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Is This Bargain Biotech Stock a Treasure or a Trap?

By David Jagielski – Jun 27, 2020 at 5:13AM

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Investors should be careful not to rely too heavily on valuation multiples.

Using stock screeners to filter out stocks that are trading at low price-to-earnings (P/E) or price-to-book (P/B) multiples can be a way to uncover some cheap investments. But some stocks are destined to stay at low multiples because they're risky or offer little to no growth.

One biotech stock that's been consistently trading at a low P/E is Biogen (BIIB -1.01%). But despite the low price, the stock's still down 12% this year, and it's even underperformed the S&P 500, which has declined by 5%. Let's take a closer look at why the stock can't get going and whether investors should avoid Biogen despite its cheap valuation, or whether it could be a bargain buy.

Biogen's been hit with a couple of setbacks in 2020

By around mid-April, shares of Biogen were doing fairly well, up 15% from the start of the year. But that all changed when the company released its first-quarter results on April 22. Sales during the quarter were up 1% from the prior-year period, while net income declined by 1%.

People working in a lab

Image source: Getty Images.

But what investors were concerned about more was the company's Alzheimer's drug, aducanumab -- specifically, the news that Biogen was not going to submit it for approval to the U.S. Food and Drug Administration (FDA) until the third quarter. The company was expecting to make the submission earlier this year, but some Biogen employees contracted COVID-19, which affected its ability to do so. Shares would go on to tumble after the news.

An even more concerning setback, however, took place on June 18 when Biogen learned it would lose its patent protection on its multiple sclerosis drug, Tecfidera. That patent was supposed to last until 2028, but rival drug manufacturer Mylan (MYL) was successful with invalidating Biogen's '514 patent. That paves the way for Mylan and other drug companies to bring generic drugs to market to compete against (and undercut) Biogen.

It's a big blow to Biogen, as Tecfidera generated $4.4 billion in revenue in 2019 for the company and made up more than half of its product revenue for multiple sclerosis drugs. It was also 39% of total product sales of $11.4 billion.

That puts all the more pressure on aducanumab to come to market quicker to help Biogen fill the inevitable void after more competition brings down Tecfidera sales in future years as a result of the patent loss.

But even if aducanumab gets FDA approval and the go-ahead, GlobalData estimates that its peak-year sales will reach $2.7 billion -- far below the more than $4 billion in revenue that Tecfidera has generated in each of the past three years.

How cheap is the stock?

What likely draws many investors to Biogen is its cheap value -- the stock is trading at just 8 times its earnings. That's far lower than over the past few years:

BIIB PE Ratio Chart

BIIB PE Ratio data by YCharts

Value investors typically look for P/E multiples of 15 or less, and Biogen falls well below that threshold. And while the stock may not have been a value trap prior to 2020, there could be a case for it now. The loss of patent protection for Tecfidera could severely impact Biogen's revenue and profit growth in the coming years. 

Even if its P/E multiple rises, the denominator in that equation, earnings, is likely to fall on lower sales. And that could keep shares of Biogen down even if it's trading at a higher multiple.

Is Biogen a buy?

Given the challenges facing the business, investors shouldn't be buying Biogen shares today. The stock doesn't pay a dividend, and there's a big question mark surrounding its future growth. Its low P/E makes it a value trap and a stock that investors should avoid, as even the approval of aducanumab may not be enough to make the healthcare stock a buy.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Biogen. The Motley Fool recommends Mylan. The Motley Fool has a disclosure policy.

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