- Q4 2018 results included 7% y/y revenue growth and 33% EPS growth.
- 2019 outlook more about trial results than drug approvals or revenue growth.
- Effects of the Tecfidera ruling are exaggerated.
Biogen (NASDAQ:BIIB) has long been one of the premier biotechnology companies. In the past, most of its income has come from multiple sclerosis treatments, but it is transitioning to treating multiple neurological diseases. To give a first impression of its ability to grow, consider that revenue in 2013 was $6.93 billion. That increased 94% to $13.45 billion in 2018.
I am optimistic about Biogen's development in 2019. I recently wrote about growth prospects for the next decade in Biogen Outlook for the 2020s. In this report, I will focus on the outlook for 2019.
Biogen Stock Price
Biogen's 52-week high was $388.67, set last July on a moment of Alzheimer's disease therapy optimism. Its low of $249.17 was last April, and it had a pretty rough December, along with most other biotech stocks.
On Thursday, February 7, Biogen dropped 7.4% to close at $308.73. I believe this is a combination of the weak guidance for 2019 and the USPTO decision to allow Mylan (MYL) with its Tecfidera patent dispute, both of which will be addressed below.
Q4 2018 Results
Before speculating on 2019, a brief factual review is in order. Biogen reported Q4 results and had its analyst conference [transcript] on January 29, 2019. The Q4 2018 Slide Deck also offers a summary of the presentation.
First, note that revenue set a record for both the full-year 2018 and for Q4.
Revenues were $3.53 billion, up 3% sequentially from $3.44 billion and up 7% from $3.31 billion in the year-earlier quarter. Spinraza and Ocrevus royalties led revenue growth. Tecfidera, which had led revenue growth since its introduction, is leveling off.
Because of the effects of tax reform on GAAP numbers in Q4 2017, I am going to use non-GAAP numbers for net income and EPS. Non-GAAP results are not usually as conservative as GAAP results.
Non-GAAP net income was $1.40 billion, down 6% sequentially from $1.49 billion and up 25% from $1.12 billion year-earlier.
Non-GAAP EPS was $6.99, down 6% sequentially from $7.40 and up 33% from $5.26 year-earlier.
It is notable that earnings grew faster than revenue.
Full-Year 2018 Results
For the full-year 2018, revenue was $13.45 billion, up 10% from 2017 revenue of $12.27 billion.
GAAP EPS was $21.58, up from $11.92 in 2017.
Non-GAAP EPS was $26.20. Cash flow from operations was $6.2 billion.
My take is that, so far, Biogen is navigating the decline in revenue from older drugs quite well. I expect revenue growth to fluctuate as new drug introductions do not occur on a regular schedule. Declines in revenues from individual therapies can also be lumpy.
Full-Year 2019 Guidance
For full-year 2019, Biogen expects revenue between $13.6 billion and $13.8 billion. The average is up 2% from 2018, indicating growth is slowing. However, guidance may be conservative. That allows guidance to be increased at intervals during the year. If revenue growth does only hit 2%, or lower, for long-term investors, the question becomes: what do trial readouts for 2019 imply over a longer period of time?
R&D expense and SG&A expense are each expected to be about 16% to 17% of revenue, both GAAP and non-GAAP. Non-GAAP tax rate is expected between 18% to 19%.
GAAP diluted EPS $26.65 to $27.65. The average is up 26% from 2018.
Non-GAAP diluted EPS $28.00 to $29.00. The average is up 9% from 2018. While EPS is not expected to grow as fast as in 2018, 9% is still quite healthy, and still faster than revenue growth.
Revenue Growth Drivers and Decliners
Like all sufficiently old pharmaceutical companies, Biogen has therapies that have already, or will at some point, become subject to generic and biosimilar competition. Even without that, the multiple sclerosis market has been very competitive, with many versions of interferon (including Avonex) available to patients. This drives the need for robust discovery operation. In the last five years, the need has driven Biogen to expand beyond multiple sclerosis into therapies for other neurological disorders.
New, already approved drugs are likely to remain drivers for at least two years. Spinraza for SMA may see some new competition in 2019, but most likely, the ramp will continue until almost all SMA patients are under treatment. Spinraza revenue in Q4 was $470 million, up 30% y/y. Ocrevus royalties will also continue to ramp but come at the expense of other multiple sclerosis therapies. Biogen's biosimilar portfolio had revenue of $156 million in Q4, up 28% y/y and has just begun to take market share in that space.
