Streetwise
Lauren Rudd
Sunday, September 8, 2013
Do Not Give In To Ridiculous Discourse
“Persons pretending to forecast the future shall be
considered disorderly under subdivision 3, section 901 of the criminal code and
liable to a fine of $250 and/or six months in prison.”
Section 889, New York State Code of Criminal
Procedure
It seems that every year the question is worded in a slightly
different context but the underlying theme is always same. What is going to
happen on Wall Street if...and here you can substitute the event de jour. For
example, now the question(s) are, “How will Syria, the debt ceiling, and the
battle over funding the government after October 1, affect the stock market?”
Oh, to be a soothsayer of such repute so as to know all the
answers. Unfortunately, with the passing of Madame Marie, who is memorialized in
the words of Bruce Springsteen’s song, “4th of July, Asbury Park (Sandy)” and
who was actually arrested at one time under the above statute, I am completely
out of crystal balls.
Nonetheless, there are countless prognosticators willing to
offer up unsolicited opinions for a “small” cash payment on your part. They run
the gamut from the biased and mundane to such nonsensical advice as, “sell
everything and buy gold.” The result is a deafening din of ridiculous discourse.
Unfortunately, all the rhetoric in the world is not going to
help your portfolio. What you need are quality investment opportunities such as
Biogen Idec (BIIB), a company with a $54.8 billion market cap that I have never
discussed before.
Biogen develops and delivers therapies for the treatment of
neurodegenerative diseases, hemophilia and autoimmune disorders. Founded in
1978, it is the world’s oldest independent biotechnology company with nearly $6
billion in annual revenues.
Some of its better known products are therapies for multiple
sclerosis, such as AVONEX® and TYSABRI®. It also produces RITUXAN®, the world's
most prescribed treatment for non-Hodgkin's lymphoma and an effective treatment
for rheumatoid arthritis.
According to a market research study, Biogen's hemophilia
drugs, ELOCTATE and ALPROLIX, are poised to capture a significant share of the
hemophilia market and also grow the market steadily by increasing prophylactic
treatment. Indicated for hemophilia A and hemophilia B respectively, they
significantly improve the quality of life of patients by reducing the number of
infusions required to manage this chronic condition.
Looking at the Company’s second quarter ended June 30
earnings report, revenues were $1.7 billion, an increase of 21 percent when
compared to the same period a year ago, while earnings per share were $2.06, an
increase of 28 percent. Net income increased 27 percent to $491 million,
exceeding both the S&P 500 and the biotechnology industry average.
The Company’s guidance for 2013 indicates that revenue growth
of approximately 22 to 23 percent, with earnings per share expected to be in the
range of $7.28 to $7.53.
Biogen has a healthy pipeline of products to support its
earnings projection. Three drugs, Alprolix (hemophilia B), Eloctate (hemophilia
A), and Plegridy (multiple sclerosis), have moved past Phase III testing and
have been filed with the FDA for approval. Three drugs currently in Phase III
testing are focused on forms of leukemia, non-Hodgkin's lymphoma, and multiple
sclerosis. And three drugs are in Phase II for treatment of lupus nephritis,
optic neuritis, and idiopathic pulmonary fibrosis.
A discounted earnings model yields an intrinsic value of $248
per share utilizing a 15 percent discount rate combined with a consensus 5-year
earnings growth rate of 21.11 percent. The more conservative free cash flow to
the firm model suggests an intrinsic value of $275 per share, using trailing
twelve month revenues of $5.942 billion, a revenue growth rate of 14.92 percent
and a discount rate of 7.33 percent, which is the Company’s weighted average
cost of capital. The shares recently closed at $230.59.
My earnings estimate for FY 2013 is $8.25 per share with a projected share price
of $258 for a capital gain of about 15 percent. There is currently no dividend.