Biogen Too Attractive to Ignore

Highlighted companies include Biogen Idec (BIIB), Genentech (DNA), Merck (MRK) and Sanofi-Aventis (SNY).

At 13x our 2009 EPS of $4.05 per share, we believe that Biogen Idec’s (BIIB) stock is too attractive to ignore. Valuation is below the biotech peer-group average, where several names are trading at a significant premium.

The company should post non-GAAP EPS up roughly 11% in 2009, even with all the Tysabri PML issues. However, valuation alone is not enough of a reason to buy the stock. We are comfortable with owning the name here based on two other reasons.

Firstly, Biogen has a significant late-stage pipeline. There are 22 programs in phase II or beyond. Six of these products are in phase III registration programs right now: lumiliximab for chronic lymphocytic leukemia (CLL), galiximab for non-Hodgkin's lymphoma (NHL), BG-12 for relapsing / remitting multiple sclerosis (RR-MS), lixivaptan for hyponatremia, Adentri for acute decompensated congestive heart failure (ADHF), and ocrelizumab for rheumatoid arthritis and lupus nephritis.

There are also several programs in phase II trials, including daclizumab for RR-MS, volociximab for ovarian cancer, the HSP-90 inhibitor for gastrointestinal stromal tumors (GIST), CDP-323 for RR-MS, BIIB-014 for Parkinson’s disease, and rFactor IX in hemophilia B.

Additionally, Biogen and Rituxan development partner Genentech (DNA) are in phase III trial called LUNAR with Rituxan for lupus nephritis, and just released positive phase III data for chronic lymphocytic leukemia (CLL) with the CLL-08 and REACH programs, and in RA with the IMAGE study. In our opinion, this is the best pipeline in all of biotech.

And secondly, Biogen has one of the largest biologic manufacturing capacities in the world. There are significant operations on both the East and West Coast of the U.S., as well as internationally. Independent sources (like Evaluate Pharma) predict that by 2012, biotechnology products will account for nearly a fourth of the entire market, up from only 16% in 2007. As large pharmaceutical companies move with greater and greater force into the biologic market, manufacturing capacity and intellectual property become highly coveted assets. Biogen possess perhaps the strongest acquirable biologic platform in the world (assuming Roche takes out Genentech).

When normalcy returns to the financial markets, and well-capitalized large-cap pharmaceutical companies look to go shopping in 2009, we believe Biogen will be at the top of the list. We have already seen two significant deals (Pfizer-Wyeth and Roche-Genentech). Names including Merck (MRK) and Sanofi-Aventis (SNY) seem to make the most sense. Today, at $50, the name is significantly under-valued. Carl Icahn agrees. Our target is $62 per share.

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Read the full analyst report on DNA

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Read the full analyst report on SNY

Read the full analyst report on BIIB

Read the full analyst report on MRK

Read the full analyst report on DNA

Read the full analyst report on SNY