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Financial Analysis of Advansource Biomaterials

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Financial Analysis of Advansource Biomaterials - February 18th, 2011

Biogen Idec (NASDAQ:BIIB) is a biotechnology company that makes drugs to treat cancer, neurological diseases, and autoimmune diseases. The company's most important products are Avonex and Rituxan, which treat multiple sclerosis (MS) and non-Hodgkin's lymphomas (NHLs), respectively. The company earned $4.4 billion in revenue and $970 million in net income in 2009.[1]

Biogen has high hopes for Tysabri, a new multiple sclerosis drug that has the potential to become a major blockbuster. However, Tysabri was withdrawn from the market in 2005 after it was linked to a rare brain disease. After two years of safety reviews, the FDA has reapproved the drug which is currently being relaunched. However, investors still consider Tysabri a significant risk and a make-or-break issue for the company.

Biogen Idec's success depends on several factors, including its research and development (R & D) product pipeline, patent expirations, and partnership agreements. Like many pharmaceutical companies, however, the company will likely succeed or fail on the back of a few key blockbuster drugs. The company's products must compete against products from a wide variety of companies, ranging from pharmaceutical giants like GlaxoSmithKline (GSK) that have enormous R&D budgets to similarly sized biotech firms with the same areas of expertise. For a biotech company, Biogen Idec has a large R&D budget, a young product pipeline, and limited product diversity.

Corporate Overview

Headquartered in Cambridge, Massachusetts, Biogen Idec was formed by the 2003 merger between Biogen and San Diego-based Idec Pharmaceuticals. Today, the company specializes in developing drugs for neurological disorders, autoimmune disorders, and cancer.

1 Corporate Overview
1.1 Key products[2]
1.2 Failed acquisition
2 Product Pipeline
2.1 Multiple Sclerosis
2.2 Cancer
2.3 Autoimmune Disorders
3 Business Growth
3.1 FY 2009 (ended December 31, 2009)[1]
4 Trends & Forces
4.1 Product Performance
4.2 Research & Development
4.3 Generics and Patent Expirations
4.4 Politics and Insurance
4.5 Partnerships
4.6 Foreign Exchange Rates
5 Comparison to Competitors
6 References
The company has development centers in Cambridge and San Diego, manufacturing plants in Cambridge, North Carolina, and the Netherlands, and international headquarters in Zug, Switzerland.

Key products[2]
Avonex (55% of net sales) - multiple sclerosis
Rituxan (26% of net sales) - non-hodgkin's lymphoma, rheumatoid arthritis
Tysabri (18% of net sales) - multiple sclerosis, Crohn's disease
Fumaderm (1% of net sales) - psoriasis
Failed acquisition
Several major pharmaceutical companies had expressed interest in the bid, no offers were made. This may be a potentially worrisome sign, as these suitors were able to review non-public data about the company's prospects. Biogen's CEO Jim Mullen told Boston Globe that the lack of offers were due to the uncertainties of Tysabri, which plays a very significant role in the valuation of the company.

In addition, Biogen is involved in complicated partnerships with Genentech for Rituxan and Elan for Tysabri. Both of these partnerships contain change of control provisions that allows the companies to repurchase Biogen's shares of the drugs and exit the partnership if Biogen gets acquired. While Genetech and Elan may very well not exercise this provision, this represents an additional risk for potential buyers.

Product Pipeline

In order to maintain profits, Biogen must continually develop new products. Since development of each new drug takes years (if not decades), the number and quality of innovations in any company's "pipeline" can serve as an indicator of the company's future success.

Since Avonex hit the market in 1996, the company has been a leader in multiple sclerosis (MS) treatment. Therefore, it comes as no surprise that Biogen has a robust pipeline for treating MS. This becomes increasingly important as Avonex patent nears its expiration, allowing the entry of competing generics. Below is a list of notable developments in the company's product pipeline:

Multiple Sclerosis
BG - 12 - As the drug enters the final phase of clinical trials, market opportunity seems questionable. Efficacy has been minimal, and toxicity is a concern as many rats that received the drug have been developing kidney cancer.
Rituxan and Daclizumab - Phase II data for Rituxan has been more robust than expected; many details, however, still need to be worked out between Biogen and Genentech (DNA), who markets the drug, with regards to moving the drug through the development cycle.
Tysabri - This multiple sclerosis and Crohn's disease is currently being relaunched. See Tysabri risk
CDP323 - This drug is also being developed as a treatment for MS; it incorporates several key improvements, including oral delivery and a shorter half-life, to minimize the concerns about PML associated with Tysabri.

