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Biotech / Medical : Biogen
BIIB 220.98+1.6%3:59 PM EDT

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From: mopgcw11/3/2009 4:30:43 PM
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Barrons; Biogen's a Buy Jefferies & Co. sees nearly 20% upside from current levels.


Biogen Idec (BIIB: Nasdaq)
By Jefferies & Company ($42.13, Nov. 2, 2009)

WE ARE UPGRADING Biogen to Buy from Hold on valuation; maintaining our price target of $50, about 19% upside to current share price.


We view current valuation largely priced in for Tysabri concerns, posing limited downside; we are upgrading to buy. While we acknowledge that Biogen lacks apparent major positive catalysts near term, we believe its current valuation as attractive for (1) inexpensive valuation (trading at about 10x our estimated 2010 earnings versus peer average of about 13 times); (2) strong free-cash-flow yield (about 8%-10% versus peer median of about 6%); and (3) potential share-price appreciation from proposed share buyback (about 8% of outstanding shares).

Strong free cash flow (FCF) enables Biogen to return value to shareholders through share repurchases or dividends. Despite its high research and development spending as a percentage of total revenue (about 30% vs. about 23% for peers), Biogen's FCF is the second highest among peers, with about 10% FCF yield in 2010 by our estimate (versus peer median of about 6%).

At current depressed valuation, we expect the recently announced share repurchase of up to $1 billion is likely to accelerate in near-term. This represents about 8% of BIIB's current outstanding shares. BIIB has about $3 billion in cash/investments, with its long-term debt-to-capitalization ratio of about 14%.

Unpredictability of additional progressive multifocal leukoencephalopathy (PML) from Tysabri long-term therapy continues to be a concern; however, Tysabri withdrawal from the market is highly unlikely (according to regulatory consultant). Currently, ongoing label change discussions will likely include the increased duration of Tysabri therapy as a risk factor for PML. Experts commented that Tysabri label changes might curtail some use in greater than 24-month treatment, but this could be potentially offset by increased use in short-duration treatment. While experts do not see the risk of Tysabri being pulled off the market (unless PML incidence reaches 1/50), they note that a higher incidence than about 1/500 PML cases at greater than 24-month duration of therapy could make them more cautious.

Our valuation analysis indicates limited downside to Biogen shares. We estimate a pure-base value of Biogen at about $38/share (without Tysabri), about $44 if Tysabri sales decline by 50% from our current assumptions, about $49 if Tysabri sales decline by 25%.

Our $50 price target is 15 times our 2010 estimated earnings per share of $4.34, discounted back at a 30% annual rate. The price-to-earnings ratio is roughly in-line with the 2009 P/E multiple for the peer group. Risks include, but are not limited to: (1) higher-than-expected current PML rates, negatively impacting Tysabri sales growth; (2) growing competition in oral multiple sclerosis drug development; and (3) potential generic Interferon (IFN) beta impact in EU sales.

-- Eun K. Yang, Ph.D.
-- Kimberly Smith
-- Lunan Ji
-- Marko Kozul, M.D
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