The Disadvantage of a Successful Pipeline

You have to spend money to make money.

Biogen Idec (NAS: BIIB) announced fourth-quarter earnings and its 2012 outlook this week, and while last year ended strong -- revenue from Tysabri, which it sells with Elan (NYS: ELN) , was up 11% -- the 2012 earnings outlook came in under analysts' expectations. Biogen is guiding for adjusted 2012 earnings of $6.10 to $6.20 per share, which is only a 3.3% increase at the low end from 2011. Last year's adjusted earnings growth was 15%.

The culprit: continued high spending on R&D. Biogen expects to spend 24% to 25% of revenue on R&D; last year it was 24.2%. While the level has come down in recent years, as it should with revenue zooming up, it's not quite at the 20% level Biogen is targeting.

Carl Icahn would be rolling over in his grave if it weren't for the fact that he reduced his holdings of Biogen by about 50% last year -- and that he's still alive. The activist investor still owns about $1 billion worth of stock. The short-term thinker can't be too excited about the spending, but he can't be too upset with management, either. Shares have more than doubled since his purchases in 2007 and 2008.

Of course, the reason shares are up and the reason R&D costs are up are completely correlated. Shares have zoomed up because to the potential of Biogen's oral multiple sclerosis drug BG-12 and other successes in the pipeline. BG-12 looks like it should be able to take market share from Teva Pharmaceuticals' (NAS: TEVA) Copaxone and Merck KGaA and Pfizer's (NYS: PFE) Rebif, which both have to be injected. And it should be able to compete with Novartis' (NYS: NVS) Gilenya, the only oral drug to treat disease progression, especially with it running into issues with unexplained deaths of patients on the drug.

For sports teams, there are rebuilding years; for biotechs, there are investing years where they have to sacrifice short-term gains for long-term potential. Biogen could return more of its cash to investors, but considering how well it's done with its pipeline, investors are probably better off letting the company reinvest it.

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At the time thisarticle was published Fool contributorBrian Orelliholds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Teva Pharmaceutical Industries.Motley Fool newsletter serviceshave recommended buying shares of Pfizer, Teva Pharmaceutical Industries, and Novartis. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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