In this section, we provide a forecast for Biogen's financial projection and estimated earnings from 2013 to 2017. Using the projected earnings and free cash flow numbers, we derive an estimated fair value for BIIB around $267. BIIB is currently trading in the $230-$240 range, thus presenting a 10%-12% discount to its intrinsic value. While the current price represents a 23x multiple to its 2014 estimated adjusted EPS, the stock is under-valued, given its high earnings growth rates.
Financial projection and stock valuation
Financial data before 2012 are based on the Biogen's 2012 annual 10K filings (BIIB 10K 2012). The data from 2013 to 2017 are projections based on historical data or revenue estimates based on 2013 earnings reports (BIIB 10Q 3Q2013). Below are financial data and assumptions that we use as our basis for deriving an intrinsic value for Biogen Idec. We start with income statement items and then analyze cash flow and financial strength and ratios.
We estimate that the combined revenues of Biogen's existing multiple sclerosis and oncology drugs are $5.5B in 2013 and will increase to $6.4B in 2017, which represents a 3.7% annual growth rate over the next 5 years.
We project that new drugs approved since 2012 (e.g. Tecfidera, GAL101, hemophilia) will generate aggregate revenues of $600M, $1.26B, $2.1B, $3.2B, and $4.2B from 2013 to 2017, representing an annual growth rate of 63%.
Altogether, the estimated total revenues for BIIB are $6.3B, $7.0B, $8.0B, $9.3, and $110.6B from 2013 to 2017. This represents a compound annual growth rate of ~14%.
Other Income Statement Items
On the expense side, we used BIIB's 2013 full year guidance (BIIB 10Q 3Q2013). Its cost of goods sold (COGS) is about 13% of revenues, whereas combined selling and general administration (SG&A) and R&D expenses are about 44%-50% of net sales. This represents a gross margin of 87% and operating margin of 37%, comparable to industry companies. We also assumed its effective tax rate to be 24.5% going forward, based on its 2013 guidance.
Interest expenses were derived from our projected debt and interest schedules. Overall, BIIB could maintain its long-term debt balance around $1B. The average interest rate for BIIB's debt is 4 %, with an estimated interest expense to be $46M.
The board of directors has authorized the repurchase of up to 20 million shares of common stock. As of December 31, 2012, Biogen repurchased approximately 13.8 million shares of our common stock at a cost of $1.48B. In 2012, approximately 7.8 million shares were repurchased at a cost of $984.7 million. During the nine months ended September 30, 2013, it repurchased approximately 2.0 million shares at a cost of $400.3 million. This leaves approximately 4.2 million shares of BIIB common stock remains available for repurchase.
At current stock price of $230-$240 range, we assume that BIIB will continue to buy back 2.0 million shares for the next few years. So the number of shares outstanding is adjusted accordingly for earnings per share (EPS) estimation.
Based om the above inputs, our income statement estimates an adjusted earnings estimates will be approximately: $9.23 (2013), $10.34 (2014), $12.11 (2015), $14.15 (2016), and $16.32 (2017). This suggests that BIIB's earnings growth rate is ~17.5% for the next 5 years.
Biogen's cash flows from operations (NASDAQ:CFO) are estimated to be between $1.6B and $3.1B from 2013 to 2017. Capital expenditures are about $200-$255M in 2011 and 2012, representing an average of 13% of CFO. After subtracting capital expenditures from its CFO, Biogen's free cash flows are in the range of $1.45B~$2.7B for the next 5 years. The free cash flow numbers were used to derive BIIB intrinsic value (see below).
Summary of financial ratios and growth rates
Based on its previous 3-year averages, BIIB's gross profit margin, earnings-before-Interest-and-tax (EBIT) margin, and net profit margin are 87%, 37%, and 27%, respectively. Its return on invested capital (ROIC) return on equity (ROE) and return on assets (ROA) are 24%, 21% and 14%, respectively. These ratios suggest that BIIB's operating efficiencies and profitability based on return on investment are comparable to the industry average.
Biogen has a solid balance sheet. It currently has cash, cash equivalents and marketable securities totaling approximately $1B as of September 2013. Although its debt balance was $1.1B in 2012, it is expected to further decline to $600M in 2013 and ~$380M in 2017.
In 2012, its total debt to total capitalization ratio (D/TC) is 14.6%, whereas total debt to equity (D/E) is about 17%. With significant earnings and cash flow growth, Biogen can pay off most of its debt, thus reducing the D/TC and D/E ratios to 2.5% in 2017.
Currently, its interest coverage ratios are over 50x-60x, suggesting that the company can comfortably service its debt obligations with its operating income.
We utilized the Discounted Free Cash Flow model to derive BIIB's intrinsic equity value. Key inputs utilized in the model are several parameters, including growth rates, discount rate and the period it takes from faster short-term growth to slower long-term growth.
Based on data from comparable companies in the pharmaceutical industry, we used a 10% discount rate for a mature company like Biogen Idec with multiple products in the market. We assume a stable long-term 6% growth rate after a short-term faster growth rate of 12% for the next 6 years. We also assume that Biogen's depreciation and amortization expense is about 7% of net revenues, an average of pharmaceutical companies.
Using the above inputs, the estimated per share stock value for BIIB is ~$267. The fair value is greatly impacted by growth rates. For instance, a 6.25% long-term growth rate would elevate the fair value to $281, whereas a 5.75% growth rate would bring down the fair value to $254.
BIIB is currently trading at $230-$240 in November 2013, representing a 10%-12% discount to the intrinsic value calculated here. While the current price represents a 23x multiple to its 2014 estimated adjusted EPS, the stock is undervalued, given its high earnings growth rates.