Halt in MS Drug May Have Hit Primecap

Biogen Idec Inc.’s decision to suspend sales of a highly touted multiple sclerosis drug slammed investors Monday, and perhaps none more than Primecap Management Co.

The Pasadena-based money manager was Biogen’s single largest stockholder at year-end, with 32 million shares or nearly 10% of the company’s total outstanding. If Primecap still owned all those shares Monday, its paper losses in Biogen’s free fall totaled about $916 million.

Primecap, notoriously publicity shy, didn’t respond to requests for comment. But its holdings in Biogen probably remained extensive because its biggest mutual funds lost at least 2.5% of their value in one fell swoop after Biogen and partner Elan Corp. said they were suspending sales of the drug Tysabri after a patient’s death.

Some analysts said they doubted that Primecap was among the horde of investors bailing out Monday. Selling into panics isn’t Primecap’s style, said Jeffrey Ptak, an analyst at investment research firm Morningstar Inc. in Chicago who tracks Primecap-managed funds.

“I’d be shocked if they sold a single share” in the downdraft, Ptak said. Any changes in the firm’s holdings would be disclosed in its next quarterly portfolio statements.

Primecap, which manages more than $40 billion in stocks, has built a name for itself with a research-intensive -- and patient -- investment style. It also has been willing to bet big on companies that it believes have strong long-term prospects.

Primecap is best known for two mutual funds it manages under contract with Valley Forge, Pa.-based Vanguard Group: the $8-billion Vanguard Capital Opportunity fund and the $26-billion Vanguard Primecap fund.

As of Dec. 31, Biogen was the No. 1 holding in Vanguard Capital Opportunity and the No. 2 holding in Vanguard Primecap, according to Vanguard’s website. In each fund, the stock was 4.5% of total assets.

On Monday, Vanguard Capital Opportunity shares slumped 78 cents, or 2.6%, to $29.53. Vanguard Primecap shares slid $1.53, or 2.5%, to $60.81.

By contrast, most major U.S. stock indexes lost less than 0.7% for the day.

Biogen shares plunged $28.63, or nearly 43%, to close at $38.65 on Nasdaq. Elan dived $18.90, or 70%, to $8 on the New York Stock Exchange. More than 118 million shares of Biogen changed hands; trading in Elan topped 167 million shares.

Wall Street had been counting on the new multiple sclerosis drug to be a blockbuster for the two companies. Biogen and Elan said they hoped to get the drug back into the marketplace after more research.

But several major brokerages cut their ratings on the stocks, helping to stoke the day’s sell-off.

Some analysts said Primecap, rather than being a seller of Biogen on Monday, might have been a buyer -- if the firm still had faith in Biogen’s longer-term growth prospects.

“It wouldn’t surprise me at all if they added to their positions,” said Dan Wiener, editor of the Independent Adviser for Vanguard Investors newsletter.

Although many money managers pay lip service to being long-term investors, Primecap says that is central to its philosophy.

“We evaluate securities based on their outlook over a three-to-five-year time horizon, with the intention of holding them considerably longer if their fundamentals warrant it,” the firm says on its website.

Primecap has owned Biogen shares for at least three years. Biogen merged with Idec Pharmaceuticals in November 2003 to form Biogen Idec.

This wouldn’t be the first time that Primecap has suffered steep, sudden losses in favored holdings: Wiener noted that the firm had large holdings in airline stocks in September 2001 and refrained from selling into the panic that followed that month’s terrorist attacks. Most airline shares rebounded sharply in the first quarter of 2002.

Primecap’s long-term performance in managing the Vanguard Capital Opportunity and Vanguard Primecap funds has made them investor favorites at Vanguard -- so much so that Vanguard closed the portfolios to new investors a year ago, concerned that the funds might get too large to manage.

The Vanguard Capital Opportunity fund, launched in August 1995, earned an average annual return of 15.2% from inception through 2004; the Vanguard Primecap fund’s average annual return in that period was 13.2%. Both funds beat the blue-chip Standard & Poor’s 500 index, which gained 10.4% a year.

Primecap last year decided to reduce its dependence on Vanguard: The firm in November launched its own line of mutual funds, called the Odyssey Funds. Those portfolios still are relatively small, and Primecap hasn’t yet been required to reveal the funds’ stock holdings.

But the large percentage declines in two of the funds Monday suggested that Biogen could be a holding: Odyssey Growth fell 23 cents, or 2.1%, to $10.81 a share; Odyssey Stock lost 23 cents, or 2.1%, to $10.90.

Primecap’s overall Biogen stake of 32 million shares was the total it showed in portfolio filings as of Dec. 31. It is possible that the firm has adjusted its holdings since then. The next filings, for shares owned as of March 31, won’t be public until spring.