Feuerstein's Biotech-Stock Mailbag

Waiting for a Biogen buyout means weathering the volatility.
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I've pulled just two letters from the Biotech Mailbag this week -- on

Biogen Idec

(BIIB) - Get Report

and

Isis Pharmaceuticals

(ISIS)

-- because my responses turned out to be rather lengthy. But these stocks are very newsworthy, so enjoy.

Carl M. writes: "Longtime reader and holder of Biogen Idec. Through all the ups and downs. Are you hearing anything about Icahn's plans or any interest in the sale of the company? As you know it popped to $84 and has pulled back on no news. Just would appreciate anything you are hearing on the company."

The problem with an investment thesis that hinges on a hoped-for-but-not-yet-consummated acquisition is that you have to sweat out the volatility that comes with the rumors and speculation.

As Carl rightly points out, Biogen Idec surged above $84 after the company announced Oct. 12 that it would entertain sale offers. But nothing's happened yet, and some investors are getting antsy on chatter that the asking price might be too high, or that some prospective bidders are walking away.

The stock fell to $69 on Tuesday, then bounced back above $73 intraday Thursday. On Friday, it closed at $70.04. Like I said, volatility.

I've laid out some

pricing scenarios for a Biogen Idec acquisition already. Generally, the consensus seems to be that the company could be taken out in the $80-plus price range.

Citibank biotech analyst Yaron Werber has been tracking the quest to acquire Biogen Idec as closely as anyone. I don't think he's the axe in the stock, necessarily, but his published notes offer as good a guide to what's happening as I've seen.

Echoing the current buzz, Werber says

Pfizer

(PFE) - Get Report

is still likely in the hunt, although other potential bidders -- he mentions

Roche

and

Johnson & Johnson

(JNJ) - Get Report

-- may have dropped out (whether they were really serious about a bid, or not, is up for debate).

Werber also believes a European pharmaceutical company could be in the mix, in part because favorable exchange rates make a U.S. acquisition attractive.

Sanofi-Aventis

(SNY) - Get Report

is often mentioned in this role.

The biggest hurdle to any deal, not surprisingly, is price, Werber says. Biogen Idec isn't going to be cheap, even for a company like Pfizer. A $23 billion acquisition, give or take a billion dollars, is a big pill for any company to swallow.

AstraZeneca

(AZN) - Get Report

has been widely mocked for overpaying to buy Medimmune, so any deal for Biogen Idec has to make strategic, as well as financial, sense.

Interestingly, Werber doesn't think

Genentech

(DNA)

and its partnership with Biogen Idec for the drug Rituxan is going to be an impediment to a deal. In what the Citigroup analyst describes as a game of "high-stakes poker," Genentech risks losing rights to Rituxan altogether if it seeks full ownership of the drug when there's a change of control at Biogen Idec.

Right, that sounds confusing. I had to read the note several times to understand the dynamics. I'm not going to try to explain it further. Suffice to say, Werber doesn't believe Genentech will try to muck up any deal to acquire Biogen Idec.

That said, Genentech still has the financial upper hand in the Rituxan partnership, which includes follow-on, second-generation versions of the lucrative drug. That has to factor into the decision-making process of any potential Biogen Idec acquirer.

There's one more thing from Werber that adds another cautionary note to the entire buyout thesis: Demand for the multiple sclerosis drug Tysabri is increasing, but Biogen Idec's guidance for the drug's growth appears too aggressive.

Werber reaches that conclusion after surveying 50 neurologists who treat about 6% of all treated MS patients in the U.S., asking them about their attitudes toward Tysabri and their current and future prescribing plans.

Remember, Biogen Idec's forecast calls for Tysabri patients to grow from about 17,000 today to 100,000 by the end of 2010. That translates into $2 billion to $3 billion in annual Tysabri revenue. It seems logical to assume that any potential acquirer of Biogen Idec needs to believe in this growth forecast to make a takeover work financially.

Werber's survey, however, definitely raises some questions about whether Biogen Idec and partner

Elan

(ELN)

can achieve the 100,000 Tysabri patient goal. Some highlights:

Tysabri is still very much a second-line multiple sclerosis drug, being prescribed to about 14% of patients who fail first-line interferons. Interestingly,

Teva's

(TEVA) - Get Report

Copaxone is being prescribed to more (35%) interferon failures.

