Investors in Biogen (BIIB 3.18%) got some great news last week as the Food and Drug Administration (FDA) approved the company's Alzheimer's drug Leqembi. But despite the big win, the stock didn't surge to new heights, and it actually declined. Here's why investors might still be hesitant about buying the stock despite the approval.
The approval isn't a slam dunk for the business
The FDA previously approved Leqembi on an accelerated basis. What was always important, however, was the full, traditional approval because that meant that the treatment would obtain coverage from Medicare. Now that Leqembi has obtained traditional approval, that's welcome news for Alzheimer's patients as it means they can gain access to the treatment and won't have to pay the full price for it: $26,500.
The bad news, however, is that it may be a time-consuming process, and there are conditions attached to the approval. Patients need to be enrolled in Medicare and must be diagnosed with mild Alzheimer's disease or cognitive impairment. Plus, doctors need to participate in a registry to help collect data and track side effects.
As a result, analysts don't expect to see revenue for the treatment really take off until sometime in 2024. And while Medicare will cover some of the price, it won't be all of it; patients could still end up having to pay over $5,000 out of pocket.
Investors might be a little hesitant to buy the stock based on the approval since the factors noted above could affect just how much demand there is for the treatment.
There are also other Alzheimer's treatments that could soon be available, including one from Eli Lilly, donanemab, which may be slightly more effective than Leqembi. It slowed the disease's progression by 29% in clinical trials versus 27% for Leqembi.
There's more caution in the markets these days
When Biogen's previous Alzheimer's treatment, Aduhelm, was approved in 2021 under an accelerated-approval basis, shares of the healthcare company soared to more than $460. Today, the stock is around $280. The difference is that back in 2021, inflation wasn't a big problem for investors and growth stocks were performing well, sometimes even when they weren't backed with strong results.
Over the past year, however, investors have become more cautious about stocks. While tech has been the exception due to the excitement around artificial intelligence this year, valuations are lower in other sectors, for the most part. Biogen currently trades at just 13 times its trailing earnings, which is below its five-year average and nowhere near the highs it hit in 2021:
BIIB PE ratio data by YCharts. PE = price to earnings.
There is no shortage of reasons for investors to be hesitant about Biogen's stock. The company ended up pulling commercial activities for Aduhelm. Data for its ALS treatment tofersen has also been underwhelming in trials, and a full approval there might not be likely.
The company's top-selling multiple sclerosis drug Tecfidera is facing competition from generics. Its sales have been falling; during the first three months of 2023, revenue of $274.5 million was down 33% year over year.
Should you buy Biogen's stock?
Biogen investors are right to be a little extra cautious with the stock as the approval of Leqembi is a positive but might not be enough to make the stock a slam dunk right now. It could take years before it generates enough to start turning the business around; multiple analysts project between $3 billion and $4.6 billion in annual revenue in 2028. And Biogen will only share in the profit on that with its development partner Eisai on a 50-50 basis.
That may not be enough growth for the stock to be a good buy until then. Biogen has lost more than $4 billion from its top line in just the past four years. There's still ample risk, and the safest option for investors would be to wait and see how demand turns out for Leqembi before deciding whether to buy the stock.
