Biogen: Forecasting Suggests Buying At Historical Lows Advisable

Balance

Daniel Grizelj

Investment Thesis

Biogen (NASDAQ:BIIB) is currently best known for being the pharmaceutical company that brought us Aduhelm, the Alzheimer’s drug controversially approved by the FDA in June 2021.

Despite its two Phase 3 trials of Aduhelm being abandoned after failing a futility analysis, the company managed to find some data in one of the two trials supporting a statistically significant, positive effect on the slowing of cognitive decline.

Despite an FDA Advisory Committee voting 10-0 against approval, Aduhelm was initially granted marketing authorisation with few restrictions by the agency itself, sending Biogen’s share price soaring from ~$265, to $395 – a gain of ~50%.

That was as good as things got for Biogen and Aduhelm, however, as despite analysts forecasting that Aduhelm would generate sales in the double-digit billions, concerns over efficacy, safety – due to instances of brain oedema, or swelling – and price – Biogen wanted to charge $56k per annum – led to a backlash against the approval.

Ultimately, the Centers for Medicaid and Medicare (“CMS”) opted against providing reimbursement for Aduhelm for anything other than clinical trials, all but ending Aduhelm’s chances of making meaningful sales.

Biogen is a Pharma that researches cures for some of the toughest to treat central nervous system diseases, so there will always be intense scrutiny of the drugs it develops and attempts to bring to market. Given Biogen’s clinical trial failure rate is high, its stock will not suit every investor’s appetite for risk.

On the other hand, an overlooked fact is that Biogen has traditionally been an exceptionally profitable company. In 2018, 2019, and 2020, the company achieved a net profit margin of 33%, 41%, and 30%, on revenues of $13.45bn, $14.4bn, and $13.4bn – the Price to Earnings (“PE”) ratio in each of these years based on current traded price of $205 is 7x, 5x, and 7.3x. Generally speaking, the lower the PE ratio, the greater the possibility of share price upside, and Biogen’s is historically lower than the Big Pharma sector average PE ratio which I calculate to be ~20x.

Last year was not such a profitable year for Biogen, as total revenues decreased to $10.98bn, whilst operating expenses did not decrease in tandem, only falling from $8.9bn, to $8.1bn, although free cash flow was calculated at $3.4bn, versus $3.8bn in 2020, and the net profit margin was 16%, compared to the sector average of ~25%.

The failure to offset falling revenues of its most profitable asset up to FY20, Tecfidera, approved to treat Multiple Sclerosis since 2013, but no longer patent protected, with rising sales of Aduhelm has seen Biogen stock slip to its lowest price since 2013. Does that represent a buying opportunity for investors, or an indication that the company’s best days may be behind it.

In this post, I’ll take a closer look at Biogen’s present portfolio, its later stage pipeline, management’s strategy for growth, and use my own forecasts and discounted cash flow/EBITDA analytics to try to answer this question. Let’s begin by assessing Biogen’s MS portfolio, which accounts for more than half of the Pharma’s total revenues in 2021.

In the tables below I show historical product sales, sales in H122, which I simply double in most cases to meet management’s guidance of $9.7bn – $10bn of revenues in 2022, and the sales going forward, based on my research into markets, and the compound annual growth rate (“CAGR”).

I am forecasting for a reasonably optimistic scenario, particularly given Biogen’s recent high rate of clinical failures, and exposure to market e.g. CNS, where there is a high degree of uncertainty. The figures are intended to be ballpark only, but hopefully shed some light into what kind of a company Biogen can become within a 5-7 year period.

Biogen – Multiple Sclerosis Losses Can Be Overcome

Tecfidera – delayed release capsules of dimethyl fumarate, an oral Nrf2 pathway activator proven to help treat relapsing forms of MS – was Biogen’s biggest selling asset in 2019 and 2020, generating $4.4bn and $3.84bn of revenues in respective years. The drug has lost its patent protection – known as loss of exclusivity (“LOE”) – however, with Viatris (VTRS) launching a generic version of the drug in August 2020, and successfully defending itself against a court challenge from Biogen, likely opening the door for further generic launches.