Galiximab and Lumiliximab - These antibodies are currently leading the oncology pipeline and are being tested alongside Rituxan to treat non-Hodgkin's Lymphomas (NHL) and chronic lymphocytic leukemia. The Phase II efficacy data, however, has not been particularly compelling.
Volociximab and HSP90 Inhibitor
Autoimmune Disorders
Tysabri - Tysabri is nearing approval for treatment of Crohn's disease. Upcoming Tysabri risk reports with regard to PML will be crucial to the drug's success as a treatment for both MS and Crohn's disease.
LTbetaR-Fc - Rituxan has already been approved to treat rheumatoid arthritis (RA). With Genentech advancing a competing drug through its pipeline, however, Biogen Idec has begun to develop LTbetaR-Fc to bolster its position in the RA market. The drug is just entering Phase II clinical trials, making its success in the marketplace unpredictable.
Business Growth

FY 2009 (ended December 31, 2009)[1]
Net revenue increased 6.8% to $4.4 billion.
Net income increased 24% to $970 million.
Trends & Forces

Product Performance
For a pharmaceutical company, developing a new drug can take years and cost millions of dollars. It is therefore crucial, especially for Biogen Idec, which has very few drugs on the market, that each of its products performs very well in the marketplace. The revenue from currently approved drugs has to be large enough to support the costly development process for future compounds. Without sufficient cash flow, Biogen wouldn't be able to fund its research and development department, which would essentially render the company unable to continue operating.

Since Biogen Idec relies heavily on two drugs, Avonex and Rituxan, for the vast majority of its total revenue, any change in the performance of these drugs will have a drastic impact on the company's overall performance. Some issues facing each of Biogen's drugs include:

Avonex currently dominates the multiple sclerosis market as the most-prescribed drug for MS treatment worldwide. Globally, over 135,000 patients use Avonex. With competition from Serono's SRA Rebif, Avonex is losing some of its market share. Nonetheless, its market share should stabilize around 30%, mostly due to the user friendliness and incredible efficacy of the drug along with Medicare's willingness to cover its increasing price.
Rituxan was the first monoclonal antibody approved to treat cancer and has become the standard for treating non-Hodgkin's lymphoma (NHL), the fifth most common cause of cancer deaths. The company shares sales with marketing partners Genentech (DNA) and Roche Pharmaceuticals (RHHBY), so any change in their agreements could affect Biogen Idec's overall performance.
Tysabri was reinstated to treat relapsing forms of MS after concerns about its link to potentially lethal PML. The drug also nears approval for Crohn's disease; it is, however, off to a shaky start due to lingering fears over its potentially high risks. The dismissal of these fears in upcoming reports could provide a substantial upside for the company.
Zevalin and Fumaderm - Zevalin is approved to treat NHL in the U.S. and EU, and Fumaderm is approved to treat psoriasis in Germany. Both drugs have been slow to penetrate their markets and have made small contributions to the company's revenue. Zevalin has failed to meet expectations, mostly due to stiff competition from in-house favorite Rituxan. Fumaderm, on the other hand, suffers from limited market exposure, with approval only in Germany.
Research & Development
One of the biggest driving forces in the pharmaceutical industry is the product pipeline. Drug companies must continuously come up with new drugs in order to remain competitive in the market and maintain profitability. Fortunately, Biogen Idec has the third-largest research and development budget amongst biotech firms, giving it the means to repeat its successes with Avonex and Rituxan.

Biogen Idec currently has 17 drugs in late stage development (Phase II or higher), some of which are new uses for preexisting drugs like Rituxan and Tysabri. This means that in the next 5 to 7 years, less than 17 new products will be launched. Because the company has few compelling drugs in late stage development, it will likely continue to rely heavily on expanding its current product line, namely its moneymakers Avonex and Rituxan, for the next 5 to 12 years. To complement its research and development division, Biogen Idec also plans to invest $200 million annually to acquire new products, as it did with Fumaderm in June 2006.

