Wednesday, September 27, 2006

Biogen-Idec(BIIB) The bar is set low for Tysabri

Tysabri was first launched in 2005 as a revolutionary treatment for Multiple Sclerosis, an autoimmune disease affecting the central nervous system. Tysabri, a biologic co-developed with Elan (ELN), showed great success in clinical trials. It was really a miracle drug that helped many patients live pain free lives for the first time.

Then there were a few cases of complications and deaths from Tysabri. Although, these cases were rare and occurred in patients with complicated cases often on many different therapies, Biogen-Idec voluntarily took it off of the market to access its safety. A year later, Tysabri is back on the market and many feel that it's image has been tarnished.

I beg to differ. Tysabri meets my blockbuster criteria ( see my other article where I explain my success criteria for biotech companies link). It is truly a novel medication in a disease that has been poorly treated to date and has a huge market size. One of it's negative attributes is that it is a biologic and must be injected in a physician's office. This is actually not a bad trait since it helps minimize mid-dosing problems. There are a few successful injectables on the market such as Enbrel).

I also think the delay has had operational and logistical benefits for Biogen-Idec. The company has had more time to optimize its launch strategy and will be simultaneously launching in Europe. Also, it is not a cheap drug. At about $20K per year it could quickly add to the bottom line.

Yes physicians and patients as well as Biogen-idec employees will be very careful to look for signs of complications, but the positive aspects of this drug is too good and should help overcome these challenges. Another positive is a lack of hype for this drug. I don't believe the upside has been captured here. This very important because most companies with blockbusters have so much anticipation built into them that any slip up will cause the stock to tank.

I expect a modest upside surprise in Tysabri in Q3 but definitely expect an increase in estimates in Q4. Today BIIB closed at $44.6 and trading at about 18.5 times 2007 earnings a very low multiple for this type of stock (link to chart). 2007 is only a few months away and historically these stocks trade at about 30-35X current year. At 14.9 billion in market cap it is a very cheap biotech stock. Biogen-idec has a lot of cash and has been investing heavily to boost it's pipeline. I think BIIB should be accumulated at these levels with intentions of selling in the 60's in 2007. The price increase will be supported by increased earnings as well as increased in PE ratios paid for this company. The chart will not give a strong buy signal until the stock crosses above it's current 200 moving average of about $45. But I am a buyer at any level below here.