Mature U.S. biotechs have stronger credit than industrials but weaker than Big Pharma, S&P says

By Ronda Fears

Nashville, Sept. 7 - Mature U.S. biotechnology companies show a stronger overall credit profile than that of the universe of U.S. industrial companies but are weaker than the Big Pharmas, Standard & Poor's said in a report released Wednesday.

S&P's study, titled "Peer Comparison: Mature U.S. Biotechnology Companies" and written by credit analyst David Lugg examined the credit strengths of Amgen Inc., Biogen Idec Inc., Chiron Corp., Genentech Inc., Genzyme Corp. and MedImmune Inc., looking at what makes them different and how such a large proportion of them - five of the six - achieved investment-grade ratings.

Lugg said in the report that various sources estimate that about 155 biotechnology products account for about 10% of the almost $500 billion global pharmaceutical market.

"However, sales of these products are growing at a rate of 22%, which is double that of the overall market, reflecting the significant advantages many of these therapies provide," Lugg said.

"The pace of new product introductions fell off in the past year with only four new product approvals, including the expected blockbuster cancer treatment Avastin from Genentech. Also, the total time needed to develop a biotech drug has steadily increased over that needed for small molecule drugs.

"During the infancy of the biotech revolution, it was hoped that these products would be faster to develop, as they would be copies of naturally occurring proteins and antibodies with fewer side effects. Experience has shown, however, that these complex products and their complex production processes can lead to unanticipated outcomes."

Amgen's market cap shows

Of the six companies considered for the analysis, Lugg said Amgen (A+/stable) clearly has the strongest market position. Spectacular double-digit growth of the majority of its owned products yields exceptional overall growth and gross margins.

Its top-selling product, Aranesp, a recombinant treatment for anemia, contributes 29% of revenues, while the top three products account for 70%. This level of product concentration is high for a pharmaceutical company and is a significant limitation on the market position evaluation.

Offsetting this concern, however, is that there is little exposure to patent expirations for several years, S&P said in the report.

Lugg also noted that despite Amgen having the largest research budget, it also has the weakest near-term pipeline. This is less of a concern, he added, as several of its key products were only launched in the past two years.

Genentech a close second

Genentech (A+/stable) has the next strongest market position, but Lugg pointed out that its lead products are not as mature as Amgen's, as can be seen by the lower overall sales level.

The company's heavy dependence on a single product, Rixtuxan, a monoclonal antibody for non-Hodgkin's lymphoma, does set it apart from Amgen. Still, overall concentration is comparable with that of Amgen.

Moreover, the rapid acceptance of Avastin and expanded uses for Herceptin should lessen this concentration in the near term, he said. Similarly, too, there is little exposure to patent expirations.

Lugg also noted that in contrast to Chiron's benefit from the majority ownership of Novartis AG, Genentech's relationship with Roche Holding AG is seen as limiting liquidity.

Biogen risk with Tysabri

Biogen Idec (BB+/ positive), the third-largest biotechnology company based on sales, presents a familiar portrait of significant concentration in a single product that is performing very well. Avonex is the largest selling multiple sclerosis treatment, though it faces significant competition.

The question mark confronting Biogen Idec is the ultimate fate of its newer MS treatment, Tysabri.

"Absent Tysabri, Biogen Idec's pipeline is sparse - a major weakness in its business risk profile," Lugg said.

Approved late in 2004, Tysabri was quickly removed from the market when a small number of patients in a related clinical trial developed a fatal condition. This development may not necessarily be related to Tysabri itself, but at this point it is unclear whether the drug will return to market.

Chiron diversity at a price

Despite the market's singular focus on Chiron's troubled flu vaccine, Lugg said Chiron (BBB+/developing watch) is the most diverse company in his comparison.

"Not only does the company have a very low level of product concentration, it also operates in the related fields of vaccines and recombinant products for clinical diagnostics," he said, but added, "This diversity, however, also reflects Chiron's inability to generate a drug that addresses unmet needs in large markets."

In addition, with its greater diversity Chiron shows lower overall gross margins - the weakest of the group, although still greater than most industrial companies.

Plus, Chiron has the greatest exposure to patent expirations of all the companies in this comparison, with its Betaseron recombinant treatment for MS set to begin losing patent protection in 2007.

A more immediate concern, however, is whether the company's Fluvirin brand of influenza vaccine will be able to return to the U.S. market after being removed last October. While Chiron has been able to resume production, it is not clear to what extent the FDA is satisfied with improvements in its production process.

Genzyme mix appealing

Another company with a diverse business mix, Genzyme (BBB/positive), derives 29% of revenues from diagnostic and surgical products. Also, Lugg noted that Genzyme, the most acquisitive of the group, has used equity as well, demonstrating an intent to preserve a conservative capital structure.

In contrast to Chiron, however, he said Genzyme's key pharmaceutical products address unmet needs in lucrative, albeit niche, markets. Top-seller Cerezyme is a recombinant treatment for Gaucher's disease - a rare, debilitating inborn error of metabolism. The success of this product actually overshadows the benefits of Genzyme's business diversity, as it contributes about 38% of all sales - a significant concentration.

Genzyme also benefits from patent protection beyond a three-year horizon.

MedImmune a rising star

MedImmune (BBB/stable) is the newest and smallest of the mature biotechnology companies. Given its earlier stage of development, Lugg said its market position is somewhat weaker than the others, with exceptional concentration in a single product, Synagis.

Synagis, a monoclonal antibody for the prevention of respiratory syncytial virus infection in premature infants, is the only safe and recommended treatment for this very fragile patient group.

Moreover, Lugg said MedImmune's patents are not set to expire for more than 10 years, suggesting that there is ample time for the company to develop additional products.

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