These Drug Partners are Headed in Opposite Directions
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Biogen Idec (NASDAQ: BIIB) and Elan Pharmaceuticals (NYSE: ELN) have partnered for more than a decade to win a big share of the multiple sclerosis (MS) drug market. While their drug Tysabri has achieved some commercial success, everyone is chasing Teva Pharmaceuticals (NYSE: TEVA) and its MS drug Copaxone that controls roughly 40% of the domestic market. Now, though, it looks like Biogen wants to go it alone, with a recent $3.3 billion bid to acquire the intellectual property and marketing rights for Tysabri. So, which company comes out a winner?
Selling off the parts
The sale of Tysabri’s assets would complete Elan’s exit from drug manufacturing, leaving it with no commercial products. The company previously spun off its drug discovery unit in a public offering and sold its drug technologies business to competitor Alkermes in 2011. While Elan would earn royalties from future Tysabri sales, it would effectively be an investment holding company that owns securities, royalty streams, and an equity stake in a drug partnership with Johnson & Johnson.
In FY2012, Elan reported negligible revenue from continuing operations, while it generated an adjusted operating loss of $168.1 million. The pending asset sale, though, provides the company with significant funds to pursue acquisitions and rebuild its product portfolio. However, not all shareholders are on board with the strategy, with one institutional shareholder recently offering $6.6 billion to purchase the entire company. While that offer is not entirely credible, given Johnson & Johnson’s 18% ownership of Elan shares, it will likely focus management's attention on maximizing shareholder value.
Meanwhile, Biogen’s purchase of Tysabri’s assets gives the company more control over its MS drug franchise, which includes its blockbuster drug Avonex. The deal also allows Biogen to more aggressively pursue government approvals for the drug, after Tysabri’s use was restricted following the disclosure of a small number of drug-related fatalities in 2006. Management sees substantial future growth for Tysabri, building on its 73,000 patients and 12% share of the global market.
In FY2012, Biogen continued to report solid financial results, with increases in revenue and operating income of 9.3% and 7.6%, respectively, versus the prior year. The company benefited from double-digit sales gains for Tysabri, as well as strong performance from non-core drugs that target various types of cancers and coronary conditions. While the company’s operating margin dipped slightly in 2012, it generated over $1.8 in operating cash flow that allowed it to reinvest $1.3 in research and development spending and build its cash holdings.
Chasing the leader
Of course, Biogen continues to chase Teva Pharmaceuticals, the current global leader in the MS segment. While Teva is the largest generic drug maker in the world, it has been adding to its specialty drug segment with leading positions in the areas of MS, respiratory diseases, and women’s health. The company has also been pursuing growth in the over-the-counter segment through a partnership with Proctor & Gamble that markets products in the cold remedy and wellness categories.
In 2012, relative weakness in the generic drug market led to limited growth for Teva and a stock price that ended the year lower than where it began. For the period, Teva reported increases in revenue and adjusted operating income of 11.0% and 8.8%, respectively, compared to the prior year. While revenue growth benefited from the company’s blockbuster merger with Cephalon, its operating margin fell slightly due to impairment and restructuring charges. However, Teva’s specialty drug segment grew sales by 26% for the period, including strong sales of its MS drug Copaxone.
Looking ahead, Teva is spending the majority of its research and development budget in the specialty drug segment, as governments around the world try to control health care costs by extracting price concessions on widely-used generic drugs. In the current environment, size and scale are needed to provide a diversified product portfolio capable of surviving in a lower margin world. With 147 domestic products awaiting FDA approval and a strong balance sheet, Teva is building its company for long run success.
The bottom line
Elan cashed in its chips after it realized that it was unlikely to succeed against larger competitors that could outspend it, by a wide margin, in the research and development department. While it might emerge from its pending deal with a new focus, the company is a work in process. Investors should stick with Biogen and Teva, two leaders that are willing to reinvest for future growth.
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