http://www.thestreet.com/stocks/biotech/1482187.html

7/6/01 7:00 AM ET
By Adam Feuerstein
Staff Reporter

Biogen (BGEN:Nasdaq - news - commentary) is in trouble.

The Cambridge, Mass., biotech company has always been considered one of the sector's A-list names. But a recent spate of bad news is giving the company a black eye and threatens to knock it down a peg or two in biotech's financial pecking order.

Investor confidence in Biogen is already waning. More than $2 billion has been whacked from the company's market value in the past two weeks, and at this point, a meaningful recovery does not appear to be around the corner.

In short, Biogen is suffering from a whopping case of the biotech growth flu. Sales of its biggest moneymaking drug are slowing, and replacement drugs from its development pipeline are either too far away from approval or don't appear as promising as previously thought. The unfortunate result: Biogen's midterm and long-term growth rates appear to be slowing to rather anemic levels.

Biogen's Big Drop
 
Biogen shouldn't be written off completely. After all, the company is expected to notch respectable 10% earnings growth this year on sales of almost $1 billion. There are biotech companies out there that would kill for $1 billion in revenue.

But many Wall Street fund managers, including some self-professed Biogen bulls, are less than sanguine with the way the company is handling itself these days. Call the recent $2 billion selloff a wake-up call, they say, a warning that more turbulent skies are ahead unless the company boosts its performance.

"I actually think Biogen's [drug] pipeline is OK, it's just being mismanaged," says a rather blunt Stu Weisbrod, chief investment officer at health care hedge fund Merlin Biomed Group.

A Miscue With Amevive

Weisbrod is a longtime Biogen supporter, but he admits to losing money on the company recently and blames company executives especially for the way they handled the development of Amevive, the company's experimental psoriasis drug. "Amevive was overhyped, then the results didn't meet the hype, so the company lost a lot of credibility," he says.

Biogen executives could not be reached for comment.

TheStreet.com previously examined the somewhat disappointing Amevive results released two weeks ago at a psoriasis research conference. The miscue is exacerbated by the fact that Amevive has serious competition from another experimental psoriasis drug under development by Genentech (DNA:NYSE - news - commentary) and Xoma (XOMA:NYSE - news - commentary). That drug, Xanelim, looked more impressive at the conference.

Based on Amevive's poor showing, several analysts reduced their financial projections for the new drug. Merrill Lynch biotech analyst Eric Hecht drastically cut his Amevive revenue estimates from $40 million to $20 million in 2002, and from $285 million to $160 million in 2004. Hecht rates Biogen neutral and his firm has done underwriting for the company.

Avonex's Dominance Is Threatened

Biogen needs Amevive to be a hit because the company is faced with slowing sales for Avonex, its top-selling multiple sclerosis drug that also provides the bulk of the company's revenue and profits. Avonex enjoys near-exclusive rights to the U.S. market until mid-2003, but that cushion may end a year earlier. Later this quarter, Swiss biotech firm Serono (SRA:NYSE - news - commentary) is expected to ask U.S. drug regulators to allow it to sell its rival MS drug in the U.S., based on strong evidence that the drug Rebif works better than Avonex.

Prudential Securities analyst Peter Drake believes there is a good chance that Rebif will enter the U.S. market by next summer, stealing precious market share from Avonex.

"We believe that a mid-2002 U.S. Rebif launch followed by a conservative uptake (at the expense of Biogen's Avonex) could carve out as much as 25 cents to 40 cents from our 2002 EPS estimate of $1.92 for Biogen," he writes in a research note, reiterating his sell rating. Prudential doesn't do underwriting.

The threat to Avonex and the lowered expectations for Amevive add to some slow growth ahead of Biogen, which could put additional downward pressure on the company's shares. At its Thursday closing price of $52.50, Biogen trades at 25 times 2002 earnings. That's a discount compared with other biotech firms, but still a lot higher than the company's long-term consensus growth rate of 15%, according to Thomson Financial/First Call.

Looking for Hope in the Pipeline

The case for Biogen investors looks even murkier when you consider that several analysts see the company's EPS growth rates over the next few years dropping into the single digits.

Lehman Brothers biotech analysts Rachel Leheny and Michael Wood recently downgraded Biogen and reduced their price target to $52 from $78. But even that reduction was generous because the analysts gave Biogen the benefit of a higher industry growth multiple -- one more suitable for faster-growing biotechs. Using a slightly lower growth multiple, their price target for Biogen would be less than $40. Leheny and Wood rate Biogen market perform, and their firm hasn't done underwriting for the company.

The case for Biogen may look bleak, but some observers believe the company will rebound. John McCamant, editor of the Medical Technology Stock Letter, says Amevive may have taken a hit, but the drug will still get approved and grab a significant share of the psoriasis market. And he's even more optimistic for Antegran, another drug a bit further back in Biogen's pipeline. Biogen is developing Antegran with Elan Pharmaceuticals (ELN:NYSE - news - commentary) to treat multiple sclerosis and Crohn's disease.

"Having two drugs in mid- to late-stage development is really pretty good," says McCamant, adding that the company has $1 billion in cash available for deals to restock its medicine cabinet. McCamant has no position in Biogen.

"Biogen is taking its lumps right now, but if the company can get some drugs approved and make some good licensing deals, they will show the Street that they can execute once again," he says.

But right now, shares of Biogen are down 20% since June 21, and the stock lags both the S&P and the biotech sector for the year. Investors are skeptical and likely will remain so until some good news -- whether that's a great second-quarter performance, an acquisition, or promising news on the drug-development front -- lights a fire under the company's long-term growth outlook.