Biogen's $1 Billion Bet on Ionis

Biogen (BIIB -0.85%) investors have been anxiously awaiting a transformative deal to jump-start growth. On Friday, April 20, Biogen announced it would be paying nearly $1 billion to access more of Ionis' (IONS -0.24%) pipeline of antisense drug candidates.

In this clip of Industry Focus: Healthcare, Kristine Harjes and Shannon Jones discuss who got the better end of this deal and what it means for Biogen moving forward.

A full transcript follows the video.

This video was recorded on April 25, 2018.

Kristine Harjes: As promised, we wanted to dig into news announced on April 20th that Biogen is striking a new deal with fellow biotech Ionis Pharmaceuticals, expanding their partnership with a $375 million upfront payment to Ionis, as well as the purchase of a $625 million equity stake that's worth roughly 9% of Ionis' outstanding shares. Shannon, the deal is worth a total of $1 billion. What does Biogen get in return?

Shannon Jones: Good question. Biogen will be getting expanded access to Ionis' pipeline, in addition to the two candidates in clinical-stage right now plus up to seven more, really with the focus being on Ionis and their antisense drugs for a broad range of neurological diseases. As we've talked about on the show before, Biogen is really refocusing itself on neurology, and really focusing and restrategizing itself to that. This deal really cements their strategy moving forward.

Harjes: Yeah. In addition to this upfront payment and the equity stake, they will also be paying for the development and commercialization of these drugs. So, Ionis really just has the royalty payments and the milestone payments. When you look at the grand sum of this deal, it looks to me like Ionis is getting a great deal here.

Jones: Absolutely. I'd say this is a huge win for Ionis. They'll be responsible for identifying the antisense drug candidates based on selected targets, while Biogen is really doing the heavy lifting. They're going to be taking it from development to commercialization on. But, really, Biogen is going to be using them as the contract drug discovery platform. So, Ionis gets to focus, they get to up their milestone and royalty payments. I think Ionis wins here.

Harjes: Absolutely. And I think it's fairly indicative that Biogen is not in a position of strength here. Biogen needs growth desperately. Their core business is aging. Its multiple sclerosis franchise, which has historically been the bulk of its revenue and still comprises two-thirds of its sales, is on the decline. They recently reported earnings, and that core franchise is down 7% year over year. At this point, they're more or less relying on a single Alzheimer's drug to pan out -- which, if you look at the history of Alzheimer's drug development, is not really a safe bet.

Jones: Exactly. Over 90% of drugs fail in Alzheimer's. So, the stakes are quite high. It's a huge binary event heading into 2019, which is when we'll get the earliest readout in Alzheimer's for Biogen. So, not only is the MS franchise declining, you have this huge, very high-risk event coming up. Then, two, Spinraza, which has really been carrying the weight for Biogen, took a big earnings hit this past quarter as well. And not only that, there's competition looming. As we talked about, Michael and I, a couple weeks ago, Novartis picked up AveXis. AveXis is planning, as early as 2019, to come out with the first gene therapy for SMA, the same space that Spinraza is in. So, not only do you have this threat from the MS franchise declining, you also have huge high risk, and now, you have a huge competitor coming on the scene, and Biogen really doesn't have anything in the short-term to make up for it.

Harjes: Spinraza, our listeners will recall, is another drug that Biogen partnered with Ionis on, and that was really the star of the earnings report. That was what analysts were looking most closely at. And it disappointed a good bit. If you look at Biogen's overall earnings, the miss was largely due to Spinraza, which was roughly flat quarter over quarter. Which, that's not what people were expecting.

You look at the dosing schedule for this drug, and it's extremely front-loaded. In your first year of treatment, the drug will cost you $750,000. It's $375,000 after that. Which, yes, $375,000 is a very large number, but it's not nearly as large as $750,000. So, structurally, this drug is set up to make a lot more money when patients first start treatment.

That's exactly the crux of the issue here -- fewer patients are starting treatment. Only 280 patients in the United States started treatment in the first quarter. That was down 33% from the fourth quarter, meaning the previous one, and down 50% from Q3 before that. Biogen highlighted some overseas growth in patient starts, but truly, sales growth is dependent on these high-paying U.S. patients. So, going forward, they're going to need to expand their reach a good bit more beyond the very sickest infants and children to reach folks with less severe forms of the disease and to reach adults. And whether or not they're able to do that, to start more patients at that same high price point, is a humongous question mark, and that's without even considering the similar therapy that you mentioned from AveXis that inspired Novartis' $8.7 billion buyout earlier this month.

Overall, the stock is down about 30% from highs reached earlier this year. Where do you think that leaves Biogen?

Jones: I think it leaves a lot of question marks for Biogen. They just paid $1 billion for access to preclinical candidates, not guaranteed revenue. Still, investors are going to be wanting some sort of deal that brings mid to at least late-stage candidates into the pipeline. Without that, I don't see many opportunities for the stock to go up from here.

Harjes: And I think that's why it's one of the cheapest large biotechs out there. On a forward P/E basis, it's trading for just under 11X, which puts them neck-and-neck with Celgene when it comes to low valuations. And anybody following the industry knows that there's been a heavy amount of pessimism surrounding Celgene right now. Truly, I like Celgene's prospects a lot better, if we wanted to head-to-head them like that. But that's probably a discussion for another day.

Editor's Note: To clarify, the deal announced is an expansion of the earlier deal between Biogen and Ionis Pharmaceuticals. The earlier collaboration includes the two candidates in the clinic and up to seven potentially advancing into the clinic over the next 2 years. This new discovery deal expands upon the earlier partnership agreement with Biogen receiving expanded opt-in rights to Ionis' drug targets over the next ten years.