Biogen Idec Ratings Raised

S&P cites the recently combined biotech outfit's greater portfolio diversity -- and solid growth prospects for its key products

On Dec. 2, 2003, Standard & Poor's Ratings Services raised its corporate credit and senior unsecured debt ratings on Biogen Idec (BIIB ; formerly Idec Pharmaceutical Corp.) to 'BB+' from 'BB'. The ratings have been removed from CreditWatch, where they were placed June 23, 2003, following Idec's announcement that it was merging with fellow biopharmaceutical company Biogen Inc., based in Cambridge, Mass., in an all-equity transaction valued at $6.6 billion.

The outlook is positive.

The upgrade reflects the recently combined biopharmaceutical company's greater portfolio diversity and the solid growth prospects of its key products.

The near-investment-grade ratings on San Diego, Calif.-based Biogen Idec reflect the growing diversity of its biopharmaceutical portfolio, its favorable product growth prospects in the intermediate term, and the company's strong financial profile. These factors are partially offset by the company's high revenue dependence on only two drugs, its relatively thin near-term product pipeline, and the challenges associated with a major merger.

Biogen Idec specializes in the development of monoclonal antibody-based (Mab) cancer treatments and autoimmune disease treatments. Pro forma for the merger, the company had nearly $1.37 billion in sales for the nine months ended September, 2003.

The combined portfolio is led by the multiple sclerosis treatment Avonex. Launched in 1996 by Biogen, the drug continues to hold the leading market share, with nearly 44% of all new prescriptions, and it generated $858 million in sales in the nine months ended September, 2003. The company also enjoys a royalty stream from its B-cell non-Hodgkin's lymphoma treatment Rituxan, which is co-marketed with Genentech Inc. Rituxan, discovered by Idec and approved in late 1997, was the first Mab approved by the FDA as a cancer treatment. It is currently the best selling cancer treatment in the world and faces little competition for the foreseeable future. Idec's revenue from Rituxan sales amounted to nearly $365 million for the first nine months of 2003.

In the wake of the merger, Biogen Idec has a $550 million R&D program, the third largest in the biopharmaceutical industry. Significant new products are essential to decreasing the company's high reliance on Avonex and Rituxan for sales and earnings. Sales for the company's more recent product launches--Amevive (Biogen's treatment of moderate-to-severe chronic plaque psoriasis) and Zevalin (Idec's cancer treatment)--have been disappointing thus far, as both products have encountered reimbursement issues. Moreover, the near-term product pipeline is light, with only multiple sclerosis treatment Antegren in Phase III development trials. Data from the trial is not expected until 2005. In the meantime, competition in the multiple sclerosis market is increasing, especially with the 2002 launch of rival Rebif by Serono SA and its co-marketer, Pfizer (PFE ).

Biogen Idec is expected to continue to turn in strong operational performance. Combined, EBITDA margins are roughly 40%. Biogen by itself had minimal debt. Biogen Idec had $653 million in funds from operations for the 12 months ended Sept. 30, 2003. Funds from operations to total debt, pro forma for the merger, is a lofty 71%.

Liquidity: Biogen Idec has more-than-adequate liquidity to continue to fund its R&D program as well as conduct acquisitions. As of Sept. 30, 2003, the company had $1.8 billion in cash and short-term investments, as well as $603 million in long-term investments. The company generated free cash flows of $121 million for the 12 months ended Sept. 30, 2003. Holders of its $1.2 billion zero coupon senior convertible notes may require the company to repurchase all or a portion of the notes as early as Apr. 29, 2005.

Outlook: The outlook is positive. The smooth integration of the operations and R&D programs of the two companies, the continued strong sales and cash flow generation of the current portfolio, and the increased diversification of the companies' revenue base could lead to the ratings being raised into investment grade within the next few years.

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