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Biogen: How Deep a Wound Is Tysabri?

By Arlene Weintraub At a time when the medical community has grown especially jittery about drug safety, the news from biotech giant Biogen-Idec (BIIB) couldn't have sounded more dire. On Feb. 28, the Cambridge (Mass.)-based company voluntarily withdrew its new drug, Tysabri, from the market.

The drug, which Biogen is marketing in conjunction with Ireland's Elan Pharmaceuticals (ELN), was just recently launched and was supposed to offer new hope for patients suffering from multiple sclerosis. But two patients who had been on the drug in trials -- plus another medication marketed by Biogen -- for more than two years developed a rare brain disorder called progressive multifocal leukoencephalopathy (PML). One died. Shares of Biogen plunged 43%, to $28.63, and Elan's stock crashed 70%, to $8.

ELAN'S CLOUDY FUTURE. Question is, did investors overreact? The short answer, in the case of both companies, is no. True, there's a chance Tysabri will make a comeback: In a conference call with analysts and journalists, Biogen execs made it clear that this is a "suspension." Further analysis of side-effect risks vs. benefits, they said, may someday make it possible for Tysabri to be reintroduced. But dozens of questions remain that will have to be answered before any relaunch is possible, and the uncertainty makes investing in both outfits risky.

The more clear-cut part of this double-faceted story is Elan. Once among Europe's top pharma concerns, Elan faltered after a series of complicated development partnerships left it heavily in debt. It recently won approval of Prialt, a pain reliever, but serious side effects make it unlikely the drug will ever be a blockbuster. Analysts were depending on Tysabri to ameliorate the debt and bring Elan back into the black from three straight years of losses. Without Tysabri, Elan's profitability prospects are unclear.

Biogen is in a slightly stronger position. Its sales for 2004 jumped from $679 million to $2.2 billion, largely on the strength of its other multiple sclerosis drug, Avonex, and its treatment for non-Hodgkin's lymphoma, Rituxan. The company reported a profit of $518 million, up 20% from the previous year. But investors were counting on Tysabri to boost revenues at least 14% this year, with some predicting that the new product's sales ultimately could top $3 billion a year.

"A STEP BACK." Even after the stock's fall, it's trading at 17 times expected earnings for 2006, and it's PEG ratio -- a measure of price-earnings ratio vs. five-year expected growth -- is a pricey 1.98. Biotech leaders Amgen (AMGN) and Genentech (DNA) trade at PEGs of 1.17 and 1.79, respectively. With Tysabri's future in question, Biogen's still-rich valuation may be questioned by institutional investors in coming days, making a further sell-off possible.

Meanwhile, Biogen's scientists are gearing up for a massive detective project. They need to figure out if the cases of PML were related to Tysabri, or to the combination of the product with another drug. And they must reevaluate other patients in the trials to make sure they're not missing other cases. Then comes the hard part: Determining if the side-effect risk makes the drug safe enough to market.

"A step back is a prudent thing for everyone," said Biogen CEO Jim Mullen in the conference call. That goes for investors as well. Weintraub is Science editor for BusinessWeek

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