Biogen Idec Acquisition Thesis November 30, 2007

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Biogen Idec Acquisition Thesis

November 30, 2007

Umesh Baheti (MBA)

Jason Chen (MD)

Akshay Dhiman (MBA)

Huaping Tang (PhD)

Market Trends


Pharma sector under rough weather


Lack of blockbuster drugs through internal R&D


Concerns surrounding drug safety and patents


Increased scrutiny by the FDA on new and existing products


FDA approvals to R&D dollars spent has declined


($64Bn,13 approved compared to $27Bn, 24 approved in 1998)
1


Increased competition from generics


Possibility of control on drug prices by new Administration could further erode industry profits



Pharma seeking new growth avenues


Increasing focus on niche areas


Alliances offer enhanced discovery capability through beefing up the pipeline and filling
strategic gaps



Biotech valuation multiples higher than Pharma due to higher growth
potential



Pressure on management to improve shareholder returns


Increased shareholder activism


1 Source: Economist Oct
-
2007

Yale Pharmaceutical Case Competition, 2007

Pfizer under pressure!


40.0
60.0
80.0
100.0
120.0
140.0
160.0
180.0
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
SNY
GSK
NVS
AZN
ABT
WYE
LLY
MRK
PFE
S&P 500 Index (^SPX) - Index Level
Source: Capital IQ as of 11/28/07

Source: Pfizer

1

Peer group includes Astra Zeneca, Merck, Novartis, Wyeth, El Lilly, Glaxo Smithkline, Abott Laboratories


Pfizer’s lackluster financial performance


Pfizer’s stock has been the worst performer in its
peer group
1

over the last 5 years


Pfizer stock trading at a substantial discount to peer
group
1



P/E of 10.8x (median P/E of 19.3x)


High potential Exubera taken off market in 3Q ’07;
write
-
off of $2.8Bn


Lipitor under competitive pressure from generics
(Lipitor 3Q ’07 revenues 5% lower than ’06)


80% decline in YTD ‘07 Zoloft revenue compared to
’06


~ $12Bn of revenue loss due to 5 patent expiration



Low ROI from R&D


Increasing R&D costs (>$8Bn)


Limited business development success across
therapeutic categories and development stages


No major blockbuster expected

Pfizer’s rationale for acquisition







Strategic


Diversify portfolio of therapeutic areas


Improve presence in biologics


Shore up product pipeline


Access to biotech R&D capability


Industry undergoing shift




Financial


Biogen is up for sale


Opportunity to deploy surplus cash


Sizeable market potential (350
-
500K
patients annually)


Biogen’s pipeline complement’s Pfizer’s
strategic priority to enhance revenue both in
the short and the long term



Yale Pharmaceutical Case Competition, 2007

Acquisition Evaluation

Benefits


Access to Biogen’s pipeline


Product Diversification


Access to Avonex and BG
-
12


Access to Biogen’s R&D resources


Knowledge diffusion into Pfizer’s
existing R&D


Access to niche and profitable MS
market


Financial


Higher valuation multiples due to
biotech slant


Higher gross margins on biotech


Synergies


Technology


Leverage Pfizer’s global sales and
distribution capability


Risks


Organizational


Divert attention from internal rationalization


Different R&D cultures and priorities; R&D
diseconomies of scale


Limited cost synergies:


Geographically diverse locations


Transaction Uncertainty


Complications due to CoC provisions


Rituxan may not end up with Pfizer


Risk of overpay due to higher valuation


Liability


Efficacy and safety of Tysabri


Revenue Erosion


Flagship product Avonex under threat from
generic substitution and competition


Timeline may not match



Yale Pharmaceutical Case Competition, 2007

MS mechanism and treatments

Source: Kieseier BC et al. CNS drugs,
2007;21(6):483
-
502

Biogen

Competitors

Approved
drugs


Avonex


Tysabri


Rebif


Betaseron


Copaxone


Novantrone

Pipeline
drugs (Ph III)


Rituxan


BG
-
12
(F
umarate)


Laquinimod (Active Biotech)


Campath


MBP8298


Fingolimod (Norvatis)


Minocycline (Tetracycline)


Mylinax


Progestin and Estradiol


Reimmune


Teriflunomide


Trimesta


Stem cells


T
-
Cell vaccination

Yale Pharmaceutical Case Competition, 2007

Comparison of existing MS drugs

Name


Class


Side Effects

Unique
Characteristics

Indication

Dose/Admin

Avonex

IFN
β
-
1a (↓anti
-
inflammatory CK)

Injection
-
site
disorders, flu
-
like
symptoms,
↑liver
enzymes, CNS
(depression/

fatigue)

