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Biogen Idec Acquisition ThesisNovember 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 J un-03 Dec-03 J un-04 Dec-04 J un-05 Dec-05 J un-06 Dec-06 J un-07
SNY GSK NVSAZN ABT WYELLY MRK PFES&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 group1 over the last 5 years
– Pfizer stock trading at a substantial discount to peer group1 – 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 (Fumarate)
•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 EffectsUnique
CharacteristicsIndication Dose/Admin
AvonexIFNβ-1a (↓anti-inflammatory CK)
Injection-site disorders, flu-like symptoms, ↑liver enzymes, CNS (depression/
fatigue)
1st drug shown in RCT to ↓MS progression ↓exacerbations. Only Rx slow permanent MS disability
RMS 30mcg IM once/wk
Rebif IFNβ-1a (recombinant)
only IFN ready-to-use, pre-filled syringes, autoinjector (PRISM)
RMS 22-44mcg SC 3X/wk
Betaseron IFNβ-1b
1st 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
NovantroneAnthracenedione
Immuno-modulator ↓T, B, γ
CardiotoxicHi potency SPMS,
PRMS, RRMS
12mg/m2 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
Fu
lly d
ilute
d E
PS
($)
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 spaceYale Pharmaceutical Case Competition, 2007
Appendix