A Must Have Pharma Stock

Varun is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After a year-long dream run, Biogen Idec (NASDAQ: BIIB) lost 5.25% in the week ended Friday, June 7. The drop would have been greater had the stock not recovered in the last two days of the week. Should investors see the current drop in stock price as an opportunity or a value trap?

2 things that went wrong

Biogen offers drugs for various forms of MS and its latest MS drug, Tecfidera (dimethyl fumarate), was approved by the FDA in March 2013. For a moment there seemed to be nothing that could go wrong with Biogen. However, the stock plunged last week after Eric Schmidt, an analyst from Cowen, pointed out a flaw that the prescription sales data of Tecfidera may have been counted twice for patients who were prescribed a new dose. The fact that the company had voluntarily asked for a delay in approval of Tecfidera by the European Medicine Agency (EMA) dealt another blow that pushed the stock down.

The company’s rationale for the delay is evidently for securing regulatory data protection (RDP) so as to avoid entry of a generic version till 2025 – in absence of RDP, generic versions may appear as early as 2019. Regardless, the delay indicated disagreement between the company and the EMA over the level of protection to be granted to Tecfidera.

The bone of contention for not granting a new active substance status to Tecfidera is Fumaderm, a compounded form of dimethyl fumarate – which is also the active ingredient in Tecfidera. Fumaderm is already approved in Germany as treatment for psoriasis. Whether Tecfidera gets patent protection for six or ten years depends largely on how successful Biogen is in its discussions with the European regulatory body.

Biogen's overall performance

Biogen is a leading player in the MS market. Its other MS drugs have been contributing to the majority of its revenue ­– $1.42 billion for the most recent quarter ended March 30. Avonex (interferon beta-1a) contributed $736 million, Tysabri (natalizumab), $275 million and Rituxan (rituximab), $288 million. This is a significant share in the overall MS market in the U.S., which is estimated to be in the range of $10-15 billion.

The European approval is important for Tecfidera as almost 40% of the demand is expected to come from there. Considering the speed with which Tecfidera has been able to capture the U.S. market, it can be said for sure that it will not leave any stone unturned to protect revenues from Europe. The ray of hope is that Fumaderm and Tecfidera are not identical but “chemical cousins.”

However, if worst comes to worst, even a six-year protection is not a big negative considering the cost advantage of manufacturing Tecfidera. The NF-κB inhibitor dimethyl fumarate is easily available and the manufacturing cost is believed to be pretty cheap. Biogen is getting a hefty premium for being the first to develop the drug for the relapsed multiple sclerosis indication.

Competition

Biogen competes primarily with Novartis’s (NYSE: NVS) Gilenya and Sanofi’s (NYSE: SNY) Aubagio.

Gilenya (Fingolimod) is an immunosuppressive drug and the first once-daily oral pill for reducing attacks of MS and short-term disability. Gilenya took seven years to develop and has been in use for the last two years and generated revenues of $283 million in the second quarter of 2012.

Novartis recently launched an ad campaign targeted at young MS patients. This is seen as the company’s effort to find a new edge in the MS market and take on Biogen’s Tecfidera and Sanofi’s Aubagio. Whereas Gilenya is priced at $60,000 per patient per year, Sanofi’s Aubagio carries a tag of $45,000 and Tecfidera, $54,900.

Sanofi’s Aubagio was approved by the FDA in September 2012, after a long period of drought for the company lasting 20 years during when it did not develop any important drug. The drug was launched in October 2012 and accounted for sales of €7 million ($9.1 million) in the fourth quarter of 2012. Sales in Q1 2013 jumped to €20 million ($26 million). Last week, the FDA accepted application for Lemtrada, Sanofi’s other MS drug, which came to its portfolio via acquisition of Genzyme, a Massachusetts based American biotech company.

Is Biogen a buy?

The question is not whether it is a buy or not because strong companies should always be a part of one’s portfolio. With an operating margin of 35% and $426.75 in net income on quarterly revenue of $1.42 billion, Biogen is indeed a strong company with ten approved drugs, FDA application filed for one hemophilia B candidate, five in Phase III trials and eight in Phase II/I.

The question is whether it is a buy at this price. At a P/E of 35.71, it may appear as overvalued to some. Novartis trades at a P/E of 18.41 and Sanofi at 21.87. However, these belong to the “elite” Big Pharma club and a strong comparison is not possible.

Nearer home, among mid-size biopharmaceutical companies, Celgene trades at 36.46 P/E and Gilead at 35.03.Moreover, Biodec trades at price-to-book value of 7.15 against 9.07 of Celgene and 7.95 of Gilead.

However, despite the favorable comparison with peers, I would still like to be cautious and buy Biogen only on dips. The current dip should be used to buy. I expect more short term dips in the future – there will be news from the European front and the stock is likely to react negatively in the short term. That should be the right time to accumulate more.

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Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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