1
st

drug shown in RCT
to
↓MS progression
↓exacerbations. Only
Rx slow permanent MS
disability

RMS

30mcg IM
once/wk

Rebif

IFN
β
-
1a
(recombinant)

only IFN ready
-
to
-
use,
pre
-
filled syringes,
autoinjector (PRISM)

RMS

22
-
44mcg
SC 3X/wk

Betaseron

IFN
β
-
1b

1
st

drug shown effective
in RCT Tx RRMS

RRMS

0.25mg SC
every other
day

Copaxone
(glatiramer
acetate)

Polypeptide
immuno
-
modulator

“myelin decoy”

Injection
-
site
disorders

Only non
-
steroidal, non
-
interferon MS therapy
(
↓SE), ØNAB

RRMS

20mg SC
QD

Novantrone

Anthracenedione

Immuno
-
modulator
↓T, B,
γ

Cardiotoxic

Hi potency

SPMS,
PRMS,
RRMS

12mg/m
2

IV
3mo

Tysabri

Monoclonal Ab

PML in combo
w/ other
immunoRx


annual relapse rate
67% = 2X current Rx
(AFFIRM)

RMS

3mg/kg IV
once/1mo

Source: www.uptodateonline.com

Yale Pharmaceutical Case Competition, 2007



Administration

Oral

Injection/Infusion

Names

BG
-
12,

Laquinimod,Fingolimod,
Mylinax, Teriflunomide, Micocycline,
Progestin and Estradiol, Trimesta.

Rituxan,

Campath,
Reimmune

Mechanism/

Indication (all
relapsing)



All immunomodulators



Fingolimod
(dual functions)



Micocycline
(antibiotics)



Progestin, Estradiol, and Trimesta

(Hormones) for women only



Rituxan
,

Campath,
(monoclonal antibodies)



Revimmune

("reboot" )


Efficacy



BG
-
12(48%)



Laquinimod(40%)



Fingolimod(>50%)



Rituxan(91
%)



Campath(>80%)

Approved for treating
other diseases



Trimestra, Estradiol, Progestin,
Micocycline




Rituxan

Legend:

Biogen drugs
/
Competitors’ drugs

Comparison of MS drugs in Phase III

Yale Pharmaceutical Case Competition, 2007

Valuation Assumptions

Sum of the parts analysis:


3.0
-
4.0x multiple on ’10 expected revenues to value each drug (based on precedent biotech
acquisitions)


Pipeline valuation: Values Ph III drugs @ $100M; Ph II/III @ $50M; Ph II @ $25M; Ph I @
$15M and Pre
-
clinical @ $5M


Facilities Valuation: Values production facility in NC and Denmark @ $400M (based on
precedent transactions)


Discounted Cash Flow (DCF) analysis:


Enterprise value calculated for Biogen’s worldwide operations


13% WACC (given)


Terminal value calculated using 5
-
8% perpetuity growth rate


Trading Multiples:


TEV/EBITDA and TEV/Sales multiples used


Peer group comprises of Abott Laboratories, Astra Zeneca, Glaxo SmithKline plc, Merck &
Co. Inc., Novartis AG, Eli Lilly & Co., Sanofi
-
Aventis AG and Wyeth

Yale Pharmaceutical Case Competition, 2007

Valuation Summary

20
40
60
80
100
120
DCF
TEV/Sales
TEV/EBITDA
Sum of Parts
Share Price ($)
Implied Enterprise value ($ Bn)

14.7


28.3

20.3


30.2

9.4


34.9

18.8


27.8

1.5
2
2.5
3
2008
2009
2010
Fully diluted EPS ($)
Standalone
Pro-forma (100% stock)
Pro-forma (50% stock - 50% cash)
Pro-forma (100% cash)


Offer price of $78/share (30% premium
to pre Biogen seeking buyout)




All cash offer likely to have adverse
impact of Pfizer’s credit ratings




Considering most likely scenario (50
-
50
case), merger becomes accretive in ’10




Assumed $300MM annual synergies


1

1

Source: HSBC Equity research

Accretion


Dilution analysis

Yale Pharmaceutical Case Competition, 2007

Strategic alternatives & key considerations


Criteria


Alternatives

Portfolio
diversification

Enhance
product
pipeline

Biotech R&D
expertise

Enhance
valuation

Cost
Incurred

Status
-
quo













Acquire Biogen














?

✘✘✘

Acquire other
biotech company










?

✘✘

License MS
pipeline from
Biogen











?



Partner with
Biotech







?



Recommendation in rank order



Acquisition makes strategic sense if price between $72
-
$85



Build expertise in biotech through partnerships



Seek other acquisitions in the biotech space

Yale Pharmaceutical Case Competition, 2007

Appendix