The large-cap biotech Biogen (NASDAQ:BIIB) has had some major news break. With attention paid to other news in biotech, such as the victory of Merck (NYSE:MRK) and its patent partner Ionis (NASDAQ:IONS) over Gilead (NASDAQ:GILD) regarding sofosbuvir (Sovaldi and as a component of Harvoni), plus the patent victory of Amgen (NASDAQ:AMGN) over Regeneron (NASDAQ:REGN) and Sanofi (NYSE:SNY), the BIIB news last week may have been overlooked.
This article discusses the news regarding BIIB's lead blockbuster Tecfidera and other matters discussed in its 10-K. Then, because of the importance of these matters, and BIIB's status as a representative large biotech, the larger relevance of these matters to all biotechs is discussed.
First, the importance of the recent news on BIIB's lead product Tecfidera.
Tecfidera runs into major patent problems
This was not a good week for BIIB's unusual patent on Tecfidera which protected the specific dose used, 240 mg twice daily. Tecfidera is an old drug, dimethyl fumarate, or DMF. Fumaric acid derivatives had been used for psoriasis before they were developed for multiple sclerosis. Since both psoriasis and MS are autoimmune conditions, protection of DMF was made difficult.
BIIB's solution to maximize its profit stream was to build a somewhat unconventional patent portfolio around Tecfidera. This version of dimethyl fumarate is a coated microtablet approach. This decreases GI side effects and allows twice-daily administration rather than 3-4X daily.
This is noted in US patent #7,320,999 called Joshi '799 by the USPTO in a document to be discussed soon. Tecfidera has two types of protection from generics. One is the protection that FDA gave it as a new chemical entity. This is a five-year statutory protection. As Tecfidera was approved in March 2013, the FDA grant of exclusivity ends in March 2018.
The other protection is patent protection. While companies do not always list their entire patent portfolio with the FDA, my understanding is that for Tecfidera, no important patents that would limit competition are felt to be outstanding or pending other than those listed in the "Orange Book" that the FDA maintains.
The Orange Book is accessible online. The Tecfidera patent list is as follows (click to enlarge):
Patent and Exclusivity Search Results from query on Appl No 204063 Product 002 in the OB_Rx list.
|Appl No||Prod No||Patent No||Patent
|N204063||002||6509376||Oct 29, 2019||Y|
|N204063||002||7320999||May 18, 2020||U - 1384|
|N204063||002||7619001||Apr 1, 2018||U - 1384|
|N204063||002||7803840||Apr 1, 2018||U - 1385|
|N204063||002||8399514||Feb 7, 2028||U - 1384|
|N204063||002||8524773||Apr 1, 2018||U - 1384|
|N204063||002||8759393||Oct 29, 2019||Y|
What jumps out at the reader is the patent that expires in 2028.
It is this patent that has been in the news since at least last year; I have written an InstaBlog or two on challenges to its validity. Now, stuff is getting very real, and I now suspect that BIIB is dead money at best for some time to come.
I'll start with a brief discussion of the European news.
Tecfidera loses a few years of life in the EU (pending appeal)
The news is summarized by IBD:
A European court revoked a patent on Biogen's multiple-sclerosis drug Tecfidera on Thursday, according to an analyst at Cowen & Co.
Eric Schmidt wrote in a brief note Thursday afternoon that a European Union court had revoked European Patent EP2137537, which covered the 480-mg-per-day dose of Tecfidera, which first launched in 2013. The patent, which expires in 2028, is one of four that Biogen holds on Tecfidera in the EU, along with a 10-year period of market exclusivity due to its classification as a "new active substance."
"The U.S. patent equivalent of the '537 patent is the '514 patent, which is being challenged in an interference proceeding by Forward Pharma (NASDAQ:FWP)," Schmidt wrote. "While we don't know the rationale behind the revocation of the '537 patent, we assume it also has to do with Forward Pharma, which claims an earlier filing date for a similar invention."
Schmidt wrote that Biogen will probably appeal the decision, which would suspend the revocation for as long as four years as the court battle goes on. If the appeal fails, he estimates that over $1 billion in sales - about a quarter of the worldwide total - will be at risk. Tecfidera is currently Biogen's top-selling drug, providing a third of revenue last year.
BIIB is planning to appeal. Losing five years of protected sales in the EU for this drug is not the end of the world, because regulatory protection until 2023 is likely set in stone, and it's difficult to guess at how relevant Tecfidera will be in MS treatment beyond 2023.
However, there may have been worse news from the US on the same patent.
The USPTO may have signaled it regrets approving the 2028 expiration of Tecfidera patent
In addition to the Forward Pharma issue, a hedge fund manager named Kyle Bass (Hayman Capital) has made use of a recently-instituted procedure that allows an outside party to request the Patent Office to review previously-granted patents. In a second try at forcing review and ultimately revocation of patent #8,399,514, which expires in 2028, Mr. Bass and his team achieved a notable success. In a decision granting "inter partes review" of the '514 patent (type in the full patent number on the linked webpage), the USPTO now sees evidence that every claim of this patent could be obviously based on more than one piece of prior art. Strangely, among the bits of prior art are the BIIB "799" Joshi patent and the design of one of its Phase 2 Tecfidera studies.
