Biogen Hits A Potential Home Run

Summary

• Biogen's current product lineup is beginning to show its age, and a fresh injection of novel products may be necessary to jumpstart top-line revenue growth.
• Spinraza is a notable step in the right direction, but we fear new gene-editing therapies may disrupt Spinraza, thus depriving Biogen an avenue of growth.
• Biogen is committed to bringing forth a new treatment for Alzheimer's, but the goal of a viable treatment may be elusive. We're optimistic, however.
• The company reported positive trial results at the 18-month mark on a key Alzheimer's product, but the same compound missed its primary endpoint at the 12-month mark, raising concerns on how valid the results truly are.
• Thanks in large part to the stellar share-price jump driven by the perceived positive data read in Alzheimer's, Biogen has now cut through our $313 fair value estimate to the upside.

By Alexander J. Poulos

We closely follow the progress of the clinical pipeline of companies in the pharma/biotech sector. Unlike other less product-driven industries, the pharma/biotech sector can experience wide swings in operating performance as a result of the lapsing of patent protection on key drugs, underscoring the importance of innovation to replace aging products. Biogen (NASDAQ:BIIB) may have hit a home run in the critical field of Alzheimer's, an area of tremendous untapped need.

Biogen - A Leader in Neuroscience

Biogen is a pioneer in the area of neuroscience with a string of successful treatments, most notably in the area of Multiple Sclerosis, MS. The company's envious position in MS is being eroded, however, as a result of new product entries, including Roche's (OTCQX:RHHBY) Ocrevus that continues to slice into Biogen's once-formidable market share. We have witnessed this phenomenon numerous times; once a key product line begins to witness a credible new entrant into the field (as efficacious or more efficacious), a decline in top-line revenue ensues, directly impacting the future value of the drug.

Often, upon a cursory glance of a low price-to-earnings multiple on a pharma/biotech stock, on its face it may look like a good "bargain," especially versus the average S&P 500 company, but it's more likely the equity may be more akin to a "value trap" as the underlying business may experience a step change downward in earnings in the future due to patent expiration, something that is not "picked up" in current year or even next year's earnings. Investors should cast a cautious eye on multiples in the biotech/pharma sector as the field can undergo "boom-bust" characteristics if new and revolutionary products are not brought consistently to market to offset the decline in other key products, whether due to a new competitive entry or a patent loss.

Biogen, in our view, may fall closer to the "value trap" definition as the company's main product line - its novel MS franchise - continues to exhibit a deceleration in sales. That is not to say that Biogen's shares don't have value or aren't fairly valued, as they are at the time of this writing; it just suggests its attractive multiple may be a bit misleading (it is trading at ~13 times expected 2019 consensus earnings per share). Further, Biogen's key product Tecfidra posted negative year-over-year US sales performance, the key market for the product. Sales did grow in the rest of the world, but we are beginning to witness signs that overall growth of the MS franchise is beginning to flatten or even decline, which may place undue pressure on new products to succeed, in order to spur top-line growth at Biogen.

Sales of Tysabri, Biogen's second-leading product, continues to lose sales as clinicians, in our view, are shying away from the product due to concerns of PML (Progressive multifocal leukoencephalopathy). PML is often caused in response to the JC virus, a common infection completely unrelated to MS. A healthy immune system may suppress the virus, but in certain MS patients treated with Tysabri, the body is unable to keep the virus in check. The JC virus can cause significant and often potentially fatal inflammation of the brain, PML. Biogen has taken great lengths to prevent a flare-up of PML with Tysabri use; however, with newer treatments entering into the marketplace, the risk may not outweigh the rewards, hence the pressure on sales.

Spinraza

The new star in Biogen's product arsenal remains Spinraza, a novel treatment for Spinal Muscular Atrophy, SMA. SMA is classified as a rare genetic disorder that affects the motor neurons found in the spinal cord. The disease prevents the neurons from sending signals to the muscles hence preventing movement; as muscles are not utilized, they atrophy (become smaller) from lack of use. Spinraza gained US FDA approval in December of 2016, thus providing those afflicted with SMA a viable treatment.

Spinraza posted an impressive debut in 2017, generating sales of $884 million in 2017 as the product was quickly utilized by the SMA community. SMA is a rich target area of perhaps the hottest trend in biotech today - gene modification therapies with Novartis (NVS) making a large splash in the field with the audacious takeout of AveXis to gain control of its industry-leading AAV9 vector therapy.

