Investing in healthcare stocks can be risky. That's true in part because it only takes one or two drugs to dictate the success of an entire business. And patent protection doesn't last forever, meaning that companies almost constantly need to work on innovating and developing new drugs -- an expensive task.
One of the riskier healthcare companies out there right now is Biogen (BIIB 3.40%). Its top drug no longer enjoys patent protection, and there's a lot of uncertainty surrounding how its business will fare in the future. But other aspects of its business could deem the stock an appealing buy in 2021.
If aducanumab obtains FDA approval, the stock will skyrocket
In the past 12 months, Biogen's stock has fallen 16% while the S&P 500 has gone in the opposite direction, soaring by the same percentage as of Feb. 17. But that doesn't tell the whole story. Biogen's stock has been very volatile, reaching highs of nearly $364 and dropping as low as $223. That's a range of $141, which is half of its current share price. Much of that volatility is due to its Alzheimer's drug, aducanumab. The uncertainty surrounding whether the U.S. Food and Drug Administration (FDA) will approve the drug is what has gotten investors both overly pessimistic and bullish on the company's stock.
In November 2020, the stock soared to 52-week highs after the FDA said its late-stage trials for the drug were "highly persuasive" and suggested that approval could be imminent. But days later, those gains would evaporate after a panel of advisors for the agency stated nearly the opposite, expressing uncertainty as to whether the drug was effective in slowing down disease progression.
Initially, the FDA was slated to make a decision on the drug by March, but it now says the review period will take place in June. If aducanumab earns approval, Biogen could quickly become one of the hottest healthcare stocks on the market.
Why is aducanumab so important for Biogen?
Investors are worried about Biogen because a court invalidated the patent of its top-selling drug last year, Tecfidera, which is a treatment for people with multiple sclerosis.
On Feb. 3, the company released its fourth quarter numbers. For the period ending Dec. 31, 2020, sales of $2.9 billion declined by 22.3% year over year. A big sore spot was Tecfidera, which generated worldwide revenue of $607.9 million -- a little over half of the $1.2 billion it reported in the prior-year period. For the entire year of 2020, Biogen reported sales of $13.4 billion -- down 6.5% from the previous year.
Profits of $357.9 million in the fourth quarter also fell 75.1% as the company's research and development expenses soared from $691.7 million a year ago to $1.7 billion in this past period. This was because Biogen made an upfront payment of $875 million related to a collaboration with Sage Therapeutics to develop zuranolone, which treats multiple psychiatric disorders.
And 2021 still looks to be a challenging year for Biogen. The company anticipates its revenue for this year will fall within a range of $10.45 billion and $10.75 billion. At the low end of that range, that would be a year-over-year decline of more than 22% from 2020's tally. And those projections include the impact of a favorable decision on aducanumab in June. Although the company says that FDA approval would only result in "modest revenue" for aducanumab this year, there's a possibility that its sales could come in even lower than its guidance.
Is Biogen stock worth the risk?
Biogen's stock is trading at a price-to-earnings (P/E) ratio of 11, which is cheap compared to the Health Care Select Sector SPDR Fund, where the average holding trades at a P/E of 25. However, Biogen looks like a value trap as its low P/E multiple isn't enough to offset the risks the company faces in the long term. Its forward P/E multiple, which accounts for future revenue potential, is 15. That metric could get even higher if Biogen's struggles continue.
But regardless of how its financials look by June, the stock will likely soar or crash depending on the FDA's decision later this year. There's a lot riding on that as analysts project aducanumab's sales in the U.S. could hit more than $7 billion by 2025, making it one of the top-selling drugs in the country -- if it gets the green light from the FDA.
This isn't a stock I would invest in today given the massive uncertainty surrounding Biogen's business, at least not until there's clarity about the future of aducanumab. While waiting for a decision might mean missing out on gains the stock will immediately make if the FDA approves the drug, you also minimize your risk by taking the safer route. And if aducanumab obtains FDA approval, Biogen will still be a great investment for a long time to come.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.