The Claims section of the patent begins this way:
The invention claimed is:
1. A method of treating a subject in need of treatment for multiple sclerosis comprising orally administering to the subject in need thereof a pharmaceutical composition consisting essentially of (NYSE:A) a therapeutically effective amount of dimethyl fumarate, monomethyl fumarate, or a combination thereof, and (NYSE:B) one or more pharmaceutically acceptable excipients, wherein the therapeutically effective amount of dimethyl fumarate, monomethyl fumarate, or a combination thereof is about 480 mg per day.
Most of the rest of the 20 claims get around to limiting the broad Claim 1 to the label for Tecfidera, namely giving dimethyl fumarate in a 240 mg dose twice a day.
Clicking on the above link to the inter partes review page of the USPTO, and then clicking on Line 20, brings you to the actual reasoning used.
My expectation is that this patent is for most intents and purposes history. That's because basically all the BIIB did was find a reasonably optimized dose based on efficacy and tolerability. However, based on the prior art, there were no unexpected results. Thus the patent may fall on the grounds of obviousness.
In order to receive the government monopoly called a patent, a protected product must be novel and non-obvious. Even though Tecfidera in this dose given twice a day for MS was a novel product, the information provided in the above document appears persuasive to yours truly that it was already known that one of ordinary skill in the art would test the drug in this dose in this dosage frequency.
Note this is the patent office's document, not that of a BIIB competitor or a short seller of its stock. It's a little surprising to see all this now. Didn't the USPTO know all this when it reviewed the patent application? Anyway, here we are. It would appear that Tecfidera in its 240 mg dose could go generic within four years, assuming the 2020 expiration patent holds. What can BIIB do about it, and how important is this to the company?
Defensive actions from BIIB to be expected but...
Of course, it is going to go to the mat in fighting revocation of the patent. Everything it can do to rebut the points made by the USPTO in this document will be made, at as many levels of hearing and appeal as are available.
Noting that I'm not a lawyer and have not consulted one, and do not provide either investment or legal advice, for the sake of this article, I'm going to assume that investors are going to treat Tecfidera as if it will go generic in 2020 in the US and 2023 in the EU.
Is a once-daily Tecfidera going to come to market?
In the second half of last year, one of the brokerage house interviews that a BIIB executive spoke at got around to the question of life-cycle management of Tecfidera. The response was to the effect that yes, BIIB is doing all the things one would expect to extend this franchise that is approaching $4 B a year in sales, or about 35% of this year's expected sales.
One is a pediatric study in MS, which can be seen in ClinicalTrials.gov.
What I would normally expect would be a once-daily version. This may not be easy or even feasible, given the very short action of immediate-release DMF. But nowadays, almost every drug has enough of an "absorption window" that one of the many controlled-release technologies can allow a once-daily version.
I do not see a QD (once-daily) vs. BID study on the Tecfidera site on ClinicalTrials.gov. This would likely be a blood level study only, with a typical goal being to show that the QD version would give a lower peak blood level than the BID (current) version, similar total exposure, and adequate trough (minima) levels. I simply do not know if there is anything in the ClinicalTrials.gov rules that allows a bioequivalence study to avoid being listed there.
The goals of a QD formulation would involve showing better tolerability as well as typically gaining additional exclusivity (three more years is what I would expect).
If BIIB does this, I'd expect a lot of skepticism from payors, given the tens of thousands of dollars a year each patient's Tecfidera costs the system. I think there would be powerful pressure to use a generic twice-daily version.
Other implications of the potential fall of 2028 patent protection
If indeed Tecfidera has no other patent protection beyond that which is listed in the Orange Book, then I would expect several BID generic applications (ANDAs) to be made with the FDA sooner rather than later.
More creatively, I would be morally certain that strong formulation companies have been studying the feasibility of getting their own QE versions of DMF or Tecfidera on the market. This can be accomplished two ways.
One way is the bioequivalence route. Show the regulator that your version is at least as good as Tecfidera based on blood levels. Assuming the FDA and perhaps the EMA agree, then a generic company is as free as BIIB to bring a QD DMF through the regulatory process.
Another way is to treat the QD version as if it were a brand new product. Do your own toxicology studies and do a clinical program with hard endpoints with enough statistical power to satisfy the regulators that a successful trial would allow marketing approval.
Given the size of the market, if a simple enough clinical trial path were acceptable to the FDA, a company could go straight from Phase 1 biostudies to Phase 3, I would assume.
What does all this mean for BIIB's share price?
I look at this as bad news. A large part of BIIB's profit stream is at risk of vanishing in less than four years. This time frame is, for readers who are not experienced in the industry, metaphorically "tomorrow" in the pharma industry. I doubt that the new products such as Zinbryta (coming soon), the hemophilia franchise, one of these days the IONS drug for spinal muscular atrophy, and then in its early days the Alzheimer's candidate could make up for the 2020 loss of the Tecfidera franchise in the US and then a 2023 loss in the EU.
