Biogen Idec is a leading biotechnology firm that has experienced strong growth through niche pharmaceutical products. However, an analyst's model projects the stock is overvalued given limitations on sustained high growth rates as markets become saturated and competitors increase efforts. The model finds a 73% probability the stock is fairly priced between $180-300 but only 5.25% above $300. The analyst advises taking profits and waiting for new product approvals and guidance.

1. LYNDON MARTIN W. BEHARRY
CPO BOX-1509
ULAANBAATAR 15160
MONGOLIA
LAND: 976-773-336-69
MOBILE: 976-997-957-62
LMBEHARRY@YAHOO.COM
Brief on Biogen Idec.
Summary
Biogen Idec (BIIB) is a strong, healthy firm. The analyst found neither
accounting irregularities nor weakness in the firm’s ten-year rise to a
leading position in niche pharmaceutical production. The entity’s seasoned
senior management has unremittingly displayed professionalism and broad-
based skill working through FDA approval process in the United States. The
firm’s European partners have lubricated transactions within the European
Community. Clearly, the firm is poised to enjoy continued growth and
success. The question is the degree of growth, and the degree of success.
From FY2003 through FY2013 BIIB boasted a robust 26.15% compound
annual growth rate of revenue. The caveat here: the standard deviation of
the entity’s average annual revenue growth revolves around 71.466%
volatility. This robust growth and volatility is typical of the few successful
biotechnology companies which survive through their first set of product
offerings.
The firm’s managers maintain a firm hold on costs; and production per unit
costs lies well within the range of competitors. Lastly, the firm’s financial
position reflects astute management of patents and amortization policy,
minimization of tax liability, and maintenance of strong FCF to investors.
Clearly, firm management has displayed extraordinary talent in recognizing
strong research and infant pharmaceutical lines in smaller organizations,
acquired rights to those products, and astutely amortized the capitalization
of those rights to reduce short-term tax liability and boost FCF.
Biogen Idec is currently trading in the low $300 range, with strong
institutional support following favorable guidance by over 25 analysts from
the leading houses. Notwithstanding this support, the instant analyst
believes that the equity is currently trading at the high end of probable
equity valuations, for the following reasons:
• The analyst does not believe the firm can sustain over 20% growth
rates for the following five years, year over year;
• The firm is currently poised to serve niche pharmaceutical markets:
Multiple Sclerosis, Hemophilia, Lupus, etc. Though one would expect
robust short-term growth as the firm enters these markets, the
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2. BIIB Report | Page 2 of 8
markets are limited, with an intermediate-term fixed horizon on
market saturation.
• Several of the product offerings address multiple sclerosis, and these
pharma products will likely begin cannibalizing each other within the
intermediate term. The analyst believes that this cannibalization will
curtail growth within the MS product line within the next 18 to 24
months.
• Sales of competitor offerings may rebound as these competing firms
increase their marketing efforts, and reduce BIIB growth in the MS
market.
• In the intermediate term, and in light of recent changes to socialized
health-care in the US, states may amend legislation changing the level
of subsidized payments for pharmaceuticals through managed
healthcare etc.
• The firm has submitted hemophilia agents, Factor VIII and Factor IX
to the US FDA for regulatory review, anticipating marketing approval
in 2014-2015. As these hemophilia products are administered orally,
analysts expect sales to grow robustly indeed. (i.e. more doctors will
prescribe the treatment as it circumvents costly and frequent
recurrent need of infusion of clotting factor). Statistics indicate that
roughly 20,000 US residents suffer with hemophilia.1 A market of
20,000 patients is not a growth sector.
In sum, the pharmaceutical industry is highly competitive. The equity
valuation of BIIB has already embodied high rates of potential future
growth. This analyst is inclined to advise equity holders take profits and
await further guidance via FDA regulatory approval of the hemophilia
offerings, and the success of MS products in the EU.
The analyst produced a Monte Carlo equity model using recently released
financial data. The model returned a 73% probability that the equity would
be fairly priced between $180 and $300; but only a 5.25% probability that
the shares would be fairly priced above $300.
Guidance:
• Take profits at $300-$320
• Wait for FDA approval on other lines.
• Wait for entrée of additional product lines to the EU.