Nevertheless, Biogen had planned ahead with the 2019 approval and launch of Vumerity, another “fumarate” drug with a better record of gastrointestinal tolerability. Sales are growing, and are likely to exceed $500m in FY22.

It is a not dissimilar story with the Interferon asset Avonex – which no longer has patent protection in place. Sales fell by 19% between 2020 and 2021, to $1.2bn. A second interferon asset Plegridy has been approved since 2014, and more recently was approved in the form of an intramuscular injection, but the market in general is moving away from interferon based treatments – which attempt to prevent the immune system attacking the myelin sheath – and towards anti-CD20 therapies e.g. Roche’s (OTCQX:RHHBY) Ocrevus or Novartis’ Kesimpta.

Back in May, the FDA rejected an application from Biogen for a subcutaneous version of Tysabri – a humanized monoclonal antibody against the cell adhesion molecule α4-integrin, indicated for MS and Crohn’s Disease.

Tysabri was Biogen’s biggest selling drug in 2021, generating revenues of just over $2bn. The FDA knockback was a blow to the company since Tysabri makes the bulk of its sales in the US.

Tysabri could lose its patent exclusivity as early as next year, with Sandoz – the world’s largest generics company, eyeing up a biosimilar challenger. Fampyra, a drug which can help increase walking speed in MS patients, has been marketed since 2017, and appears to have a limited market.

To summarise, the patent expiries of Biogen’s key MS assets Tecfidera, Avonex, and Tysabri presents a significant problem for Biogen, since the company seems somewhat underprepared to try to offset the losses in its MS division.

In my forward sales modelling table below, I have included one pipeline asset – a BTK inhibitor, Orelabrutinib, acquired from China-based Pharma InnoCare and currently in a Phase 2 trial for MS. In truth, an approval for this drug is far from certain, and Biogen will owe InnoCare ~$825m in milestone payments should the drug be approved, by the terms of its deal.

Biogen MS Division - sales forecast to 2030

Biogen MS Division – sales forecast to 2030. (my table and assumptions)

As we can see, in the table I forecast Tecfidera sales to fall by 10% per annum, offset by 10% per annum growth in Vumerity sales – based on analysts’ consensus opinion that Vumerity has blockbuster (>$1bn sales per annum) potential.

I forecast Avonex and Plegridy sales to fall by 5% per annum, and Tysabri sales to fall by 1% per annum, and I forecast Orelabrutinib to be approved in 2024, going on to achieve sales of $500m by 2030.

Biogen does have other MS indicated assets in its pipeline, as we can see below, but by management’s own admission Biogen’s clinical trial failure rate is high, so I am erring on the side of caution. Overall, I don’t see much prospect of sales in the MS division growing, or recapturing former highs of >$8.5bn at the present time.

Biogen pipeline

Biogen pipeline as of Q222. (earnings presentation)

Source: Q222 earnings presentation.

The Emergence of New Alzheimer’s, Neuromuscular and Depression Drugs Offers Hope

Biogen management has made it clear that it intends to reprioritise away from MS and into other CNS fields.

Alzheimer’s is still a priority for the Pharma, and management has not yet given up hope that the Phase 4 post-marketing study of Aduhelm will provide the efficacy and safety data required to relaunch the drug commercially, with support from reimbursement agencies. With that said, Biogen CEO Michel Vounatsos – the driving force behind the development of Aduhelm – announced he would be leaving the company in May, taking ~100 sales staff earmarked to sell Aduhelm with him as part of a $1bn cost saving exercise.

Biogen’s other Alzheimer’s shot is Lecanemab, whose Biologics License Application (“BLA’) has been accepted by the FDA as the drug itself progresses through its pivotal Phase 3 trial. This time, Biogen’s development partner, the Japanese Pharma Eisai, will handle the submission.

