11:36 AM ET March 11, 2002
By Ted Griffith, CBS.MarketWatch.com
CAMBRIDGE, Mass. (CBS.MW) -- Throughout his tenure in the top job at Biogen, CEO James Mullen has been shadowed by a question his predecessors never answered to Wall Street's satisfaction.
When Mullen met with analysts in Boston last fall, the discussion returned time and again to that familiar question: Can Biogen successfully broaden its business beyond one product?
Biogen (BGEN: news, chart, profile) has relied for years on a single drug, multiple sclerosis treatment Avonex, to fuel revenue and profit growth. For almost as long as the drug has been on the market, investors have been pressing the biotech firm to come up with new products to reduce the reliance on Avonex.
Now, the need to diversify takes on renewed urgency in the wake of rival Serono's announcement Friday that it's won regulatory approval to sell its multiple sclerosis treatment, Rebif, in the United States. The Food and Drug Administration has decided to allow Serono to circumvent a special U.S. market exclusivity that was supposed to shield Avonex from competition until May 2003.
News of Serono's victory sent Biogen's shares tumbling as much as 12 percent amid worries about how the arrival of a competitor would affect Biogen's earnings. The company said it's reviewing its profit projections but doesn't have answers yet.
Serono said Monday it's begun selling Rebif in the United States. A company spokeswoman said Serono is targeting a 25 percent share of the U.S. market over the "next few years."
On March 15, Biogen's stock could come under pressure again when Swiss-based Serono (SRA: news, chart, profile) is scheduled to present results from a head-to-head trial comparing Rebif to Avonex.
But Mullen isn't worried -- at least not outwardly. On a conference call Friday, Mullen said Biogen had previously made plans to build up its sales force to cope with the additional competition and he's confident the company will defend its leadership position in the MS market.
"We're very prepared for this event," Mullen said during the call. "We think Avonex will continue to prevail as the No.1 product."
And during an earlier interview with CBS.MarketWatch.com at Biogen's Cambridge, Mass. headquarters, the chief executive appeared at ease. He smiled often and spoke expansively about Biogen's future.
It seems the 43-year-old Mullen is convinced he is finally ready to put to rest the question that has dogged his company for so long.
"This is really shaping up to be a breakout year for Biogen," Mullen said. "We have put a lot of the risks behind us and we've put the stakes in the ground for future growth."
Biogen's long-awaited second product, Amevive, for the treatment of psoriasis, accounts for a big part of the CEO's optimism. He believes Amevive will answer the skeptics who doubted that Biogen would ever be more than just a one-trick pony.
Biogen filed in August for regulatory clearance to sell Amevive and a number of analysts say it could win the FDA's OK this year -- making it the first biotech drug approved to combat the skin disease.
Following not too far behind Amevive is a third potential product, Antegren, which might be used in combination with Avonex to more vigorously combat multiple sclerosis. Biogen is also studying Antegren as a treatment for the inflammatory bowel condition Crohn's disease. Antegren could reach the market by 2004 or 2005, according to analysts.
Mullen also argues that the situation for the company's original product is not as gloomy as some claim.
Several analysts say Serono's Rebif poses a serious threat to the Avonex franchise now that the European biotech firm has shattered Biogen's so-called "orphan drug" protection.
For several years, Biogen has been locked in a battle to protect Avonex's special status in the United States. Under the Orphan Drug Act, the FDA can grant a company market exclusivity in the United States as a reward for developing a treatment for a relatively rare disease, such as multiple sclerosis. A competitor can, however, get the protection overturned if it can demonstrate to the FDA its drug is better, which is what Serono did. The company said its Rebif drug showed "clinical superiority" to Avonex in a head-to-head trial that lasted nearly six months.
Analyst Sam Williams at Robertson Stephens said, in a note to clients, that the FDA has delivered "what is effectively an endorsement of Rebif's superiority over Biogen's Avonex, giving Serono exceptional marketing ammunition with which to take Rebif into the U.S. market." Williams also said Rebif could become the leading drug in its class in the U.S. "over the next few years."
Serono first announced the six-month data from the comparison trial back in May. That announcement led to a flurry of litigation between the two companies, with Biogen charging that Serono was being misleading. The controversy will likely be rekindled on March 15 when Serono will present full-year data from the head-to-head trial.
Biogen's CEO insists the company isn't intimidated by the prospect of a rival in the U.S. multiple sclerosis market. Mullen, who oversaw the introduction of Avonex in Europe before becoming CEO, said the company already competes effectively against Rebif in Europe and would have an advantage in the United States because it has established solid relationships with patients and doctors here.
And Biogen has some impressive clinical results of its own to support Avonex's value in fighting the neurological disorder, Mullen said. The severity of MS varies considerably, but it can lead to paralysis.
"We're still the only product that's shown a reduction in the progression of disability," the chief executive said.
