TECFIDERA Raises The Bar For Biogen Idec

The bar has been raised significantly for Biogen Idec (BIIB) after the FDA approval of TECFIDERA™ (dimethyl fumarate) – Biogen Idec’s first-line oral treatment for relapsing forms of multiple sclerosis (MS). While the approval wasn’t all that surprising to the market judging by the mild ~5.4% jump that BIIB saw during last Thursday’s trading, many investors who prefer larger pharmaceutical companies are now looking much more favorably upon BIIB. The stock is up 31.6% since the start of the year, beating the broader market by almost 22%.

Although it’s just one more drug in Biogen’s already impressive multiple sclerosis product line, Wall Street is expecting particularly high sales for Tecfidera based on its proven efficacy and target indication.

Just how high are these expectations?

Consider that Biogen’s three big MS drugs – AVONEX (approved in 2003), TYSABRI (in 2006), and RITUXAN (in late 2012); bring in the bulk of its ~$5 billion in annual revenues. These three drugs bring in quarterly revenues of $736 million, $275 million, and $288 million respectively as of Q3 2012, and have generally penetrated quite nicely into their target indications. The one exception is Rituxan, which has a lot more room to run.

Then consider that the eight BIIB analysts surveyed by Bloomberg have an average expectation of $3.25 billion in annual revenue for 2017. This implies that Tecfidera will have to outperform Biogen’s blockbuster drug Avonex after it fully saturates its target indication.

Yeah, the drug has some pretty big shoes to fill. To top it off, the drug will have competition for this indication from Novartis’s (NVS) Gilenya and Sanofi’s (SNY) Aubagio (as mentioned in the Bloomberg article), but BIIB investors might be encouraged to know that that Novartis’ next (promising) oral MS drug BAF312 isn’t expected to hit the market any time before 2017.

The notion that Tecfidera is going to single-handedly boost Biogen Idec’s already enormous revenues by 65% within the next few years might be hard to swallow, but the sheer size of the MS indication makes it more than feasible. The degenerative disease affects about 2.1 million worldwide, and roughly 350,000 in the United States alone. With MS treatments costing around $30,000 per patient per year, one can infer that the MS drug market could be as large as $10 billion in the US alone, with a lot more potential in overseas markets that’s more difficult to measure.

This is huge market, which is why it doesn’t make sense to worry about Biogen’s valuation given how much more revenue potential it has down the road.

Patent expirations are also a non-issue for now. Note that in 2009, Biogen Idec was able to move the patent expiration on Avonex all the way to 2026.

So while Biogen Idec really was a laggard amongst the big pharma names in past years, its highly profitable multiple sclerosis portfolio is taking the company in a completely new direction. I also think that Wall Street has placed very realistic expectations for Tecfidera that may even be surpassed before 2017, depending on its marketing and market penetration rate.

Because of this, I see BIIB as an undiversified but fairly safe pharmaceutical stock that has one of the better risk/reward profiles in the big pharma space. I also believe that its lack of yield is outweighed by the stock’s lower valuation relative to its top-line growth, which should continue quite nicely with the introduction of Tecfidera.

Since the analyst expectations for Tecfidera’s sales potential will basically be the market’s general expectations for the new MS drug for quite some time, I’d expect BIIB to either hold its new levels or possibly stage another rally given that the company doesn’t release any additional news that could fade the bullish sentiment. We’ll have to see.