Generics and Patent Expirations
Within the biotech industry, the patent system is fairly young and underdeveloped. Due to the relatively recent emergence of biotechnology and biopharmaceuticals, the FDA has not yet established firm guidelines governing patents. Biotech companies, as a result, frequently fight over intellectual property rights. Additionally, there has never been a generic version of a biotech drug, nor is there a pathway for such a "biogeneric" to be created. This is a result of the incredible complexity of biopharmaceuticals versus the traditional, small-molecule drugs developed by most other pharmaceutical companies. The issue is that biologic drugs are complex proteins as opposed to relatively simple molecular compounds; currently, the technology to prove two proteins' similarity doesn't exist. Lawmakers and generic drug companies are working to create a pathway for testing and approving generic biologics, especially since such a pathway would lower drug prices. In the meantime, however, biotech companies like Biogen Idec are far less threatened by generic competition than general pharmaceutical companies.

The last of the patents for Avonex expires in May of 2013, and many have already expired in different countries around the world. Biogen's patents for Rituxan, Zevalin, and Anti-CD20 Antibody, will expire between 2013 and 2018, with the U.S. patents expiring towards the end of this time frame. Should a pathway for the approval of biogenerics emerge, these patent expirations would adversely affect Biogen Idec, creating stiff competition and lowering drug prices. In all likelihood, however, such a pathway won't be developed in the very near future.

In addition to patents on drugs that Biogen manufactures, the company also licenses many of its other patents to competitors for a fee. These partners use the patents to manufacture and market the final products, for which they pay Biogen a royalty. These licensing royalties fluctuate as the company obtains new patents or loses patent protection.

Politics and Insurance
Like other global pharmaceutical companies, Biogen Idec faces constant pressure from governments and activist organizations to increase access to medications by either lowering prices substantially or granting generic licenses. While sales would likely increase as a result, prices would decrease, along with profits.

Additionally, changes in health insurance plans would impact sales and revenue. If an insurance program changes its policies and removes coverage for a certain treatment, sales are likely to decrease. In general, insurance programs are more likely to cover essential expenses, such as cancer or autoimmune disorder medications, while elective expenses like cosmetic surgery, are less likely to be covered. Due to the nature of Biogen's products, they're somewhat less likely to see their coverage under insurance plans reduced.

Most of Biogen Idec's products, including its top revenue generator Avonex, are covered by Medicare. Medicare is the government's health subsidy plan for low-income citizens. Policies allow the government to bargain for lower prices; essentially the government caps prices for a large number of plans. This can negatively impact profits, though it also increases the raw amount of medication sold. Recent federal government reforms to Medicare have reduced the reimbursement rates for many of Biogen's products, including Avonex, which separates itself from many of its competitors in part because of Medicare's willingness to cover its cost. Changes in Medicare legislation could cut into revenues even more in the future, especially if nationalized or cheaper health care advocates come into office.

Over 30% of Biogen Idec's revenues come from selling its products in collaboration with other pharmaceutical companies. This includes blockbuster hit Rituxan, which the company markets with Genentech and Roche. Because Biogen Idec shares revenue in these partnerships, it is sensitive to any alterations in the partnership agreements. Any mishap in handling these agreements could be very costly to the company's overall performance.

Foreign Exchange Rates
Product sales abroad represent nearly 30% of Biogen Idec's total revenue. With a quarter of its business conducted in a different currency and financial data reported in U.S. dollars, the company's performance fluctuates with changes in foreign exchange rates. A recent weakening of the U.S. dollar relative to the euro and other key currencies has worked in Biogen's favor; as it converts the euros it earns in Europe to USD, it gets more dollar for every euro.

Comparison to Competitors

Biogen Idec has several competitors across its three areas of pharmaceutical expertise (cancer, autoimmune disorders, and neurology), including Teva Pharmaceutical Industries (TEVA), Genentech (DNA), GlaxoSmithKline (GSK), MERCK SERONO S A (SRA) , and Bayer Schering Pharma AG. These competitors range from pharmaceutical giants to comparably sized biotech companies. Many of Biogen Idec's products compete for market share with products from these competitors. At the same time, however, many of these competitors also enter partnerships with the company to jointly sell a single product. In short, Biogen Idec has interesting relationships with many of its competitors.

Novartis AG (NVS)
Abbott Laboratories (ABT)
Merck (MRK)
Pfizer (PFE)
Bristol-Myers Squibb Company (BMY)
Eli Lilly and Company (LLY)
Amgen (AMGN)
Schering-Plough (SGP)
Boston Scientific (BSX)

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