Zacks_Analysts' Blog : Restructuring at Biogen - Analyst Blog

A few days after announcing third quarter results, Biogen Idec (BIIB) announced its intention to streamline its operations and increase efficiencies through the implementation of a restructuring program. Biogen also revised its guidance for 2010.

Key Changes

As part of its restructuring initiative, Biogen said that it intends to focus on neurology and biologics going forward. In connection with this, the company intends to terminate the development of cardiovascular products.

As far as the oncology pipeline is concerned, Biogen plans to spin out or out-license these candidates. Biogen intends to exit eleven programs, including neublastin for neuropathic pain and anti-TWEAK, and focus on projects which represent high return potential.

Biogen’s aim is to launch five new products by 2015.  The company's main R&D focus will be on neurological diseases like multiple sclerosis, amyotrophic lateral sclerosis (ALS), or Lou Gehrig’s disease, and Parkinson’s disease.

Biogen already has a strong presence in the multiple sclerosis market with Tysabri and Avonex in its portfolio. The company is looking to strengthen its position in this market through the successful development and commercialization of candidates like fampridine, BG-12, PEGylated interferon, and daclizumab. Daclizumab, a phase III candidate, is being developed with Abbott Labs (ABT).

Biologics is another area which could help drive long-term growth at the company. Key candidates in this segment include rFactor VIII and rFactor IX for hemophilia. We believe Biogen will look to bolster its biologics pipeline through partnership and in-licensing deals.

Biogen also amended its collaboration agreement with Roche (RHHBY) for Rituxan and said that it will eliminate its oncology and rheumatology sales force for Rituxan. Going forward, Rituxan will be marketed by Roche in the US. This move should help improve profitability from the collaboration.

As part of its restructuring initiative, Biogen also terminated its collaboration agreement with Cardiokine for the development of lixivaptan. The company paid $25 million to Cardiokine in connection with the termination.

Biogen will be shutting down three facilities and relocating its workforce to the remaining three sites. The workforce will be cut down by about 13% or 650 employees. The company also intends to bring its business development, venture development and corporate strategy units under a single head called the Corporate Development Group.

Financial Impact of the Restructuring Program

Biogen expects to achieve annual savings of about $300 million, starting from mid-2011, through its restructuring program. About two-thirds of this savings will come from the R&D line. The company expects to incur restructuring charges of about $115 million of which $85 million is related to the workforce reduction. The balance charge is in connection with the closure and consolidation of facilities.

The company expects to take a charge of about $70 million related to the restructuring in the fourth quarter of 2010.

2010 Guidance Revised

Following the restructuring announcement, Biogen revised certain parts of its previously issued guidance for 2010. While the company still expects revenues to grow in the mid single digit range, Biogen now expects earnings to exceed $4.85 per share. The company was previously expecting earnings to exceed $4.70.

Biogen narrowed its R&D expense guidance to 26-27% of total revenue (old guidance: 24-27%). SG&A expense guidance remains unchanged at 20-22% of total revenue.

Our Take

The restructuring initiative is a step in the right direction for Biogen. The streamlining of the R&D pipeline should allow the company to focus on its core expertise area – neurology. Meanwhile, estimates have gone up with company announcing significant cost savings.

While the Zacks Consensus 2010 estimate has gone up by 14 cents to $4.89, the Zacks Consensus 2011 estimate has gone up by 57 cents to $5.62. Though we are positive on the company’s restructuring initiative which should help drive the bottom-line, we remain concerned about the increased competition in the multiple sclerosis market in the form of Novartis’ (NVS) Gilenya.