Friday, July 30, 2010

Biogen-Idec (NASDAQ:BIIB): Porges downgrdes to Underweight, $51 target

Bernstein's Geoffrey Porges is making a significant call in Biogen-Idec (NASDAQ:BIIB) downgrading the name to Underperform from Market Perform with a $51 price target (prev. $57)

After all the news in biotech over the past week Bernstein regards one company as unfortunately marginalized: Biogen Idec. Based on their concerns about competition, pricing, pipeline, revenue and earnings growth, as well as lack of credible buyer interest, they are downgrading Biogen Idec to Underperform with a new $51 price target. There are a number of reasons for our view that Biogen is likely to underperform its peers and the broader market in coming months.

First, the disclosures about Sanofi's interest in Genzyme seem credible to Bernstein and amount to a rejection of a possible bid for Biogen. Speculation about other simultaneous bids for Biogen seem unlikely to materialize. Despite Biogen's sell off last Friday, they expect further downside for Biogen as takeout interest bleeds out of the stock. Firm regards Sanofi's likely interest in Genzyme as real and reflecting the value Sanofi, and possibly other acquirers, see in Genzyme. They see less unrealized value in Biogen and regarded Sanofi as one of the few potential acquirers with dry powder and likely interest in acquiring Biogen's assets. They believe the possibility of another bid for Biogen emerging now, after the company has been for sale for the better part of two years, is very low.

Second, branded competitive pressure on Biogen's MS franchise is set to increase significantly. In June an FDA advisory committee recommended approval of Novartis' fingolimod (formerly FTY 720, now Gilenia) and this amounted to a much stronger endorsement than Bernstein expected.

Third, last Friday's approval of generic enoxaparin raises the probability of approval for generic versions of Teva's Copaxone, which adds to the likely future threats to Biogen's Avonex.

Fourth, all these factors (increased branded competition, likely generic competition for Copaxone, possible biosimilar competition for Avonex) undermine the viability of Biogen's aggressive pricing strategy in the MS market.

Fifth, Bernstein believes the support for Biogen's stock from aggressive share buybacks is likely to wane within a month or so. Specifically, the company only has $1.5bn in available cash reserves at the end of Q2 after their buyback activity in and after the quarter. The company's current share repurchase authorization of $1.5bn has only $235mm remaining after their quarterly results announcement on July 20. While their annual operating cash flow of $1.5bn would support a recurring annual share buyback of $1.3bn, the pace of such a buyback is likely to be materially slower than the $2.5bn repurchase in the last 9 months. With reduced buyback activity, the firm expects the support for the stock in the market to soften.

Sixth, Biogen's flexibility to reduce R&D and SG&A spending and significantly improve margins seems to have limited additional scope. One of the key elements of bullish theses about Biogen is that their historically high R&D ratios (up to 31% in 2004) could be reduced dramatically with new management and a rejuvenated board.

Seventh, Berinstein believes the company's R&D portfolio has limited potential and no near term newsflow of significance. While the company's pipeline contains several items with long term potential, it mainly consists of only marginally innovative products with unclear probabilities of success and limited commercial potential (pegylated beta interferon, BG-12, daclizumab). Of their much touted "eight programs in late stage development", they regard only long acting factor IX as having both a solid technical foundation and significant commercial potential.

Finally, Biogen continues to suffer from a divided board, to which they add inexperienced management and significant turnover of key executives.

SCB Biogen revenue forecast reduced by 2-5%; EPS forecast reduced by 7-10% long term.

Notablecalls: This is another significant call from Porges, the Bernstein biotech analyst many consider the best in the business. For reference, check out what he did to Gilead (GILD) on July 16 when he downgraded the stock.

The one thing about Porges is that he doesn't flip around with ratings. He's been rating BIIB Market Perform for at least 3 yrs. When he changes his opinion, people take notice. I suspect large accounts will be selling BIIB today.

I'm not even going to comment on the details. I have no value to add there.

This one is going down today.

Goes towards $55 and possibly (likely) below.