There is not anything else likely to drive growth until new therapies are approved.
In the decline mode, the main problem is Avonex and Plegridy. Combined, these therapies generated $597 million in revenue in Q4, down 7% y/y. I see nothing that would stop that decline, and the rate could even accelerate due to competition.
From the above discussion, it should be clear that Biogen's future revenue, earnings, and stock price are highly dependent on pipeline outcomes. The pipeline is extensive, so here I can only provide an overview. In the next session, I will address the Alzheimer's part of the pipeline.
Biogen generates a lot of free cash flow. Some of that is used to in-license potential therapies. For instance, in January 2019, Biogen and Skyhawk Therapeutics entered into a collaboration, research and development services agreement. The SkySTAR technology platform for small molecule RNA splicing modifiers could result in novel therapies for MS, spinal muscular atrophy (SMA), and other neurological diseases. Biogen paid Skyhawk an upfront payment of $74 million and may also pay additional milestone payments as well as potential royalties. Biogen will record a research and development expense of approximately $35 million in Q1 2019. While it will be years before any therapies developed from this deal reach commercialization, it does show Biogen's willingness to continue to invest for the long run.
In 2018, Biogen added 6 clinical programs to its neuroscience pipeline, including BIIB078 (IONIS-C9Rx) for C9ORF72-associated ALS, BIIB110 (ActRIIA/B ligand trap) for muscle enhancement in diseases such as SMA, an option to acquire TMS-007 for acute ischemic stroke, BIIB104 (AMPA receptor potentiator) for cognitive impairment associated with schizophrenia (CIAS), BIIB074 (vixotrigine) for small fiber neuropathy, and BIIB095 for neuropathic pain.
In terms of the stock price in 2019, however, the value is mainly in assets that may achieve commercialization, or at least a clear-cut Phase 2 or 3 result that will lead to commercialization, within 2 to 3 years. For my purposes, that means drugs in Phase 3 or that have positive Phase 2 results are on track to go to Phase 3.
There are just 2 non-Alzheimer's assets in Phase 3 right now: BIIB093 (IV glibenclamide) for stroke and BIIB098 (diroximel fumarate; DRF) for MS (multiple sclerosis).
The Phase 3 BIIB093 trial enrolled its first patient in large hemispheric infarction (stroke) in September 2018.
BIIB098, renamed Vumerity, was acquired from Alkermes (ALKS). It filed for approval with the FDA in December 2018. That means it could be approved in 2019 and generate commercial revenue in 2020. If so, it will be entering the crowded, highly competitive MS field. On the plus side, it would have no patent expiration issues, so it might be a good replacement for Tecfidera.
I believe there will be no new Biogen drug on the market generating revenue in 2019. Any revenue ramp must come from already-approved therapies. Hence, the guidance.
Beyond the Phase 3 drugs is an extensive Phase 2 pipeline. Not every Phase 2 trial will get positive results, and even then, each must be run through a Phase 3 trial before FDA approval is possible (with some exceptions). It is the breadth of the Phase 2 pipeline that impresses me. The stock price typically will tick up when positive trial results are announced but down when a trial fails. Here is the current list:
Biogen Phase 2 pipeline, less Alzheimer's [source]
I plan to look at some of these individual drug candidates, with their implications for future Biogen revenue, in future articles. The general methodology used by analysts is to assign a likelihood of success and multiply by a reasonable estimate of revenue, in turn, based on market share and pricing.
To get a very rough estimate of what kind of revenue might be generated in 5 years by these Phase 2 therapies, I will use Spinraza Q4 revenue since it is a treatment for a relatively uncommon disease. That revenue was $470 million, which would annualize to $1.88 billion per year. If it is assumed that less than half, or 6 of 13, of this set of therapies are approved, and average that level of income generation, that would add $9.4 billion in annual revenue by 2025. If revenue is otherwise flat, this scenario would represent a 70% increase over 2018 revenue. I tend to see Biogen as good at pre-clinical and Phase 1 vetting, so my hope is that more than 6 will be successful.
What could happen or be on the horizon in 2019? Biogen provided the following in the Q4 2018 slideshow:
Slide 31 (source: Biogen Q4 2018 presentation)
Alzheimer's Disease Therapies
In addition to the pipeline discussed above, Biogen has multiple drugs in trials for Alzheimer's disease.