Phase 2 study results have shown that Lecanemab reduces amyloid deposits after 18 months, and decreases the pace of cognitive decline, although the therapy failed to meet the study goal of an 80% probability that the drug would be superior to placebo. As such, the jury remains out on whether an approval can be achieved, and even if it is, whether the CMS and insurers will be persuaded to provide reimbursement.

Spinraza – indicated for Spinal Muscular Atrophy and one of the most expensive drugs in the world, at a list price of ~$750k, has been a success for Biogen, generating ~$2bn sales for the company in each of the past three years, although competition from the likes of Novartis’ (NVS) Zolgensma and Roche’s orally administered Evrysdi are likely to impact future sales growth. Tofersen is an approval shot, although the Amyotrophic Lateral Sclerosis (“ALS”) therapy failed a Phase 3 trial, and Biogen may have its work cut out for it in convincing the FDA to approve the drug given the Aduhelm debacle.

It is a similar story in depression, where Biogen is developing Zuranolone in partnership with Sage Therapeutics (SAGE). The drug is in Phase 3 trials for both PostPartum Depression (“PPD”) and Major Depressive Disorder (“MDD”), although, like seemingly so many other Biogen drugs pushing for approval, it failed a Phase 3 trial, in MDD, in 2019. Sage since opted to run three shorter trials and is now confident of approval.

MDD is a >$10bn market, while PPD is valued around $5bn, so if approved, although the MDD market is crowded, Zuralonone could become a blockbuster for Biogen.

Biogen sales forecasts in CNS fields

Biogen sales forecasts in CNS fields. (my table and assumptions)

In summary, based on the above, I am forecasting for Aduhelm sales to eventually find some minor traction, if only from clinical trials, and for Lecanemab to achieve peak sales of $1.5bn by 2030.

It’s entirely possible that Aduhelm generates no further sales and Lecanemab is not approved, or even that Lecanemab achieves sales revenues >1$bn per annum if late stage trials mark it out as a best in class treatment, but in the interests of balance I have used the numbers above.

I also forecast overall blockbuster peak sales of $1bn for Zuranolone. Again I am speculating that the drug does win approval, in PPD in 2023 and MDD in 2024, although it is not guaranteed. Sales may ultimately be higher than $1bn per annum, but I am assuming some profits will be shared with Sage.

Biosimilars

Biogen’s biosimilars division has been growing, although incrementally as opposed to exponentially. The Pharma has three solid candidates in Benepali, Imraldi, and Flixabi, which are versions of Amgen’s Enbrel, AbbVie’s (mega-blockbuster) Humira, and Enbrel again. Together these three assets generated $831m in revenues in 2021, although performance to date in 2022 seem to suggest that sales have plateaued.

Nevertheless, Biogen has recently won approval for Byooviz, a biosimilar for Roche’s blockbuster eye therapy Lucentis, and there are potentially two more biosimilars that could make it to market in the coming years. BIIB800 references Roche’s Actemera, a therapy for Rheumatoid Arthritis, BIIB801 references Cimzia, UCB Pharma’s Crohn’s Disease therapy that racked up sales revenues of $1.8bn in 2020.

Biogen sales forecasts across Biosimilars division

Biogen sales forecasts across Biosimilars division. (my table and assumptions)

Source: my table and assumptions.

As we can see above, I am forecasting that sales within the biosimilars division could double by the end of the decade. It is likely competition will intensify, with the likes of Organon (OGN) – in partnership with Samsung Bioepis – Biocon, who acquired Viatris’ biosimilars business last year, an newly IPO’d Alvotech (ALVO) all challenging incumbents such as Sandoz, Amgen, Teva (TEVA) and others, but Biogen, on paper at least, appears to be handling this division well.

