Insiders Are Wrong About This Industry Leader

Tim Begany's picture

Friday, May 30, 2014 - 4:00pm

by Tim Begany

When considering whether to buy or sell a stock, many investors base their decision heavily on the actions of key insiders such as the CEO, the chairman of the board, and others. After all, who should know more about a firm's investment merits than those running the company?

Blindly following insiders into and out of a stock can be dangerous, though. Like the rest of us, insiders are human. So who's to say they'll never make mistakes such as selling in a panic during bad markets or buying on the assumption their company's stock will simply keep going up?

But when it comes right down to it, we don't really know why insiders buy or sell. They don't have to tell us, only report when they did and how many shares were transacted. So even though it can be informative to know what insiders are doing, they can easily be dead wrong.

And they certainly are about one well-known stock, in my opinion.

As a group, this company's key insiders have reduced their ownership of the stock by more than 14% during the past 12 months, according to Morningstar. They now hold a total of about 225,000 shares worth roughly $72 million, based on a recent stock price of $320.

That's still an impressive hoard, to be sure -- but I've got to wonder if these insiders wish they simply held. If they had, they'd be about $10 million richer right now -- in large part because the stock rose nearly 34% during the time they were cutting back their own positions.

Clearly, investors shouldn't take the general bearishness of insiders as a sign that they, too, ought to sell Biogen Idec (Nasdaq: BIIB), a major pharmaceutical firm best known for its multiple sclerosis (MS) medications Avonex, Tysabri and, most recently, Tecfidera. Bailing out now would leave shareholders at high risk for seller's remorse down the road, in my view.

That's because few companies come close to dominating the market for MS drugs the way Biogen has -- and should continue to. The firm's two biggest-earning MS drugs, Avonex and Tysabri, are both blockbusters combining for annual sales of more than $4.5 billion. That's 58% of Biogen's total annual revenue of $7.6 billion and 28% of the $16 billion MS drug market.

That's not to say Biogen lacks close competitors. Its main rival, Israeli drugmaker Teva Pharmaceuticals (NYSE: TEVA), owns a similar chunk of the MS market, mainly because of the $4.3 billion in sales its leading MS drug Copaxone generated worldwide last year.

However, Biogen could soon overtake Teva by a substantial margin for a couple reasons, one being that Copaxone sales have likely peaked and are poised for major declines because of greater competition from cheaper generic equivalents. Also, Biogen's new MS drug Tecfidera, which performed extremely well in Phase III trials, is just gaining traction and should produce sales in excess of $1 billion for years to come (following an $876 million showing last year). It's off to very strong start this year, bringing in $506 million in the first quarter.

Another key catalyst for future growth is the all-important drug pipeline, and Biogen has an extensive one.

For instance, it launched a new hemophilia medication, Alprolix, in March and should get FDA approval for a second one, Eloctate, toward the end of the year. Together, the two drugs could see annual sales of $1.3 billion by 2020, project analysts at the Japanese asset management and investment banking firm Nomura. By then, Biogen's MS portfolio could be churning out more than $13 billion of revenue a year, these analysts also estimate.

Another particularly promising drug in the pipeline: anti-LINGO, which may be able to treat MS-related nerve damage. The drug, now in Phase II trials, could be a huge advance in MS therapy because so far it appears to help restore nerve function. Current treatments only reduce the frequency of MS relapses by hindering the immune system issue that causes the disease.

Biogen's pipeline also includes drugs being developed to treat a variety of other diseases and conditions including lupus, lung disease, Alzheimer's, non-Hodgkin's lymphoma, and certain spinal issues. Beyond MS, Biogen already has the blockbuster Rituxan, with 2013 sales exceeding $1.1 billion. Rituxan has long been a standard treatment for certain hematologic cancers including non-Hodgkin's lymphoma and chronic lymphocytic leukemia, as well as for rheumatoid arthritis.

Risks to Consider: Although it has an impressive pipeline, Biogen is still somewhat undiversified and currently gets most of its revenue from a handful of medications, mainly those for MS. What's more, the MS portfolio could soon be facing greater competition from "biosimilars" -- so-called copycat drugs that aren't chemically identical but provide similar therapeutic effects.

Action to Take --> Don't follow insiders out of Biogen. Rather, hold the stock or even consider buying, particularly on a pullback. The firm has a strong, reliable stable of high-performing MS drugs and a solid pipeline that should help it diversify.

Management's guidance calls for earnings per share (EPS) of at least $11.35 this year, which would be a 27% gain from last year's $8.96. By the end of 2018, EPS could rise to nearly $21.40 based on consensus growth estimates of 19% a year, which are feasible because of the factors I've described. If the stock's earnings multiple hovers around 28 as projected, this sort of growth could propel the price 87% higher to nearly $600 a share.

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Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.