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Ode on 'Accretion' Urn: Biogen Pays $3.25B for Tysabri Rights

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By Randy Osborne
Staff Writer

Biogen Idec Inc.'s move to buy all rights from Elan Corp. plc to the blockbuster multiple sclerosis (MS) therapy Tysabri (natalizumab) didn't take long for analysts to applaud, though Wall Street traders spent time digesting the $3.25 billion deal, which includes contingent payments.

"Everybody's probably searching for [the answer to the question], 'Does this make sense on a net present value [NPV] basis?' We think it does," said Paul Clancy, chief financial officer of Weston, Mass.-based Biogen.

Clancy acknowledged during a conference call with investors "a range of scenarios that everybody has for Tysabri. We think that's fair. We've had comfort that, across all of those ranges, it's quite attractive." The product holds patent protection for another seven years or so.

For the first 12 months after the agreement is signed, Elan remains entitled to 12 percent of Tysabri sales, after which the amount goes to 18 percent of sales up to $2 billion and 25 percent of sales over that amount. Tysabri sold $1.6 billion last year, up 8 percent from the year before, with Biogen recording $1.1 billion of that amount.

Biogen said the new deal will start making money right away, with 20 cents to 30 cents per share more in 2013 GAAP earnings, and 50 cents to 60 cents accretive to non-GAAP earnings per share (EPS).

Mark Schoenebaum, analyst with ISI Group, said during an impromptu webinar on the news that the agreement "does look like a pretty good deal for Biogen. I like it."

Wall Street showed "a little bit of an underreaction," Schoenebaum said, speaking at mid-morning. "The bears are saying, 'Well, what does this mean about BG-12?' I've heard this from folks. I think the reason the stock is up 3 percent now, and not up 6ish percent, is probably because of people worrying about [the prospects for] BG-12, and selling into some of the strength."

BG-12, more recently branded Tecfidera (dimethyl fumarate), is Biogen's eagerly awaited oral MS drug. Based on data from the Phase III DEFINE and CONFIRM studies, Biogen asked for FDA approval and expects it to happen in late March, with a launch likely in the second quarter. (See BioWorld Today, Jan. 25, 2013.)

In a poll, Schoenebaum posed the NPV question directly to 148 buy-side respondents. Half said the benefit for Biogen was "positive," 41 percent said "neutral" and a little more than 8 percent said "negative." Seventy percent said the deal did not change the way they think of Tecfidera.

Schoenebaum also asked, "Who do you think looks smarter here, Elan management or Biogen management?" Sixty-four percent chose Biogen. By ISI Group's analysis, the deal is a "break-even" for Biogen, if Tysabri reaches $2.9 billion in worldwide sales. Accretion in EPS could eventually reach about $1, in Schoenebaum's view.

Wells Fargo analyst Brian Abrahams, in a research report, called the deal "a sound strategic decision," and said "risk stratification through use of the [JC virus] assay appears to be paying dividends with continued growth in usage."

More than 7,700 new patients started Tysabri over the past year, thanks to the test for the virus, which has been associated with progressive multifocal leukoencephalopathy (PML). Abrahams estimated Tysabri will sell $2.51 billion in 2017, though Tecfidera "could compete for uptake."

Analyst Michael Yee, with RBC Capital Markets, noted the "likely underappreciated" fact that Biogen "has already been handling essentially all sales and marketing worldwide, so there will be little added expense to income statement." In a research report, Yee wrote that "although $3.25 billion is a large chunk of cash, even for Biogen, and forgoes other business development opportunities for now, we view this as overall positive for the strong accretion."

As others took the opportunity to note, Biogen's "strength is commercial execution and smart business development deals," Yee wrote. "Here, they (1) extract maximal accretion for a low cost of capital, (2) still maintain the capacity to do plenty of business development deals and (3) now [have] undisputed leadership in key MS therapy classes."

Approved in 2004, Tysabri was pulled from the market the following year, because of the infused alpha-4 integrin inhibitor's link with PML, a deadly type of brain infection. Biogen and Elan, which shared the compound 50/50, were able to persuade the FDA to allow sales to restart in 2006. (See BioWorld Today, June 6, 2006.)

The label was amended in 2009 to reflect PML risk, noting that the occurrence of the condition in patients treated for 24 months to 36 months is generally similar to the 1-in-1,000 rate seen in clinical trials. Tysabri has been approved for Crohn's disease, too.

Biogen's stock (NASDAQ:BIIB) closed Wednesday at $160.98, up $3.62. Elan's shares (NYSE:ELN) ended at $9.39, down $1.07, or 10.2 percent.