Biogen Inc. (NGS: BIIB). The BIIB shares performed wildly early in November, shining a light on the company’s dependence on its multiple sclerosis products and its need for a blockbuster drug to significantly diversify its earnings.
However, by November 9, the stock was trading below where it had started upon news that the FDA Advisory Committee had voted that previous clinical studies did not provide enough evidence to support aducanumab for the treatment for Alzheimer’s disease. While the Committee’s recommendations are non-binding, we believe that the recent vote may dampen the likelihood of aducanumab’s regulatory success. Nevertheless, an approval could significantly boost earnings in the near-term, providing relief for other areas of the company’s business.
While Biogen achieved an earnings and revenue surprise in the third quarter, the company saw its results fall year-over-year as generic entrants began to emerge in the U.S. multiple sclerosis market. As Biogen’s MS portfolio provides roughly 67% of the company’s revenue, the rise of generic alternative products poses a particularly acute threat. As such, management lowered its full-year guidance for 2020. It now expects revenue of $13.2-$13.4 billion, down from its earlier guidance range of $13.8-$14.2 billion.
Looking beyond, the company has a deep pipeline of 30 clinical assets, seven of which are expected to have mid-to-late stage readouts by the end of 2021. If successful, the market impact of these therapies would not be realized until 2024. Based on the uncertainty surrounding the regulatory decisions on aducanumab and the rise of generic competition in the MS market, our rating remains HOLD.
The share price is driven in part by pipeline developments. On November 6, Biogen posted an update on the FDA Advisory Committee’s meeting on aducanumab. The Committee voted that Biogen’s EMERGE and PRIME clinical studies did not provide enough evidence to support aducanumab for the treatment for Alzheimer’s disease.
Other recent therapy highlights include: 1) Biogen recently presented positive Phase 2 data showing that BIIB059 demonstrated a statistically significant reduction in joint disease activity compared to placebo in systemic lupus erythematosus patients. 2) In September, Biogen reported data that further defined the effectiveness and improved GI tolerability of Vumerity, evaluated the quality of life benefits of Tysabri, and showcased the benefits of Plegridy and Avonex in older individuals with multiple sclerosis. 3) Also in September, Biogen presented data showing the socio-demographic and clinical disparities of patients with MS, highlighting the importance of the company’s efforts to develop digital tools and technologies to facilitate more personalized decisions in MS care.
EARNINGS & GROWTH ANALYSIS
Biogen reports revenue by products in four disease categories: Multiple Sclerosis, including royalties from OCERVUS (67% of revenue), Spinal Muscular Atrophy (15%), Cancer and Other (12%), and Biosimilars for Rheumatoid Arthritis/Crohn’s disease/Psoriasis (6%). Fiscal 3Q20 results for these categories are summarized below.
MS product revenue (including royalties from OCREVUS) were $2.26 billion, down 4% from the prior year, due primarily to fierce competition in for Tecfidera in the U.S. While Tecfidera sales fell 15% in the U.S., its sales rose about 1% across the rest of the world.
Cancer and Other revenue fell 20% to $417 million. The decrease was primarily driven by a 29% decline in Rituxan / Gazyva revenues, which more than offset a 15% increase in Other Revenues. Management expects that the COVID-19 pandemic will continue to impact sales of Rituxan in the near-term future.
Biosimilars revenue was $207 million, up 13% from prior year.
Turning to our estimates, we are lowering our FY20 EPS forecast to $33.30 from $35.10, reflecting a decline of about 80 basis points year-over-year given the increased competition within the MS market. We are also lowering our FY21 EPS forecast to $25.20 from $33.00 given the fierce competition in the MS market in the U.S.
Management reported that net cash flows from operations were $1.18 billion for the quarter, down 30% year-over-year, while free cash flow fell 32% to $1.10 billion. Long-term notes payable were $7.43 billion, compared to $4.46 billion in 4Q19.
Biogen has a buyback program.
MANAGEMENT & RISKS
Michel Vounatsos, the Chief Executive Officer of Biogen, has served in this position and as a member of the Board of Directors since January 2017. Mr. Vounatsos joined Biogen in 2016 as Executive Vice President, Chief Commercial Officer. His experience includes 20 years at Merck, where he held leadership positions in Europe, China, and the U.S. Prior to Merck, Mr. Vounatsos held management positions at Ciba-Geigy. In August, Michael R. McDonnell became EVP and CFO for Biogen, replacing Jeffrey D. Capello in the role.
The company faces product concentration risk as over 60% of Biogen’s total revenues are derived from its multiple sclerosis drugs. The company is currently a leader in the MS market, however recent competition from several large pharma companies is hurting Biogen. Additionally, we note that Biogen receives royalty revenue from sales of MS drug Ocrevus, but does not own any commercial rights to the drug, which is marketed by Roche. Biogen co-developed Ocrevus with Roche and then opted to exchange its 30% interest for royalty payments. As a result, Biogen receives royalties on a product that competes with its own MS drugs.
Like other biotech and pharma companies, Biogen faces significant risks related to the costs of new drug development, the ability to maintain a strong pipeline and the ultimate revenue loss from generics when their drugs come off patent. The company has also relied on partners to co-develop drugs and has not independently developed their own product in more than a decade. This capability void could instill collaboration dependency.
With over 25% of Biogen’s total revenues earned in international markets, the company is exposed to currency risk.
Biogen is a biotech company that researches, develops, manufactures, and sells therapies for treating neurological and neurodegenerative diseases worldwide. The company also sells products that treat plaque psoriasis, non-Hodgkin’s lymphoma, lymphocytic leukemia and rheumatoid arthritis. Current research continues on multiple sclerosis and has expanded to include neuroimmunology, Alzheimer’s disease, ophthalmology, lupus, and other neuromuscular and movement disorders. Founded in 1978, the company is located in Cambridge, Massachusetts and employs approximately 7,400 people.
On November 18 at midday, HOLD-rated BIIB traded at $247.71, down $1.10.