New Market Opportunities & Total Revenue Projections

Biogen’s biosimilars division is probably a more sure-footed approach to revenue generation than tough-to-treat CNS indications such as Alzheimer’s, or Depression, but arguably, Biogen’s long term plans seem to focus on potentially more achievable approval shots.

Biogen business development strategy

Biogen business development strategy. (earnings presentation)

Source: Q222 earnings release.

Of course, it depends on the quality of the drug in development, but looking at Biogen’s long term strategy, above, Aurinia Pharmaceuticals (AUPH) has recently commercialised a drug for Lupus Nephritis, whilst the global stroke management market is worth >$30bn and includes a variety of different approaches and approve dugs.

Parkinson’s Disease and genetic neurodevelopmental are likely tougher markets to succeed in, although progress is being made in Parkinson’s by the likes of AbbVie (ABBV) and its pump-delivered levodopa-carbidopa formulation ABBV-951.

Biogen forecast new market opportunities sales to 2030

Biogen forecast new market opportunities sales to 2030. (my table and assumptions)

I am forecasting that Biogen can earn >$3bn from these new market opportunities plus its digital health capabilities, which is another strong focus and potential source of revenue as healthcare continues to integrate with technology. My schedule of approvals is loosely based on current pipeline progress, current markets and sales of existing drugs in these markets.

To summarise, it is quite a bold prediction to target peak sales >$16bn in 2030 – reflecting a CAGR of 6%, but then again, Biogen earned $13.5bn in 2020. The biggest worry is the company’s recent approval rate which has been low.

Things will have to improve on that score going forward – perhaps Biogen would benefit from a more pragmatic new CEO to guide home the most promising opportunities and let go of some dead wood, as has already happened with the termination of e.g. anti-tau antibody BIIB076, and a small molecule indicated for ALS therapy.

Free Cash Flow and Share Price Target

chart

Biogen income statement forecast to 2030. (my table and assumptions)

Above I have mocked up a forward income statement to 2030, based on past performance, although weighted towards 2020, which means net profits are lower, although the forward PE trends downward from ~16x, to ~7x, as operating expense margin increases. Below, I calculate the free cash flow, and using a weighted average cost of capital of ~10%, which I use for most Big Pharma forecasting, apply discount factors to calculate a target share price.

BIIB stock price target using discounted cash flow, EBITDA analysis

Share price target using discounted cash flow, EBITDA analysis. (my table and assumptions)

As we can see above, using DCF analysis I calculate a fair value share of $250 if Biogen is capable of achieving the targets I have forecast above, or a similar level of revenue generation and free cash flow based on current products and pipeline at least.

Using EBITDA analysis my share price target is much higher, jumping to $363, or an 82% premium to Biogen stocks’ current traded price of $200, as opposed to the 25% premium implied by DCF analysis. The midpoint share price target is $306, or a 54% premium to current price.

Conclusion – Given The Risk, Biogen May Be Fairly Priced, But Small Upturn In Fortune Could See 50% Upside In Time

Although it is possible to map out some basic forecasts for Biogen’s performance going forward, using recent performance and an analysis of products and pipeline, I cannot guarantee that things will work out this way for the Pharma.

In theory, the drugs I have discussed above will continue to be the main revenue drivers at Biogen, and management’s hope is that they will be joined by the likes of Alzheimer’s therapy Lecanemab, Depression treatment Zuranolone, several new biosimilar drugs, and some wins in new markets such as Stroke, and Parkinson’s.

If that does happen and Biogen continues to be somewhere near as profitable as it has been in the past, and if the company can steer clear of too much controversy, I can see the share price rising >50%, as my analysis implies. It will take time for the company to move on from Aduhelm, and Vounatsos, and Alzheimer’s will continue to be a key market for Biogen, making the stock price volatile.

By delivering in its other, less speculative target markets, Biogen can keep the share price steady while it continues to search for a breakthrough in neurodegeneration.

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