By Mark Glassman Published: October 25, 2005
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IMPROVING SALES AND earnings might pacify investors when Biogen Idec (BIIB) releases its third-quarter results Wednesday after the close. But observers will be asking plenty of questions about the Cambridge, Mass., biotechnology company's long-term plans.

Biogen's biggest problem is Tysabri, the blockbuster multiple sclerosis drug it pulled from the market in February. Approved by the Food and Drug Administration last November, Tysabri was touted by analysts as a billion-dollar drug — until evidence of a serious side effect emerged. Three patients who took the drug during clinical trials developed progressive multifocal leukoencephalopathy, or PML, a debilitating brain disease. Two of the three died. On Feb. 28, the day Tysabri was pulled, Biogen's stock plunged 43% to $38.65. It has hovered around that level ever since.

Biogen hasn't thrown in the towel on Tysabri, however. Last week, along with its partner in Tysabri, Elan (ELN), Biogen announced the completion of a safety review of the drug that determined that the PML problem was limited to those three patients. The companies are now awaiting the outcome of a supplementary application to the FDA, which could make or break Tysabri and affect revenue numbers for quarters to come. Biogen and Elan have asked for a fast-track priority review, which could get Tysabri back on the shelves as early as next spring.

Despite the Tysabri troubles, Biogen is expected to post solid profits for the quarter. Analysts polled by Thomson First Call predict third-quarter earnings of 42 cents a share, up 15% year-over-year.

And Biogen is drawing plaudits for its ambitious cost-cutting efforts. On Sept. 8, the company announced it would lay off 650 employees, or about 16% of its staff. Biogen said it would incur a one-time charge of between $30 million and $40 million to pay for the downsizing. And in June, Biogen sold a manufacturing facility in Oceanside, Calif. — built last year to make Tysabri — to Genentech (DNA).

"Starting next quarter and really into 2006, they're really going to start to see substantial cost savings due to their new expectations for what the manufacturing requirements for Tysabri will be," says Bret Holly, an analyst with CIBC World Markets, a Toronto-based investment bank. "It won't have a monumental effect in the third quarter." (Holly doesn't own shares of Biogen Idec; CIBC World Markets doesn't have an investment-banking relationship with the company.)

Chris Raymond, an analyst with Robert W. Baird & Co., a Milwaukee investment bank, says cost-cutting alone won't pave the way to profit growth forever. "They have been very aggressive at keeping their costs down, which has been helpful," he says. "But the thing about biotech is that it's a growth sector. You can save your earnings numbers for only so long." (Raymond doesn't own shares of Biogen Idec; Robert W. Baird doesn't have an investment-banking relationship with the company.)

While the FDA mulls the return of Tysabri, Biogen will hope for a lift from sales of Avonex, an older multiple sclerosis drug that had been in danger of being supplanted. Considering the cannibalization — and reverse cannibalization — that has occurred between the two MS drugs this year, it's difficult to pinpoint third-quarter sales. Avonex revenues have been flat for the past three quarters.

"If it comes in flat again this quarter," Raymond says, "a reasonable question to ask is, What does this mean for the drug's prospects for next year?"

As for the pipeline, Biogen has three promising oncology drugs in Phase II clinical trials. The drug candidates target lymphoma, solid tumors and leukemia — all fairly big markets. But even under the best of circumstances, these drugs likely won't come to market for years.

One revenue stream that Biogen investors can count on now is the cancer drug Rituxan, co-marketed with Genentech. When Genentech released earnings on Oct. 10, it reported $502 million in global Rituxan sales during the third quarter. The companies haven't disclosed their revenue-sharing arrangement, but Holly estimates that Biogen should receive about 36.5% of the total third-quarter sales.

Even so, don't expect Biogen's stock to push $60 again until the company gets some good news from the FDA.

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