even though my remaining Biogen stake is well within my portfolio rules I have to ask: is BIIB overpriced? Should I sell it and look for a better value proposition?

There were reasons Biogen was priced where it was in 2008 through 2010, the big one being a disease called PML (progressive multifocal leukoencephalopathy) caused by the JVC virus. Biogen's specialty is multiple sclerosis MS therapies. Its Avonex was the most prescribed MS therapy, but the new wonder drug was supposed to be Tysabri. MS is an autoimmune disease; MS therapies work by selectively suppressing the immune system. Turned out, the JVC virus lurks in the brains of about 1/2 the population, generally doing no harm except when the immune system collapses, when it causes PML, and often results in death.

Tysabri use led to some PML cases, and in a few instances to death. Not knowing what the rate was, nor what treatment could be given for PML, the FDA revoked Tysabri's marketing license. The immediate solution turned out to be to monitor for PML and stop giving Tysabri if there were symptoms. The FDA re-approved Tysabri provided a monitoring program was in place. While Tysabri was so effective that sales ramped back up substantially, naturally there was concern by doctors, patients, and investors that we might see more PML deaths and a permanent ban on Tysabri.

Nevertheless in Q1 2008 Tysabri sales were $115 million, total Biogen revenue was $942 million, and GAAP EPS was $0.54. It being the recession, investors were risk-adverse, and it seemed no amount of good news on Tysabri, revenue, or profit could do much for the stock until late 2010.

So much of the run up in the price was just investors catching up to the new reality: a highly-profitable biotechnology company with a strong pipeline of potential future blockbusters. But in the same way investors lagged reality before 2011, perhaps so many momentum players have jumped on the BIIB bandwagon that the stock has gotten ahead of its fair valuation.

By the beginning of 2013 we had pre-screening for JVC and better treatments for PML, reducing the risk of PML mortality to statistically close to zero. We have substantial Fampyra revenues, though that therapy had also had its issues.

Plegridy (peginterferon beta-1a) for relapsing MS pivotal Phase III data has met all primary and secondary endpoints after 1 year cutoff of a two-year study. Biogen expects to file with FDA and EMA (Europe) by mid-2013

Daclizumab-HYP Phase III data readout expected in 2014. It is also for relapsing forms of MS.

Biogen also filed for approval with FDA for Hemophilia Factor 8 for A and 9 for B, based on significant Phase III trial results.

A number of other therapies are in Phase I, II, or III trials. See the Biogen-Idec product pipeline for more details.

So we can figure that the most likely scenario is that Biogen Idec will see substantial revenue and profit growth over the next few years and new therapies come to market. It is unlikely that everything in the pipeline will get good results and FDA approval, but Biogen has a lot of shots on goal.

You can build spreadsheets (and I have, and sell-side analysts certainly do) guessing at revenue and profits from future therapies based on patient populations, competing therapies, and guesses about pricing. But experienced pharmacology and biotechnology investors know that promising therapies often fail, and unexpected side effects can show up even after FDA approval. Picking winners of competitive races is also more guesswork than science.

So a good hard look at the latest quarter should keep us anchored in reality, and then some P/E ratio points can be added to reflect optimism about profit growth in the next few years; add as many points as you are comfortable with.

Biogen reported on the first quarter of 2013 last Thursday. Revenue of $1.415 billion was up 9.5% from Q1 2012, which is quite good and means a fair P/E ratio should be above the market average. GAAP EPS was $1.79, up 43% y/y; now that should be worth some a P/E ratio well above market. Ballpark it at 30 to 1.

Guidance is for 2013 GAAP EPS of $6.69 to $6.90. Given that non-GAAP guidance is $7.80 to $7.90, let's use $7.00 and multiply by 30. That gives us $210 per share, not much off today's auction price.

So my ballpark estimation is that even at this price BIIB is still a good value. Included in the price are estimated 2013 profits. The pipeline of new drugs revenue and profits won't kick in substantially until 2014. I would expect BIIB to end 2014 in a higher price band, depending on the details of new product ramps.

I am inclined to hold my BIIB and, if I need to sell stock because I spot another opportunity as good as Biogen was in 2008, I could probably find something else to sell. Most likely I will leave BIIB off the leash until it again becomes a risk management problem from being too large a percentage of my portfolio. If I am wrong and it falls in the short run, or becomes a smaller percentage of my portfolio again because something else runs up, I might even buy more.

Keep diversified!

Disclaimer: I own share of BIIB and reserve the right to sell them or buy more at any time, even though I currently have no plans to change my position.

See also:

My Biogen Idec main analyst conferences page.
My BIIB Q1 2013 conference notes
www.biogenidec.com

Biogen Idec (BIIB) Hemophilia Therapies

Biogen Idec is known for its multiple sclerosis therapies Tysabri, Avonex, and Rituxan. It also has an extensive pipeline of potential therapies in immunology, oncology, cardio and hemophilia. Yesterday Biogen (BIIB) held a three hour conference on its hemophilia therapies. Here I'll summarize some of the key points that were made. You can listen to the entire conference from a link at the Biogen Idec Investor Events page.

Hemophilia (alt spelling: haemophilia), the chronic inability of the blood to clot, is a rare, but no extremely rare, disease: under 20,000 people have it in the United States. It is typically caused by a defect in one of two blood clotting proteins: coagulation factor VIII in hemophilia A or factor IX in hemophilia B.

Managing hemophilia usually involves infusing the clotting factor into the blood. This can be done when there is an incident that would cause bleeding, or it can be done on a regular basis as a prophylactic. Over time most U.S. patients have moved towards prophylactic use of either natural or recombinant factors. However, the clotting factors have a lifetime of only a few days in the blood. So for hemophilia A, the most common type, infusions are typically done three times a week or every other day. For hemophilia B, two to three times a week is typical.

A variety of pharmaceutical and biotechnology players have sought to extend the life of coagulation factors in the blood. Biogen appears to be on track to be the first company to deliver such a therapy. The initial development was done by Syntonix, which Biogen acquired in 2007. The long-acting factors were created by fusing a recombinant factor of each type with Fc antibody fragments. The rFactor binds to cells that line the blood vessels, but can be re-released back into circulation without being degraded.

Long Acting rFactor IX for hemophilia B is has started a Phase 3 trial after having been shown to be safe and effective in Phase 2. As always, Phase 3 trials involve far more patients than Phase 2 trials, so issues can arise that are unforeseen. That said, given that other Fc-fusion therapies have been safe and recombinant factors are safe, the prospects are pretty good.

Long Acting rFactor VIII for hemophilia A, the more common type, has completed a Phase 2 trial. While the data has not been released, it is good enough that management is preparing for a Phase 3 trial.

If the Phase III trials are successful, it is likely patients can be treated just once a week or so. That would be a tremendous benefit to patients who must being infused as babies and continue the process for their entire lives. It would likely encourage more patients to use therapy prophylacticly.

Current therapy is rather expensive (see hemophilia financial issues), another reason some patients do not dose regularly. I don't know how Biogen will initially price their version, but costs could be reduced in the long run because of the less frequent dosing needed.

For investors, gaining FDA approval for long-acting hemophilia therapy would be an obvious plus and might help overcome doubts due to possible upcoming MS competition from Novartis's Gilenya (fingolimod).

Keep diversified!

See also:

my Biogen Idec Medical Analyst Conference Call summaries
Biogen Idec Hemophilia site