In Biogen auction, a high price for a high risk asset - Oct. 18, 2007 - Sent Using Google Toolbar

In Biogen auction, a high price for a high risk asset - Oct. 18, 2007

Carl Icahn raises the stakes for Big Pharma

The financier has set a high benchmark for bidders for the biotech firm. Fortune's John Simons explains why Big Pharma is likely to pay top dollar for a very risky asset.

By John Simons, Fortune writer
October 18 2007: 10:43 AM EDT

(Fortune) -- Buying a biotech company is like shopping for a coveted gem in an eBay auction. Nobody should expect a bargain.

Suitors for Biogen Idec ( Charts ), the country's fifth-largest biotech that put itself up for sale late last week, are no doubt resigned to paying top dollar as they submit their bids over the coming weeks. Financier Carl Icahn - who happens to own 1 percent of Biogen - set a high bar when he offered to pay $23 billion, or about $80 a share, for the company. That's a 19 percent premium over the stock price before the company put itself in play.

Financier Carl Icahn, who owns a minority stake in Biogen, reportedly put the company into play.

Most observers believe Icahn instigated the company's sale, then made the bid to gin up an auction atmosphere. If so, the move could pay off big: Big Pharma - flush with cash, desperate to fill emptying pipelines, and eager to gain a foothold in the more lucrative biotech drug business - are likely to pony up.

It might be a Pyrrhic victory: Pfizer ( Charts, Fortune 500), Sanofi-Aventis (Charts), and Wyeth (Charts, Fortune 500 ) are among the rumored bidders, but whichever company wins will surely pay a high premium for a high-risk asset.

Founded some 30 years ago, Biogen is one of the pioneers in the biotech industry. The Cambridge, Mass.-based firm specializes in treatments for cancer and for autoimmune and neurological disorders. Revenues last year came to $2.7 billion.

There's reason to think Biogen would be a smart purchase for a struggling Big Pharma. The company has a fertile pipeline and five major products on the market. But that doesn't mean a Biogen buyout would be a sure winner: The company's top two main moneymaking drugs share an uncertain future.

The first, Tysabri, carries the most risk. There have been concerns that the multiple sclerosis treatment causes a life-threatening neurological disorder known as PML. In 2005, Biogen voluntarily withdrew Tysabri, but the FDA let the company put it back on the market more than a year later after patient evaluations showed a low rate of PML in Tysabri patients.

The drug is restricted to patients who have tried other multiple sclerosis treatments without desired results. Biogen is conducting studies to determine the longer-term effects of Tysabri use, which won't be complete until mid-2008.

What's more, Biogen faces at least two competing MS treatments, which are coming down the pike in the next few years from Novartis (Charts) and Genzyme ( Charts, Fortune 500). Some analysts believe Tysabri's sales will peak at $1.5 billion in 2010, just in time for some stiff price competition.

Meanwhile, Biogen's other blockbuster multiple sclerosis treatment, Avonex, is already battling fierce competition. Sales, which grew 10 percent to $1.7 billion in 2006, are expected to slow dramatically between 2007 and 2012, according to analysts. Biogen's bottom line will feel the pain: Avonex is the only best-selling drugs for which Biogen doesn't have to share a percentage of profits with a research partner.

Yet, for all the drawbacks, Biogen's appeal extends beyond its current medicines. A Big Pharma buyer would likely gain an advantage over peers with a head start in biotech drug research, manufacturing and marketing.

Thanks to Carl Icahn, the price of admission into the biotech arena will be hefty - too hefty, warn some analysts.

"There are cheaper ways to buy a pipeline and biologics capacity than to buy Biogen at $80 a share," says Caroline Stewart, an analyst with Piper Jaffray, who downgraded her rating on Biogen's stock Monday to "underperform" on Monday. Her price target: $65 per share.

"It's crazy to suddenly say the stock is worth $20 more just because Carl Icahn says it is," adds Stewart.

Indeed, AstraZeneca paid a similar premium (in terms of forward price-earnings ratio) when it purchased Maryland-based biotech MedImmune for $15.6 billion last spring. AstraZeneca investors balked at the deal, as the company lost 25 percent of its market capitalization in the three months following the transaction.

In spite of what Biogen characterizes as a brisk auction with "several" suitors, some analysts think bidders should hold off, at least until results from long-term patient evaluations for Tysabri are known in mid-2008.

By then, Tysabri will also have been back on the market for a full two years. Waiting until June of next year, says Adam Walsh, a biotech analyst with Jefferies & Company, would help ensure physician checks don't uncover higher instances of PML among patients.

By then, Biogen's mid-stage pipeline should have more clarity too. "It's tough to value a company with these questions looming," says Walsh.

Biogen's board hasn't made any further statements about the sale of the company since Friday's initial announcement. In that statement, the board said it has hired Goldman Sachs and Merrill Lynch as financial advisers, leading many observers to believe that a deal is imminent - perhaps by early November.  Top of page