Biogen believes its Alzheimer's therapies are likely to succeed; it has invested heavily in them. On the other hand, all other potential Alzheimer's therapies (excluding palliatives) have failed to date. Taking a deep dive into known statistics do not give a clear answer as to whether any or all of these therapies will achieve positive Phase 3 results, get FDA approval, and become commercial successes. So, I will outline the positive and negative views, noting I continue to favor the positive one. You might want to read more deeply about the skeptical view before making any investment decision.
Glass half empty: attempts at treating Alzheimer's by treating amyloid and tau have failed to date. No reason Biogen's therapies should be any different. The positive effects in trials so far can be seen as minimal, so they will likely disappear in the Phase 3 trials. No value should be assigned to these assets unless a Phase 3 trial comes in with clearly positive results.
Glass half full: the Phase 2 (or 1b) results have been positive. Sure, they are not a 100% cure for the disease, but they do not need to be. Since there are currently no effective therapies, all they need is statistically significant Phase 3 results. Biogen realized the key to treatment is early intervention before the plaques and nerve damage have made recovery impossible. Biogen is on track to a really, really big revenue stream and Alzheimer's victims will get their first chance at stopping their disease progression.
Caveat: Patent Challenge for Tecfidera
On February 6, 2019, the USPTO (U.S. Patent and Trademark Office) decided that Mylan's challenge to Tecfidera patents could go to trial. Note that is not a ruling on the validity of the patents. I quote to be clear: "After considering the evidence and arguments presented in the Petition and Preliminary Response, we determine that Petitioner has demonstrated a reasonable likelihood that it will succeed on at least one of its challenges to patentability. Accordingly, we institute trial as to all claims and all grounds presented in the Petition."
This could be seen a big victory for Mylan or a big defeat for Biogen, but my assessment is it is a small skirmish in a large and complex war. Mylan is a generics maker and of course, wants drugs to go generic as quickly as possible. In the case of Tecfidera, there are multiple patents, a good example of a patent thicket.
According to the recently filed 10-K (pages 15 and 16), Biogen has U.S. patents expiring in 2020 and 2028. European patents expire in 2019 and 2028. In addition, in Europe, Tecfidera has regulatory exclusivity until 2024.
Perhaps, I am less concerned about this event than others maybe because I also own Mylan stock. I believe Mylan is undervalued. One reason I own a generic pharmaceutical company is that I know drugs lose patent protection, but the number of generic drugs that can be sold just keeps growing, and volumes keep increasing as the U.S. population ages.
Cash, Cash Flow, and Debt
Cash and equivalents ended 2018 at $4.9 billion, but debt was $5.9 billion. Cash flow from operations in Q4 was $1.9 billion. Biogen is well positioned to pay off debt or continue to repurchase stock. I believe the company could easily pay a dividend, but that is not how management likes to return cash to shareholders. $1.4 billion was used to repurchase shares in Q4.
The big If for Biogen is the outcome of the Alzheimer's disease Phase 3 trials. I think it is more likely than not that one or more of the drugs will receive an FDA approval. Given the large number of potential patients, the long duration of therapy they will be on, and the likely lack of competition for at least a few years, I think Biogen would be generating billions of dollars of additional revenue under this scenario. I see Biogen as undervalued and worth holding until at least Phase 3 results of an Aducanumab trial come in. That could be in early 2020.
Even if aducanumab does not reach statistical significance, the broad pipeline of neurological disorder drugs should increase revenue over time even as patents on older drugs expire.
Given the expected revenue growth rate for 2019, I believe the current BIIB P/E of between 15 and 16 is appropriate. Earnings growth is expected to be faster and might justify a P/E of more towards 20. So I expect the stock price in 2019 to stay between about $300 to about $400. Any positive trial data should push Biogen towards the top of the range. Based on past market moves, the main mover within this range in 2019 is likely to be investor excitement or apathy about Alzheimer's therapies. The range is also broad because of the high market volatility that seems to have become the norm.
For long-term investors like myself, 2019 will be a trial of patience as we wait for Alzheimer's results in 2020.
This article was written by
Analyst’s Disclosure: I am/we are long BIIB, MYL, IONS. 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.
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