I recently bought Biogen (BIIB -0.48%) stock for my personal portfolio (adding to a previous position) after the company reported disappointing Q2 earnings and slashed its 2015 guidance. If that sounds like an odd decision to you, you're not alone: Lots of investors sold out of Biogen after it reported earnings on July 24, prompting a massive nose-dive in the stock's price.
But after reading the call transcript (courtesy of S&P Capital IQ) and looking at the earnings sheet, I saw an opportunity for a long-term investor to get in and own shares of a great company. Here are the three reasons I bought in.
1. The news wasn't that bad
Biogen dropped its guidance for 2015 in a pretty big way: Management slashed its expectations for revenue growth from 2014 in half -- from 14% to 16% growth to 6% to 8% -- and 2015 EPS expectations dropped from between 25% and 28% growth over 2014's numbers to between 15% and 19% instead.
Biogen is seeing a big slowdown in uptake of Tecfidera, its multiple sclerosis (MS) blockbuster and largest revenue driver. While the drug brought in 26% more revenue year-over-year last quarter -- and a cool $883 million -- it only showed 7% growth from Q1. That's not a temporary slowdown, either: Management's updated guidance for 2015 indicates that there will be minimal growth in patients treated by Tecfidera in the United States. Management attributes the slowdown in part to the fact that a few patients treated with Tecfidera contracted progressive multifocal leukoencephalopathy, or PML, a potentially fatal brain infection -- and those cases have, according to EVP Stuart Kingsley, "created greater caution on the part of both physicians and patients about switching to oral [MS treatments, including Tecfidera]."
But it wasn't all bad news. For example, management highlighted strong early Tecfidera uptake in several European countries, including the U.K., Spain, and Italy. Hemophilia drugs Alprolix and Eloctate are new to the market and only contributed $54 million and $74 million in sales, respectively, last quarter, but their growth ramps look impressive. Revenue for both drugs is growing fast, as Q2's sales represented 26% and 38% growth over Q1's sales. Analysts estimate that Alprolix could bring in peak annual sales of $500 million or more, and Eloctate may even cross the $1 billion threshold, so these are growth drivers to watch.
But biotech isn't about today's sales, or even tomorrow's -- It's about potential revenue years from now. Biogen CEO George Scangos put it plainly in Biogen's Q2 call: "The primary source of value creation will be from the introduction of new therapies." Let's dive in.
2. An intriguing opportunity in Alzheimer's disease
Before I go any further, know this: Alzheimer's is tough to treat, and the odds are heavily stacked against any drug's success in treating this terrible disease. According to one study, 99.6% of Alzheimer's drugs tested in clinical trials from 2002 to 2012 failed.
Biogen recently reported data for Alzheimer's drug aducanumab that on the surface didn't sound so great -- while a 6 mg dose of the drug showed improvement in two measures of cognitive decline, the improvement was not statistically significant. But this was a small trial, and Biogen's management has indicated that with a larger sample they believe they will achieve statistical significance on those measures. And there were other positive indications in the phase 1 trial: The 6 mg dose significantly reduced beta amyloid (which is believed to cause Alzheimer's disease) in the brain. And the larger 10 mg dose, as Biogen previously reported in March, reduced beta amyloid in the brain and slowed cognitive decline in a statistically significant manner.
At the end of the day, this was a very small, early-stage study, so missing statistical significance in the 6 mg dose group, while not great news, isn't necessarily a death knell for the drug. We'll know more once Biogen's phase 3 studies ultimately report data (they're both recruiting patients now). Until then, I'm willing to give the benefit of the doubt to management and assume that they're not just throwing good money after bad by funding these large, expensive phase 3 trials. And if Biogen finds a drug that can help fight Alzheimer's, it's a $10 billion in peak annual sales opportunity (or maybe even more) for the company.
3. More potential home runs in the pipeline
Beyond Alzheimer's, Biogen has a lot to offer in terms of both new therapies and add-on indications for drugs already on the market. MS drug Tysabri, which is already no slouch at $463 million in sales last quarter, is being tested in a phase 3 trial for secondary progressive MS (which affects around 30% of MS patients and which currently has limited care options). Biogen expects data in 2015 for this potentially big expansion.
Biogen's anti-LINGO-1 phase 2 trial in MS should report out next year. Anti-LINGO-1 could revolutionize MS treatment, which is why analysts are estimating that it could bring in as much as $10 billion in peak sales if approved. To understand why analysts are throwing around those big numbers around anti-LINGO-1, you have to understand how MS works.
In patients with MS, the immune system destroys the myelin sheath that protects axons (which send signals between nerve cells) in the human nervous system. As the axons degrade from exposure, patients experience spasms and numbness. Currently-available drugs only slow the disease's progression -- but anti-LINGO-1 is being tested to help that protective myelin sheath regrow, thereby hopefully preventing further decay of the nervous system and halting MS in its tracks. That's a serious opportunity to improve patient quality of life.
And Biogen has other exciting drugs outside MS, most notably SMNrx, a drug partnered with RNAi biotech ISIS Pharmaceuticals currently being tested in phase 3 trials as a potential spinal muscular atrophy fighter (data expected in late 2016/early 2017). Analysts estimate peak sales of between $1 billion and $2 billion.
To sum up...
Let's face it: Biogen is likely to struggle on the revenue front over the next few years as growth in the MS portfolio slows and the company clears through clinical trials for its next generation of drugs. I believe that investors slashed its market cap because many folks are only looking at its current portfolio and, not unreasonably, find it lacking given the company's rich valuation (even with the haircut, it's still valued at more than 20 times last year's earnings).
But I think the market's missing the huge opportunity three to five years out in that pipeline. Given the big diseases Biogen's focused on fighting, any of several drugs in its pipeline could promote some stellar growth for the company. I'm excited to own more of this great company, and I believe that Biogen will reward investors who stick with it for the long haul.