Forty percent of responding doctors want to see 1-3 years of additional safety data on Tysabri before they're comfortable prescribing the drug as a first-line treatment. Another 32% of doctors in the survey want to see 4-6 years of additional safety data.

The big safety worry with Tysabri is progressive multifocal leukoencephalopathy, or PML. Doctors in the survey say that one additional case of PML reported in a Tysabri patient would reduce use of the drug by 26%.

Multiple sclerosis patients are also wary of Tysabri's safety risks, with 36% of Tysabri-eligible patients refusing to take the drug.

Now, I recognize this is just one survey and that there are certainly others conducted by Wall Street's sell-side community that are more bullish. Nevertheless, it raises good thinking points about Biogen Idec's aggressive forecast.

This, in turn, could affect the bidding for Biogen Idec. For the record, Werber gives 70% odds that Biogen Idec does get bought. And he believes $85 is a good price. He has a hold rating on Biogen Idec and Citigroup provides banking services to the company.

Bob. Z. writes: "Adam, you should attend the Isis Pharmaceuticals analyst day in New York City on Tuesday. I would like to hear your take on the data update. I think you might change your mind."

Bob is referring to Isis' cholesterol-lowering antisense drug mipomersen, which I wrote about in a previous

Biotech Mailbag. I'd say I was neutral on Isis. I did listen to portions of the Isis analyst day on Tuesday, and read the company's

press release

, which included some new clinical data, and looked over a lot of analyst reports.

After all that, I'm still neutral on Isis. Sorry, Bob.

I readily acknowledge that Isis has done well to rebound from years of past clinical failure, and that mipomersen is the most compelling antisense drug in development today. (There aren't any successful antisense drugs on the market yet, so that achievement is relative.)

Isis CEO Stanley Crooke has been very outspoken and aggressive about the company's plans to partner mipomersen. Most importantly to investors, he's telling anyone who will listen that potential Big Pharma partners are willing to pay up big-time to get access to the drug.

All this has helped Isis' stock price, up 45% this year, up 220% since the beginning of 2006. Congrats to Bob and everyone else who's owned the stock. You've done well.

Here's my rub: I don't think Isis has the safety data yet from mipomersen clinical trials to clear up all the concerns linking mipomersen to dangerous liver toxicity. Yes, I know, there was more data shown at Tuesday's analyst meeting downplaying such a risk, but it's not really enough. Not yet.

The FDA takes liver toxicity very seriously. It's one of the few safety risks that can basically stop a drug's development dead in its tracks. If you've never seen this, download and read the

FDA's guidance

on drug-induced liver toxicity. It's good information to have.

I'd be more favorably inclined toward Isis if it was developing mipomersen solely as a life-saving drug for the small number of people who have a genetic defect causing astronomically high cholesterol levels. In this orphan population, many of whom die prematurely, the risk-benefit of mipomersen is compelling, even with the risk of liver toxicity.

Isis could be another

Genzyme

(GENZ)

, pricing mipomersen extremely high to treat relatively few patients, but still generating hundreds of millions of dollars in revenue annually.

But Isis has decided that mipomersen is destined for ordinary folks with uncontrolled cholesterol and a high risk for heart attack. For these people, Pfizer's Lipitor isn't working and they need something else. According to Isis, there are 15 million to 16 million patients in this category, which has the potential to generate $2 billion to $4 billion in mipomersen sales.

I understand why Isis would want to attack such a big market opportunity, but the risk-benefit equation is much different with this group of patients. The FDA is going to be way more conservative when it comes to safety.

Likewise, I suspect that any potential Big Pharma partners will also be wary of stepping into a drug that has the potential to cause serious liver injury. We all know that Big Pharma has a history of being seduced by biotech drugs with questionable efficacy, but how many times does Big Pharma pay up to license a drug that has questionable safety?

Not often, in my opinion. Not, at least, until the risks are better identified.

The recent boasts of Isis CEO Crooke may come to pass. He may just have a Big Pharma partner in his pocket, waiting to pay serious coin for mipomersen. I totally understand investors taking a flyer on Isis for that opportunity.

But do it with eyes wide open, and with the full understanding that: 1) expectations for a partnership are priced into the stock already, to some extent; 2) mipomersen is not out of the woods when it comes to liver toxicity; and 3) Crooke's long track record of antisense drug failure and disappointment doesn't entitle him to a free pass just yet.

Adam Feuerstein writes regularly for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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