Given the well-established Avonex business combined with the promise of drugs that are nearing the market, Mullen said he has no interest in taking part in the megamerger trend that swept through the biotech industry late last year. Three major biotech buyouts were announced in December, the largest of which was Amgen's $16 billion offer for Immunex.
Mullen said he believes Biogen's shareholders will get the best returns if the company remains independent. Founded in 1978, Biogen is the oldest major biotech company that hasn't been acquired.
"We've done all the hard work and it's now time to reap the rewards," Mullen said.
Some on Wall Street share the CEO's optimism. Larry Feinberg, who runs a hedge fund called Oracle Partners, says he remains confident about the health of Biogen's business in spite of the competitive pressure. Feinberg said he believes Biogen will successfully defend its turf in the United States and he said Biogen has come out on top in Europe where the two companies already go up against each other.
He calls Biogen's stock among the most attractively priced in the biotech field and said Friday's slide only created a buying opportunity.
At its current level of about $51, Biogen's stock trades at about 26 times this year's expected earnings of $1.95 per share, according to Thomson Financial/First Call. On the same basis, shares of Genentech (DNA: news, chart, profile) trade at more than 50 times earnings and shares of No.1 biotech firm Amgen (AMGN: news, chart, profile) trade at more than 40 times earnings.
Of course the company's earnings are subject to downward revisions because of the new challenge from Rebif, but, even so, Feinberg said Biogen's stock could be a big winner in coming months. With Amevive waiting in the wings, the hedge fund manager is making a big bet that Biogen's stock is ready for a run-up. He said his fund holds roughly 1 million shares of Biogen.
"This is a stock that could double over the next year or so," Feinberg said.
But there are plenty of analysts and fund managers who doubt that Biogen's stock is ready to break out of the doldrums. And, so far this year, the skeptics have been proven right. It's been a disappointing year for biotech stocks and Biogen is no exception. Its stock is down about 10 percent since the beginning of 2002 and it's well off its all-time high of more than $120 touched briefly during the genomics-inspired euphoria over biotech stocks in early 2000.
There are good reasons why Biogen's stock is so cheap relative to its peer group, the skeptics say. In addition to the competitive threat now facing Avonex, disappointments with Amevive could hurt Biogen's stock, they argue. Analyst Michael Wood at Lehman Bros. said Biogen may run into delays in winning regulatory approval for Amevive. On top of that, Biogen may need to get a patent license from a rival to commercialize Amevive, Wood said.
Back in June, Biogen disclosed that it was "evaluating" the need to license patents from Genentech for Amevive. Some analysts have suggested Genentech would be unlikely to grant a license on favorable terms because the South San Francisco-based biotech firm is developing a psoriasis treatment that would compete with Amevive.
Mullen said Biogen is still having discussions on the license question, but, in any case, he said the issue would not be a "showstopper" that would prevent Amevive from reaching the market.
"Ultimately, it may effect the economics in a modest way," Mullen said.
Even if Amevive makes it to the market, though, it may not be the big hit that Biogen hopes, said analyst Leon Henderson, of Btech Investor, a biotech consulting and investment firm. Henderson, who holds a medical degree, said there are several new biotech psoriasis treatments nearing the market and it will likely be difficult for Amevive to distinguish itself. Henderson said none of the new psoriasis treatments, including Amevive, have produced what he considers overly impressive results.
Of all the potential treatments for the skin disease, Immunex's Enbrel may have the edge, Henderson said. While it's not yet approved for psoriasis, Enbrel has been used for years to treat rheumatoid arthritis, meaning it has established a track record with doctors and patients, he said. Enbrel will soon have behind it the marketing muscle of the biggest company in the biotech industry as Amgen's acquisition of Immunex (IMNX: news, chart, profile) is expected to close later this year.
Still, Amevive has its share of fans on Wall Street, who point out that Biogen's psoriasis treatment will likely be the first and that the company has already shown it can successfully market a drug.
Analyst Eric Schmidt at SG Cowen said Amevive results Biogen presented at a recent meeting of dermatologists solidified his hopes for the drug.
"All the data presented were consistent with our prior expectations and increase our confidence that Amevive is safe, efficacious and approvable," the analyst wrote in a note to clients.
Of course, if Amevive does turn out to be a success, it probably won't be long before Mullen faces the question: Can Biogen broaden its business beyond two products?
The CEO, however, doesn't seem bothered about that prospect. Aside from the new MS drug Antegren that's in late-stage development, Mullen said Biogen has several experimental drugs in its pipeline, including potential treatments for heart failure and cancer. Biogen last year was among the top three in research and development spending in the biotech industry, he said.
"We have taken a lot of criticism over the quality of our pipeline, but people are starting to look at it again," Mullen said. "Our research operation is generating interesting compounds routinely. We're feeling pretty confident"
Ted Griffith is a reporter for CBS.MarketWatch.com
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