Conceptually, we like the practicality of gene-modification therapy. If the therapy lives up to its promise, the potential for a "one and done" course of therapy would hold great appeal to both payers and patients alike. Currently, however, we have witnessed a decline in the effectiveness of the product as time progresses, most notably in the hemophilia treatments. We are reserving judgment of the overall potential of gene therapies at this time until longer-term data is generated and presented, but from where we stand, the promise of Spinraza is under credible threat from a deep-pocketed rival that is well-versed in the MS field, thus adding credence for the potential total disruption of the promise of Spinraza.

Growing Biosimilar Pipeline

We remain big fans of the promise of biosimilars, as the coming wave of biosimilars promises to dramatically reduce the cost of the specialty drug spend, most dramatically in the US. Specialty drug spend is the primary growth engine in the pharma sector with year-over-year growth often lapsing the growth witnessed in traditional oral therapies such as tablets and capsules. The difference in pricing centers on the lack of competition due to a cohesive set of laws governing the use of biosimilar products. The industry, however, may have entered a new age of enlightenment on the part of the FDA with a robust platform to ease the transition towards opening up price competition.

Biogen in conjunction with its partner Samsung Bioepsis has skillfully entered the worldwide market for biosimilars with a viable alternative to Enbrel, which remains Amgen's (AMGN) top-selling product (original approval in November 1998 which highlights the lack of innovation from Amgen) and Remicade. The joint venture generated $380 million in sales in 2017, but we expect the number to jump substantially beginning in October 2018 when the duo will be allowed to market a biosimilar version of Humira in Europe called Imraldi. Humira remains AbbVie's (ABBV) top-selling product accounting for over 50% of the group's overall revenue.

We fully expect the EU to embrace Imraldi, which will help lower overall costs while reducing Humira's growth trajectory. Humira generated over $6 billion in international sales in 2017 with the vast majority of sales emanating from the EU, underscoring the large potential market for a biosimilar for Humira. We feel the biosimilar division will become a source of revenue growth for Biogen over the next few years as the promise of the biosimilar market comes to fruition. For Biogen to morph more into a growth entity, additional productivity from the near-term pipeline will be needed.

The Promise of Alzheimer's

The primary area of intense R&D spend for Biogen remains the ever-elusive goal of a viable treatment for Alzheimer's disease. Alzheimer's is a progressive loss of memory which typically afflicts those in the sixth decade of life. With the rapid greying of America, we fully anticipate the number of patients diagnosed with Alzheimer's will explode over the next few decades surpassing the current estimate of over 3 million afflicted patients.

Alzheimer's is the sixth leading cause of death with the average patient lasting eight years after symptoms become noticeable. The current crop of treatments is deemed inferior, thus underscoring the critical need for further innovation in this sector. There have been numerous spectacular flameouts as the goal of a viable treatment remains elusive. The share price of Biogen slumped once early results of BAN2401 were released in December as the product missed its primary endpoint at the twelve-month mark. Biogen and its commercial partner Eisai (OTCPK:ESALY) decided to forge ahead with the trial collecting data up until the eighteen-month mark to determine if the therapy offers any hope.

On July 5, Biogen issued a press release stating BAN2401 showed a statistically significant reduction in slowing the Alzheimer's Disease Composite Score, a key indicator of disease activity. The announcement came as a great surprise as the product was virtually written off six months ago when it failed its initial clinical trial. Biogen did not reveal the entirety of the data set underscoring just how difficult it will be to handicap the commercial viability of the product. The share price of Biogen jumped ~15% upon the recent data release, underscoring the critical importance a new line of therapy is for Biogen.

Concluding Thoughts

We remain optimistic on the prospects of Biogen as we view the company as attractive, but inherently risky as the next leg of growth will be entirely dependent on an Alzheimer's therapy with a spotty clinical track record. We feel the wide fair value range of $219-407 underscores just how risky we view the equity at its current quote. Thanks in large part to the stellar share-price jump driven by the perceived positive data read in Alzheimer's, Biogen has now cut through our $313 fair value estimate to the upside. The company's share price had been under our fair value estimate since August 2015.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Alexander J. Poulos is an independent contributor to Valuentum Securities.

Heathcare and biotech contributor Alexander J. Poulos does not own shares of companies mentioned in this article. Some of the companies written about in this article may be included in Valuentum's simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.