Wise drug developers say only fools rush in, but Biogen (NASDAQ: BIIB) couldn't help falling in love with early data for experimental Alzheimer's drug aducanumab about four years ago. The company recently threw its most anticipated potential new drug on the scrap pile due to a lack of efficacy. Now that suspicions concerning aducanumab have been proven, investors who were waiting for the shoe to drop smell a bargain opportunity.
Is the newly de-risked Biogen a good stock to buy following its clinical-trial disaster? Despite the recent loss, long-term investors have seen their shares gain 5,030% over the past couple of decades. Let's take a look under the hood to see if this legendary biotech can do it again.
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Reasons to remain cautious
With the exception of Spinraza, U.S. demand for Biogen's entire line of multiple sclerosis (MS) products is sliding. The number of Tecfidera capsules that Biogen shipped in the U.S. fell 5% last year. Even though Biogen raised the drug's list price, sales in the region fell 1%, to $3.3 billion, as pharmacy benefit managers demanded larger rebates to keep it in accessible formulary tiers. Tecfidera is losing ground to Gilenya, another MS capsule from Novartis (NYSE: NVS) , which reported rising U.S. demand last year.
Biogen's Tysabri is a highly effective but dangerous drug reserved for severely relapsing MS patients and is getting pummeled by a new competitor. Ocrevus is a bi-annual infusion from Roche (NASDAQOTH: RHHBY) that's approved for the most aggressive form of MS and the larger group of relapsing remitting patients.
Ocrevus looks like the safest MS treatment of all time, as well as the most effective. This winning combination drove first-year sales of Roche's drug to a whopping $2.4 billion in 2018.
Right now, Spinraza for spinal muscular atrophy (SMA) is the only product driving growth for Biogen, and it will face an interesting challenge soon. Novartis spent $8.7 billion last year to acquire a single-administration gene therapy, Zolgensma, and the Food and Drug Administration (FDA) will probably announce an approval decision in April.
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During a clinical trial supporting Zolgensma's application, all 15 type-1 SMA patients treated were still able to breathe on their own 24 months after receiving a single dose. Historical averages show that just 8% of type-1 SMA patients reach that milestone.
Spinraza costs around $750,000 for the first year and around half that amount every year after the first. The Institute for Clinical and Economic Review (ICER) thinks Novartis could charge $2 million upfront for Zolgensma and it will still cost less than Spinraza over the long run.
Sales of Spinraza jumped 95% higher last year to $1.7 billion, but Biogen has already warned investors that 2019 won't be nearly as spectacular due to saturation of a limited patient population. If the one-shot cure from Novartis is a winner, those sales could begin falling before 2019's finished.
Reasons to buy
Before we beat up on Biogen's clinical-trial failure, it's important to remember that back in 2015, it was the right thing to do given the data available. It's also important to remember this company generated $5.3 billion in free cash flow last year and has been reinvesting those profits into a highly collaborative clinical-stage pipeline.
Biogen has collaboration agreements with around a dozen drugmakers, including Roche. The Swiss pharma giant paid Biogen $2.0 billion last year for rights to Ocrevus, Gazyva, and Rituxan.
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Biogen's collaboration with Roche goes way back, and since then, Biogen's been the one that's licensing potential new drugs from smaller biotechs. For example, Biogen licensed Spinraza from Ionis Pharmaceuticals (NASDAQ: IONS) years ago, and the partners have three more candidates in early clinical-stage testing.
In February, the FDA started reviewing an application from Biogen's collaboration partner Alkermes (NASDAQ: ALKS) for diroximel fumarate, an oral MS therapy that looks as effective as Tecfidera but easier to tolerate. If approved, more high-margin royalty revenue could come rolling in.
A market scorn for Alzheimer's trial failures hammered Biogen's stock price about 30% lower today, which works out to a market cap reduction of $18.6 billion. Consensus estimates suggested aducanumab was worth just $7.4 billion in 2018 dollars less than a year ago.
Biogen's stock price has been beaten down to 8.7 times trailing free cash flow, which means investors will come out way ahead, even if sales remain flat into perpetuity.
A buy now?
Past failures don't guarantee further catastrophes, but throwing more money at the same failed targets isn't a recipe for success, either. Biogen's still planning a phase 3 trial with BAN2401, a candidate from the same class as aducanumab, following phase 2 results that were not encouraging .
Spinraza's really the only successful clinical-stage program that was in Biogen's pipeline four years ago, and there's a good chance that the next several years won't be much better. Profits are strong enough to hold on to any shares you already have, but trying to catch this falling chainsaw probably isn't a good idea.
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