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Biogen Is A Buy Regardless Of Aducanumab

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About: Biogen Inc. (BIIB)
by: William Meyers
William Meyers
Long only, tech, biotech, research analyst
Summary

Biogen was undervalued before the aducanumab announcement.

If approved by the FDA, aducanumab could generate billions in annual revenue.

Biogen's pipeline is broad and deep, so treat it as a growth stock.

Biogen (BIIB) has been on even more of a roller-coaster ride than the rest of the highly volatile biotechnology pharmaceutical sector this year. In March it plunged from over $320 per share to under $220 per share after Biogen announced it had stopped its aducanumab for Alzheimer's trial. In October it regained much of that loss when it reversed the announcement, saying aducanumab data may support an FDA approval.

Throughout this period I have maintained that current commercial drugs, plus a broad and innovative pipeline, mean that Biogen should be trading at a higher multiple to earnings, even without an aducanumab approval. Opinions differ on what the chances are for an aducanumab approval. We will know more after more detailed data is released later this year, in December.

This will be a brief review, a summary of the state of a large, complex company. Potential buyers will likely want to take a more detailed look at the Biogen pipeline, its sales record, and in particular its statements about aducanumab, as well as the opinions of other journalists, analysts, and Alzheimer's specialists.

ChartData by YCharts

Biogen without Aducanumab

Biogen's Q3 results confirm the story I told in Biogen Q2 Results Show Resilience. A good place to start is with the revenue numbers for specific drugs:

Therapy Revenue in Millions

Q3 2019

Q2 2019

Q3 2018

y/y %

Tecfidera

$1,122

$1,150

$1,090

3%

Avonex + Plegridy

530

554

590

-10%

Tysabri

484

475

470

3%

Fampyra

24

24

23

8%

Benepali

116

120

123

-6%

Imraldi

49

47

0

na

Flixabi

18

17

11

63%

Fumaderm

4

4

5

-22%

Spinraza

547

488

468

17%

Rituxan*+Gazyva royalty

408

394

375

9%

Ocrevus royalty

188

183

137

37%

Other**

110

160

147

-26%

* unconsolidated joint business revenue, Anti-CD20 products ** mainly contract manufacturing

Table source: compiled by author from Celgene Q3 press release

Summing up, revenue in Q3 grew 5% y/y. In a rational market that would result in a company having a higher stock price compared to earnings, or P/E, because the presumption would be continued earnings growth. A P/E of 15 would certainly be warranted, and one of 20 would not be surprising. Even as I write, post the new aducanumab announcement, Biogen has a forward P/E of 9.0. That makes it clearly undervalued, unless aducanumab is needed for continued P/E growth. For reference earnings in Q3 were $8.39 GAAP and $9.17 non-GAAP.

The argument for a lower P/E ratio is the declining revenues from older drugs when they encounter generic, biosimilar, or other competition. You can see that in the above table with the y/y decrease in Avonex sales. So far those changes have been more than compensated for by ramping revenue from newer drugs like Ocrevus and Spinraza. Vumerity for multiple sclerosis was tentatively approved by the FDA; it is an improvement on Tecfidera. In the future approvals and commercialization of pipeline drugs will (most likely) result in further revenue growth. The Biogen pipeline is so extensive that I recommend following the link to it; I will not reproduce it here. Notable late-clinical stage potential therapies include tofersen for Amyotrophic lateral sclerosis; BIIB093 for large hemispheric infarction; and BIIB111 for choroideremia.

Slide 48 from the Q3 analyst conference gives a clear picture of how Biogen is likely to exceed investor expectations in the next decade:

A screenshot of a social media postDescription automatically generated

Biogen with Aducanumab

Even if approved for use by the FDA, aducanumab is not a cure for Alzheimer's. The statistics indicate that for very early Alzheimer's disease it slows the mental decline due to disease progression. Nevertheless, all other approved Alzheimer's therapies only temporarily improve symptoms. This would be the first therapy to slow the pace of the disease. As such, given the impact of the disease, which always ends in death if something else does not kill the patient first, the sky might seem to be the limit when it comes to pricing. In reality most Alzheimer's patients are under Medicare. If Alzheimer's were a rare disease aducanumab might be priced at $100,000 per year with not much of a complaint from the government or private insurers. But it is a common disease. I can only guess at pricing, but I would think it would not be less than $10,000 a year, at least until there is competition.

Most people who already have Alzheimer's (about 5.8 million in the U.S.) are too far gone to be covered by the likely aducanumab label. In fact, often newly diagnosed patients may be too far along to derive much benefit. The ideal subjects are just starting to get the plaques or amyloid accumulation that are a symptom and cause of the disease. These patients may show little mental deterioration. New screening methods will need to be introduced to catch people early. The number of new cases per year is currently approximately 500,000. At $10,000 per year per patient, a single year's cohort of patients (assuming 100% treatment, which is unlikely) would generate $5 billion in aducanumab revenue. How much annual sales would top out at would depend on how long patients remain on treatment. Biogen will certainly argue for a higher price tag, based on the drug's benefits. By comparison in 2018 total revenue for Biogen was $13.45 billion.

Of course there is a chance, perhaps considerable, that the FDA will reject aducanumab. More likely it will grant conditional approval, requiring Biogen to continue conducting studies. Opinions vary, and will probably change after the December data presentation, but for illustrative purposes I will give it a 50% chance of approval. In that case (and using my prior numbers and pricing assumptions) the probability weighted revenue would reach $2.5 billion a year after the initial ramp up.

Conclusion

Buying or holding Biogen has little risk. While some of its older drugs are declining in sales, and all will eventually have generic or biosimilar competition when patents expire, even without aducanumab revenue, Biogen should grow due to its strong commercial franchise and robust pipeline.

The main risks are from competition in specific disease indications and possible increased government regulation of pricing. Other than that, there is just the usual volatility. Macroeconomic risk is minimal; for most patients their therapies are not optional.

I think the stock price can sustain a P/E of 20 as long as it seems like aducanumab commercialization is a realistic possibility. If approval is prevented or delayed, the stock is likely to drop, but if the FDA grants approval, then we will need to do a more accurate projection of future revenue and earnings based on the drug price and the breadth of the label. At a (trailing 12 month, non-GAAP) P/E of 15 Biogen would have a stock price of about $484. It opened on November 4, 2019 at $301.14, so clearly it has room to grow. And if aducanumab is approved, it is likely to go wild.

Disclosure: I am/we are long BIIB. 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.