Given all the pipeline uncertainties, I think that BIIB's 16X P/E on TTM EPS is higher than I'd be willing to pay now.
BIIB's Tysabri franchise is mature and so is its Avonex franchise. The replacement for Avonex, Plegridy, has not been setting the world on fire. And, lots of competition already exists in the MS space with much more coming.
Among the competitors entering the space soon are ocrelizumab from Genentech, a Roche (OTCQX:RHHBY) company. This drug uses BIIB technology (derived from the IDEC merger years ago) and thus Biogen will receive royalties on sale. However, while these can reach 24% in the US, they are nominal internationally. If ocrelizumab comes to market and does well in the main relapsing-remitting MS space, it is unclear whether the royalty stream from it will compensate for the extra competition it will provide to BIIB's dominant MS franchise.
BIIB as a paradigm for biotechs
Everything from the patent problems to growing competition against a mature product line that has become a dominant "category-killer" is seen now over and over again. You can look at BIIB's issues growing beyond its MS franchise and strong cash flows from its Genentech royalties and compare them to AMGN's difficulties in growing faster than its five legacy products will shrink. Also, BIIB has disclosed some governmental probes and qui tam (whistleblower) lawsuits regarding its marketing practices, something that has dogged AMGN for a while.
One can look at AbbVie (NYSE:ABBV) and GILD to see P/Es that, as with AMGN and now BIIB, are below the market average as a result of the difficulty in repeated a massive success with a product (Humira) or product line (HIV/AIDS and HCV in GILD's case).
Directionally speaking, BIIB and the large-cap oriented biotech ETF (NASDAQ:IBB) have tracked each other closely for years. BIIB has outperformed IBB the past five years, but has lagged IBB the past two years; but their directional correlation is clearly very close.
Concluding thoughts - BIIB as a buy/sell/hold candidate
With most of BIIB's meal ticket's sales now at risk beginning in 2020, it's difficult for me to think of buying into shares around and above $250, which is above 16X TTM EPS (I only use GAAP EPS unless otherwise noted). It's difficult not to prefer GILD at or below 8X, with two dominant franchises and potential growth in each.
Once a stock becomes, in my view, a "don't buy" stock, the question is how long a patient investor needs to wait for positive returns. BIIB has had a long stretch, between early 2000 and late 2009, in which it simply went sideways - with one major disappointment with Tysabri in 2005 when the stock crashed. So there's that possibility.
Many investors will have very large long-term capital gains in BIIB and would be reluctant to sell. Certainly the revenue flow from Genentech, the cash cows of Tysabri, Avonex/Tysabri, and Tecfidera and its possible QD version are powerful wealth-generators.
How much value is there in the pipeline? Perhaps a lot, and as readers probably know, I'm bullish on the biotech sector for years to come. Secular tailwinds are good things. Plus, BIIB has a foot in the door with a JV to develop and market biosimilars, focusing on the TNF inhibitors for now. So I expect substantial profitability for years to come, and would be optimistic about the company and the shares when taking the truly long view.
As it happens, given my opinions of different major biotech/biopharma companies, that fits my general view of the entire space now. I think it had an amazing run that got a little frenzied by spring 2015. Now I think it's normal for IBB to consolidate, churn, sell off at times. I've been saying this for quite some time. In early January 2015, Seeking Alpha published an online interview it did with me on biotech, titled DoctoRx Positions For 2015: I Have Cut Back On My Exposure To All Biotech Substantially. One of the bullet points of that article (interview) is relevant to BIIB and to the sector at large, given the tenor of recent news:
I have cut back my exposure to all biotech substantially. The field is immensely complicated, burdened by litigation, full of exciting possibilities, and littered with investment minefields.
Indeed, and this was said before political threats to the pharmaceutical companies began to worry investors.
It's easy to see why Warren Buffett sticks to companies that are felt to be more predictable from year to year or from decade to decade.
However, over long periods of time, my guess is that biotech is the next "tech." I cannot prove it, but I can invest on the theory that as time goes by, scientific advances will compound, and the sector may emerge to be the world's leading sector. Who would have thought 25 years ago that Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Facebook (NASDAQ:FB), and Amazon.com (NASDAQ:AMZN) would be among the very largest market cap stocks in the world? One could not think that, because only AAPL even existed then, and it was a forgotten name in the absence of Steve Jobs. So it may be with biotech. I think there's great profits coming, but I'm not sure from where, or when.
BIIB has accomplished a great deal; I'm optimistic about it for the long haul. For now, it now looks to me as though its P/E is at risk of slipping to 12X or below, so I'm on the outside looking in here with a lot of interest but no money at risk.
Disclosure: I am/we are long AMGN,GILD,IONS,REGN.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Not investment advice. I am not an investment adviser.
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