Biogen (BIIB 1.87%) is a large-cap biotech that has witnessed significant volatility this year, with over 40% price swings in both directions. As it turns out, market participants were essentially betting on the outcome of its ability to advance aducanumab, a potential treatment for Alzheimer's disease, to regulatory approval. That has been a very profitable venture for traders, but not so much for long-term shareholders who are disappointed with spikes in the share price that are coupled with sudden jolts back down to reality.
There is a lot at stake for Biogen, as the company is facing a substantial revenue decline of its already-marketed therapies and is having trouble finding ways to make up those lost sales. Will the company be able to enrich investors for the next five years?
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A declining business
Biogen encountered a major setback when last month, after a panel of experts at the U.S. Food and Drug Administration voted unanimously that aducanumab failed to demonstrate efficacy in a key late-stage study. The agency still has until March 2021 to make a final decision, but rejection of the drug's Biologic License Application (BLA) seems like a given at this point. (A BLA is the same as a standard New Drug Application, but it applies to drugs that are composed of biological entities instead of chemical ones.) With this failure, the company effectively put off -- if not totally lost -- an opportunity to tackle a portion of the vast $818 billion global treatment market for dementia.
To make matters worse, Biogen also lost a litigation battle resulting in the invalidation of U.S. patents covering its multiple sclerosis drug, Tecfidera. The patents were struck down due to lack of written description in its original filing application, resulting an end to Tecfidera's monopoly that would have lasted to 2028. Last year, Tecfidera accounted for approximately 50% of the company's $14.38 billion in revenue.
There are already multiple copycat drugs for Tecfidera on the market. As a result, Biogen's sales and earnings per share (EPS) in the third quarter of 2020 declined by 6% and 4%, respectively, compared to Q3 2019, to $3.38 billion and $8.84.
As more generic competitors are commercialized, Tecfidera's U.S. revenue would likely become negligible in the grand scheme of Biogen's sales due to significant pricing pressure. Although it has seven clinical programs in phase 3 (not counting aducanumab), Biogen would have a tough time replacing its lost income considering the current magnitude of Tecfidera's contributions.
Can a $1.5 billion bet save the company?
Last month, Biogen announced it was giving $875 million in cash to depression drug developer Sage Therapeutics (SAGE 6.37%) as well as buying a $650 million stake in the company. In exchange, Biogen would be eligible for royalties on a key candidate in Sage's pipeline, assuming it receives regulatory approval.
Right now, Sage's only commercialized drug is Zulresso, a treatment for postpartum depression. Aside from potential side effects of heavy sedation or loss of consciousness, Zulresso is challenging to administer: Delivery involves intravenous injection at a hospital or clinic. For all these reasons, the drug is not selling well and only generates about $1.6 million in revenue per quarter, virtually unchanged from Q3 2019.
Unfortunately, the leading candidate in Sage's pipeline isn't really promising at all. That experimental therapy is called zuranolone and is in phase 3 clinical testing as a treatment for depression. It failed one such study back in December 2019, but the company is nevertheless deciding to proceed with further investigations. The therapy candidate had an effect in the very short term, but failed to distinguish its efficacy from placebo after just two weeks of treatment.
Sage thinks that it can eventually hit the mark by upping the experimental drug's dosage and running more large-scale clinical trials. New data for zuranolone will likely be available next year.
What's the verdict?
The failure of aducanumab to win the blessing of FDA experts, loss of exclusivity on Tecfidera, and a billion-dollar bet on an unpromising drug are all rather negative developments for Biogen. The stock, however, already has these risk factors priced in, with a dirt cheap valuation of three times sales and eight times earnings.
In five years, Biogen's financials would look very similar to what they are today, as its sales encounter a steep near-term decline before the growth of new pipeline candidates takes over. If you have a value-investing mindset and want to hold shares for the long term, go for Biogen. Otherwise, the business just doesn't have the growth it needs right now to uplift the stock. For those who prefer fast-moving growth stocks, check out these companies instead.
