Background: Because of its recent sell-off going into earnings, I recently wrote an article for Seeking Alpha detailing the history, product lines and pipeline of Biogen Idec (NASDAQ:BIIB). This is a company formed about a decade ago by merger, and it is one of the pharma industry mergers that has worked well. I commented in the article that from a technical standpoint, the stock had stayed within its uptrend, and that was good enough for me. Indeed that opinion worked out in this case.
The company came out with Q2 results this AM that blew consensus away. This article discusses them and my thoughts for future price action. My basic thesis is that the P/E/G is too low here and that BIIB is probably headed for new high ground.
Introduction: Biogen Idec reported blowout numbers today:
Biogen Idec Inc. today reported second quarter 2014 results, including revenue of $2.4 billion, a 40% increase compared to the second quarter of 2013. Second quarter 2014 non-GAAP diluted earnings per share (EPS) were $3.49, an increase of 52% over the second quarter of 2013. Non-GAAP net income attributable to Biogen Idec for the second quarter was $829 million, an increase of 51% over the second quarter of 2013.
Results were increased by a net $0.15 per share related to a settlement of reimbursement issues with Italy. I am not certain, but I would not think this was "in" consensus. Thus, my adjusted EPS is $3.34, not $3.49. I go with non-GAAP earnings here as the GAAP vs. non-GAAP adjustment is non-cash, from amortization of intangibles and goodwill. Here is where the Street was:
EPS Trends Current Qtr.
Current Estimate 2.83 3.02 11.53 14.48 7 Days Ago 2.82 3.02 11.52 14.46 30 Days Ago 2.80 3.01 11.52 14.32 60 Days Ago 2.80 3.01 11.49 14.23 90 Days Ago 2.77 2.97 11.42 14.15
Revenue Est Current Qtr.
Avg. Estimate 2.16B 2.25B 8.91B 10.17B No. of Analysts 20 20 23 23 Low Estimate 2.05B 2.20B 8.72B 9.50B High Estimate 2.23B 2.35B 9.19B 11.01B Year Ago Sales 1.72B 1.83B 6.93B 8.91B Sales Growth (year/est) 25.10% 23.20% 28.50% 14.20%
As you can see, this is a true earnings and sales surprise, not a dubious one as many of the large and mega cap companies sometimes assert. A prominent analyst liked the quarterly report. As Investor's Business Daily reported:
...ISI Group analyst Mark Schoenebaum was generally impressed, pointing out that this was the largest beat that Biogen had reported in 10 years.
"Overall a really good call with no new disclosures that diluted the quality of the EPS/sales beat on the quarter," he wrote in an email to clients after the conference call.
BIIB markedly raised guidance in its press release:
Biogen Idec increased its full year 2014 financial guidance. This change represents a meaningful increase from prior guidance owing primarily to the growth of TECFIDERA in the U.S. and the E.U., the strength of our other MS therapies, and clarity on the AIFA pricing matter.
This guidance consists of the following components:
- Revenue growth is expected to be approximately 38% to 41%.
- R&D expense is expected to be approximately 20% to 21% of total revenue.
- For the balance of the year, full year guidance for R&D expense includes greater than $150 million intended for new early and mid-stage business development opportunities.
- SG&A expense is expected to be approximately 22% to 23% of total revenue.
- GAAP diluted EPS is expected to be between $11.26 and $11.46.
- Non-GAAP diluted EPS is expected to be between $12.90 and $13.10.
As we know, the stock has reacted sharply upward. However, it is still within a trading range. In the following discussion, I will present my bullish view of the shares, which explains why I more than doubled my BIIB holdings following the earnings release.
Discussion: The stock is up about 10% as I write this. Only about 1% of the shares outstanding have been sold short. Thus, this price adjustment should be considered a real reflection of Mr. Market's view of the company's value and not especially a short squeeze.
Here is the one-year price chart for BIIB:
Splits: Dec 21, 1999 [2:1], Jan 18, 2001 [3:1]
It now looks to me as though BIIB has been experiencing a running consolidation that looks fated - in my guess - to go to new highs. My reasoning is fundamental, with some technical aspects.
BIIB has gone nowhere for five months following a long, strong rise. It is now showing a strong yoy price gain with the benefit of the multi-month consolidation. This is often an attractive technical set-up.
This price gain is now revealed to be adequately supported by EPS.
In addition, these earnings are somewhat understated to the extent that R&D is running about 22% of sales. This is high for a large company; if management did not see such fruitful opportunities, it could pump EPS more by spending less on R&D. In other words, the earnings are of high quality in my opinion.
BIIB has been viewed as undervalued on a P/E/G (price:earnings:growth) ratio. Dr. Paul DeSantis presented a chart today in his Gilead (NASDAQ:GILD) pre-earnings article on Seeking Alpha that showed BIIB with a PEG ratio of only 0.8 off of projected 2017 EPS (which now look too low).
The above said, here are the main growth drivers that I see. Please see my recent article and more importantly the company's website for the full story. The growth drivers I see, in some descending order of importance are:
1. Tecfidera. This recently-introduced oral drug product for multiple sclerosis is a major home run. Sales in Q2 was $700 MM, up from $192 MM a year earlier. There is lots of room for growth here. How high is the limit, though, I do not want to guess. Note: there are patent expiration worries on the Street, though nothing imminent.
