Biogen: Buybacks and Biotech

08/21/2019 5:00 am EST

Focus: HEALTHCARE

George Putnam

Editor, The Turnaround Letter

Biogen (BIIB) is a major biopharmaceutical company specializing in treatments for multiple sclerosis (about 60% of sales) and spinal muscular atrophy (about 15% of sales), notes George Putnam, editor of The Turnaround Letter.

Its founding in 1978 makes it one of the oldest firms in the biotech industry. Biogen completed its initial public offering in 1983 and has grown through both internal innovations and acquisitions, including the $6.8 billion merger with IDEC in 2003.

In 2018, the company completed the spin-off of Bioverativ, its hemophilia treatment business (itself a former Turnaround Letter recommendation that produced a +95% return). 

The company’s shares have fallen sharply from their high of $475 in early 2015, and suffered a 25% drop this past March following the failed clinical trial of its Alzheimers’ drug.

In the market’s view, this disappointment only served to heighten the pressure on Biogen’s current roster of treatments – which are exposed to rising competition that could threaten the company’s revenues and profits.

Its Tecfidera franchise for multiple sclerosis faces a major threat from a patent lawsuit by Mylan as well as emerging generic competition.

Spinraza, a fast-growing treatment for spinal muscular atrophy, will likely see alternatives from Roche and Novartis. Other core products, including Avonex, also seem to have a less-prosperous future as new competition enters the field. 

With its revenue growth prospects appearing hazy at best, consensus estimates pointing to a decline in EBITDA in a few years and the risks of its pipeline highlighted by the Alzheimers’ failure, investors have abandoned Biogen shares. 

While there may be a few clouds over Biogen at present, investors are pricing in a fairly stormy future. At 5.9x EV/EBITDA, the market assigns almost no value to its pipeline of new products.

Yet Biogen is not only developing innovations to maintain its multiple sclerosis and other neuromuscular disease franchises, but it is also expanding into promising new therapeutic areas including ophthalmology and neurosciences.

The company’s biosimilar platform (which produces biologic therapies based on a competitor’s product that is losing its patent protection) offers additional growth opportunities. 

Recent results also suggest that investors may be overly gloomy about Biogen’s prospects. The company reported surprisingly strong second quarter results and raised its guidance for the full year. 

Bolstering its ambitions and valuation is Biogen’s sturdy financial condition. Its $2 billion in net cash flows from operations in the second quarter, combined with only $1.6 billion in net debt (debt in excess of its cash balances), indicates its ability to pursue a variety of strategic options including acquisitions and share repurchases.

Biogen’s $2.4 billion in share buybacks last quarter illustrates its commitment to shareholder value. For patient investors, The shares offer considerable upside potential. We recommend Biogen with a $360 price target. 

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