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3. BIIB Report | Page 3 of 8
Assumptions, Data, and Analysis
The analyst completed a discounted cash flow analysis using guidance from
the firm’s historical R&D and production patterns, and with information
provided by the firm during recent earnings reports.2
VARIABLES3
HISTORICAL
MEAN
HISTORICAL
σ
ALTERNATE
RATE
SOURCE OF ALTERNATE
DATA
Revenue
Growth
Rate
34.987% 71.466% 23.000% BIIB 2014 Guidance
CoGS 14.704% 10.732% 11.651%
Overall aggregate as a
function of Revenue
SGA 12.407% 3.109% 23.000% BIIB 2014 Guidance
R&D 28.248% 3.276% 22.000% BIIB 2014 Guidance
Depreciatio
n /
Amortizatio
n
19.196% 8.304% 15.344%
Recent 5-year
performance
Other
Expense
16.917% 37.433% 15.000% Historical trend
Total
Operations
Expense
77.334% 38.787% 75.344%
Interest
Income /
(Expense)
0.000% BIIB historical trend
Tax Rate 34.566% 16.954% 35.000%
Aggregate Payout as a
function of EBT
Capital
Expenditur
es
3.266% 30.089% 3.500% BIIB 2014 Guidance
Working
Capital
32.038% 11.436% 5.000%
Plug-in low-ball
estimate to
accommodate robust
sales growth. (Note:
this analyst could find
no reference to leading
brokers accounting for
working capital
expenditure.)
∆ Working
Capital
-1.299% 21.435% 0.000%
WACC 13.981%
Calculated based upon
Average of CAPM in
tandem with RoE, and
ttm debt cost.
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4. BIIB Report | Page 4 of 8
The instant analyst completed a Monte Carlo probability-weighted scenario
of approximately 450,000 iterations, using the rates described above. The
analyst imputed 2014 year revenue of 8.5 billion (i.e. based upon Biogen
guidance of 23% revenue growth: projected RevenueFY2014 = RevenueFY2013 X
1.23), with an annual growth rate of 23% around a standard deviation of
5.75%. To account for conservative quality estimate, the model reduced
subsequent years’ growth rates by 1% each period, maintaining the same
standard deviation. This projection returned a mean valuation per share of
approximately $220. The analyst may make the spreadsheet work available
for critique.
Monte Carlo snapshot of share price probability distribution (based upon
recent January 2014 data). The analysis suggests that the firm’s current
trading range is inflated, toward the extreme range of probability of actual
equity value.
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5. BIIB Report | Page 5 of 8
Following are snapshots of Monte Carlo process:
Graphic depicting probability distribution of share price between $180 and
$300 (based upon the analyst’s model).
Graphic depicting probability distribution of share price above $300 (based
upon the analyst’s model).
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6. BIIB Report | Page 6 of 8
Snapshot of the model before run.
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7. BIIB Report | Page 7 of 8
Snapshot of the model during run.
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8. BIIB Report | Page 8 of 8
Appendix A
2014 Financial Guidance per the January 29 8-k:
Biogen Idec also announced its full year 2014 financial guidance. This
guidance consists of the following components:
• Revenue growth is expected to be approximately 22% to 25%.
• R&D expense is expected to be approximately 20% to 22% of total
revenue.
• R&D expense includes over $200 million earmarked for potential new
business development deals.
• SG&A expense is expected to be approximately 22% to 23% of total
revenue.4
• Non-GAAP diluted EPS is expected to be between $11.00 and $11.20.
• GAAP diluted EPS is expected to be between $9.74 and $9.94.
• GAAP diluted EPS is expected to include amortization of acquired
intangible assets of approximately $415 million.
• Capital expenditures are expected to be approximately $300 million.
Biogen Idec may incur charges, realize gains or experience other events in
2014 that could cause actual results to vary from this guidance.
1 http://openicon.blogspot.com/2010/09/biogen-idec-biib-hemophilia-therapies.html
2 http://finance.yahoo.com/news/biogen-idec-2013-total-revenues-113000170.html
3 The analyst imputed a Monte Carlo “Max Extreme” distribution fit for revenue. All other
functions returned normal distributions.
4 As historical SG&A, adjusted for Depreciation and Amortization tends toward 14% of
Revenue, the instant analyst believes this 22% to 23% guidance includes an allowance for
working capital and/or increased sales/marketing expense to grow and maintain market
share.
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