2. Hemophilia products. Biogen Idec has now gotten regulatory approval to market longer-acting blood factor agents for hemophilia A and B. These products, Alprolix and Eloctate, address what the company says is a $7 B market. Of course, with inflation, over time $7 B becomes $8 B, which becomes $9 B. This likelihood (my view) is one of the several reasons I have shifted my stock investing primarily to biotech. It gives you secular growth with the hope of keeping up with inflation, and reasonable P/E/Gs. And no global warming or pollution issues, either.
3. Tysabri. This is still growing. If Biogen Idec can get it approved for secondary progressive MS, an important and undertreated form of MS (most MS treatments are approved for the relapsing form of MS) and/or stroke, sales will grow much faster.
4. Other MS products. Its longer-active replacement for Avonex (injection), Plegridy, has just now been approved for marketing in Europe, the company announced on the conference call. daclizumab, a JV-ed product with AbbVie (NYSE:ABBV), looks like an important pending product and is in late stage development.
5. Biosimilars. A Seeking Alpha article last December reported on the company's JV with a Samsung division. From the opening paragraphs:
In December, Biogen Idec has taken the lead in marketing anti-TNF biosimilars in Europe, through Samsung Bioepis, its joint venture with Korean electronics giant Samsung (OTC:SSNLF). The original contract with Samsung was signed in 2011. The joint venture is potentially a key player in the advancement of biologic follow-on products, though it has been quiet on exactly which drugs is it targeting.
According to the U.S. government trial register Samsung Bioepis is running Phase 3 trials to develop copies of Remicade and Enbrel, some of the biggest blockbusters in pharmaceutical history.
6. Rituxan/Gazyva: These products, which are principally for B-cell hematologic malignancies, are marketed by Genentech, a Roche subsidiary. I do not expect much if any growth here if Gazyva supplants Rituxan, due to the profit split Biogen Idec has which favors Rituxan over Gazyva.
7. Other pipeline. BIIB's pipeline is satisfactory apart from the products listed.
EPS and growth rates: Now that the company has guided for $13 this year, next year's consensus EPS must rise. This increase will relate to uptake of the hemophilia products and growth of Tecfidera. I am going to make some guesses. One is that 2014 guidance of $13 is low. So I will assume $13.50 (non-GAAP) EPS for 2014. Current expectations have been for about $3 per share increment between this year and 2015. I see no reason that this will not occur, so I will model $16.50 for 2015.
What can occur beyond 2015? Crystal balls do get cloudy farther out. In my own view, BIIB is currently a light blue chip now that could very well be headed for deep blue chip status. It is a strong free cash flow generator. It operates in secular growth areas. It is a very well-respected company with clean accounting. It is not litigious. It is based in Cambridge, Mass., and thus has direct access to many of the top scientists and emerging biotech companies in the world. There are only a small number of companies like it. Its spending on both R&D and sales is elevated, the former due to numerous appealing R&D targets and the latter due to the growth spurt the company is in. These depress margins. Meanwhile there will be increasing opportunities for accretive buybacks as the growth rate slows.
I think that $20 per share EPS now hovers into view. A company that is growing this fast and that could earn $16.50 in 2015 could easily meet and surpass the $20 mark in 2017. The great thing about being in the traditional biotech field, with genetically engineered proteins, is that the biosimilar field is vastly different from generics to standard small oral molecules. With biosimilars in Europe, brands have kept most of their sales. So "classic" biotech firms such as Biogen Idec deserve a higher P/E than companies whose products are all subject to traditional devastating generic competition when their regulatory and patent protection expire.
Price projection: Given all the above, I think it is reasonable to target $400+ in one year, perhaps this year in a spate of enthusiasm. This would be in the range of 24-25X 2015 EPS that I am guessing can be reported. It would be 20X my achievable or beatable estimate for 2017.
Warren Buffett's adage continues to be relevant that it is better to own shares in a great company at a fair price than shares in a fair company at a great price. It's also important that the company be in a great industry. In the 1920s, there might have been a great stagecoach and buggy whip manufacturer, but such a company faced strong headwinds. This is not the case here.
Biogen Idec is one of the leaders in what is palpably one of the great growth fields of our era and possibly ever. It is soundly financed, professionally run, and in the midst of a gigantic profits run. What's not to like?
Risks: All the standard stock market, profitability, R&D failure, etc. risks apply. In addition, seasonally-negative factors apply the next few months. The company's SEC filings list many risk factors. Prospective BIIB investors may well wish to read and reflect upon them. No competitor is rolling over and playing dead for Biogen Idec. No payor loves paying the prices it likes to receive for its products, either. There are real challenges ahead.
Conclusion: BIIB now meets one of my main criteria for a great stock. This is that earnings are unexpectedly surging and are at record highs even while the stock price is below its all-time high.
Biogen Idec increasingly strikes me as a core holding for biotech investors and potentially a core holding for growth stock investors whether or not they have a special interest in biotech.
Disclosure: The author is long BIIB, GILD. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.