Biogen Bout
The Bull Argument
By
Paul Larson (TMF Parlay)
I'm bullish on biotechnology, as well as Biogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGEN)") else Response.Write("(Nasdaq: BGEN)") end if %>, one of the industry's blue chips. Biotechnology in general and Biogen in particular have added an immeasurable amount of value for their customers by extending and improving the quality of life around the globe. Shareholders that aided in making this happen have been rewarded richly in return.
Biogen was one of the first ever biotechnology companies when it was founded in 1978, and it came public way back in 1983. As such, the company's management and scientists are some of the most experienced in the business. Back in the '80s, the company was largely a research specialist that left the manufacture and distribution of its discoveries to the large pharmaceutical companies. But, in 1996, the company started a major transformation of itself.
When the company's Multiple Sclerosis treatment AVONEX was approved by the Food and Drug Administration (FDA), Biogen took care of almost all of the manufacturing, marketing, and distribution of the drug itself. AVONEX has been a runaway hit, since the drug was a marked improvement over what few MS treatments there were before. Between the company's royalties on some of its older discoveries and sales of AVONEX, the effect on Biogen's income statement has been unmistakably positive.
Biogen (millions, except EPS)
Year Revenue Net Income EPS
1995 $135 $6 $0.04
1996 $260 $41 $0.28
1997 $412 $89 $0.59
1998 $558 $139 $0.90
1999 $794 $221 $1.40
I don't know about you, but I'm impressed by the above figures. This year, the trend has continued. If the company meets its fourth-quarter estimates, it will have booked roughly $950 million in revenue and $250 million in profits for 2000.
Biogen has obviously been an extremely consistent grower, and it has also generated a large amount of free cash flow. Beyond racking up an impressive $659 million of cash on its balance sheet, Biogen has also been using cash flow to repurchase shares and expand its manufacturing and research & development capabilities. While many of the other biotechnology firms are burning cash and shareholder value, Biogen has been creating boatloads of value for itself. I suspect this will continue.
Of course, not everyone agrees with this prognosis. One of the main knocks against Biogen, which I'm sure the bearish argument will point out in excruciating detail, is that the company's development pipeline is looking a little lean after one of its more promising drug candidates, ANTOVA, was halted in preclinical trials. Moreover, Biogen's largest cash cow, AVONEX, goes off-patent in 2003.
Biogen is combating this problem in two ways. First, it is significantly increasing its spending on internal research and development. In the third quarter of 1999, the company spent some $59.0 million on R&D of new therapies. In this year's third quarter, that figure was up to $94.5 million, or about a 60% jump. On a percentage basis, R&D spending has gone from 36.1% of sales to an impressive 48.9%. Clearly, Biogen is putting a significantly larger amount of resources toward securing and fattening its drug pipeline.
Second, Biogen has been an active dealmaker this past year, creating several joint ventures and licensing agreements for potential drugs. Biogen has joined with Elan <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ELN)") else Response.Write("(NYSE: ELN)") end if %> in developing a next-generation MS treatment, Antegren; with private Dutch firm NsGene in developing several neurotrophic proteins; and also has a broad, multi-product development agreement with Targeted Genetics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: TGEN)") else Response.Write("(Nasdaq: TGEN)") end if %>. These deals should go a long way toward beefing up Biogen's pipeline and, therefore, its future cash flows.
AVONEX still has plenty of legs left, too. The company has almost a full three years to continue harvesting significant profits from this drug, and further growth appears in the cards as the drug is approved for more and more types of MS. Sales of AVONEX were up 18% year-over-year in the third quarter, and continued growth in the high teens looks like a lay-up for the next several years.
In addition, just because a drug goes off-patent does not mean that its sales go to zero. While the contribution from AVONEX will certainly fall off when the fateful day comes in 2003, it will still contribute to Biogen's top line, along with the numerous other drugs in the company's pipeline.
Biogen started out as a research company and has had success in the biotechnology industry that only a select few can hold a candle to. Between Biogen's almost $700 million war chest and the cash flow being generated by AVONEX still accelerating, Biogen has more than enough resources to reinvest toward finding new drugs. Perhaps more importantly, the company's scientists are some of the most talented and experienced in the industry. While nothing is for sure, especially in the biotechnology industry, I'm betting that Biogen will continue to create enormous shareholder value for many years to come.
Bear Argument »
