Most Biogen (BIIB 3.18%) shareholders are probably excited about the company's newly approved Alzheimer's drug Leqembi right about now, and it's no surprise why. Some commentators are calling for the therapy to bring in $12.9 billion in sales annually through 2028, which works out to be more than double its top-line revenue of $10.1 billion in 2022.
But exuberance about Leqembi ignores some other financial metrics that should unsettle investors, and might even convince some of them to sell.
Growth hasn't been a guarantee
As a pharma company, Biogen needs to consistently use its research and development (R&D) capabilities to discover, test, and commercialize new medicines over time. For the business to grow, and for shareholders to earn a return, it needs to make more money from selling its medicines than it costs to develop them. Furthermore, it needs to convince the market that it's going to make more and more money over time in order for shareholders to justify holding onto their shares. But at least two of the key metrics that measure its success with all of the above are looking mediocre, even over the long term.
Over the last 10 years, Biogen's quarterly revenue rose by only 34%, arriving at $2.4 billion, and its quarterly free cash flow (FCF) shrunk by 35%, reaching $383 million. Both of those figures should frighten investors, especially those who have held their shares for a long time. Furthermore, its biopharma peers like Novo Nordisk, AstraZeneca, Gilead Sciences, and others haven't had the same problems whatsoever. Look at this chart:
BIIB Revenue (Quarterly) data by YCharts
And to make matters worse, Biogen's shares badly underperformed the market in that period, gaining 33% compared to the broader market's growth of 220%.
But what's the root cause of its trouble? That's where things get even more frightening, unfortunately.
The company has a handful of medicines on the market, six of which treat multiple sclerosis (MS), and its pipeline has plenty of programs targeting various neurological disorders ranging from depression to Parkinson's. But all of its segments reported lower sales year over year as of Q1, caused by problems ranging from generic drug competition to pricing pressure. And even if it manages to commercialize a pair of medicines before the end of the year, generic competition won't go away, nor will patients suddenly be able to afford medicines that are priced too high.
The fact that these issues are happening all at once in 2023 isn't a coincidence. Because of how long it takes to develop new medicines, the seeds of the decline seen in recent years were most likely planted by underinvestment (or incorrectly chosen or poorly executed investments) in the pipeline between seven and 15 years ago. Initiating too few programs in that period means having too few finished medicines to commercialize and keep growing now. The kicker is that there's no sign the exact same problem won't happen again over the next seven to 12 years as a result of decisions made today and in the recent past. The issue is ongoing.
Biogen's future isn't looking so hot
Management likely understands that the company's performance hasn't been ideal. In late 2021 and mid-2022, it announced cost savings programs that are anticipated to save on the order of $1 billion annually. To accomplish that, it'll be slashing its workforce, consolidating several of its facilities, and making efficiency improvements to its R&D and selling, general, and administrative (SG&A) operations.
Those aren't the actions taken by a business that expects a windfall in the coming years. Management claims that it's trying to rebuild a trajectory for sustainable growth while also improving the productivity of its R&D pipeline. A handful of its programs were paused or canceled, and it exited ophthalmology altogether. That could prove to be a good decision, or it could prove to be a further curtailing of the pipeline, crimping future growth for years.
Either way, shareholders need to come to terms with the idea that the company might not be organizationally capable of growing consistently by commercializing drugs in the correct verticals. There has certainly been enough time for Biogen to display its capabilities with R&D. It isn't smart for investors to rush to sell their shares today, though, as it is faintly possible that the approval of Leqembi will herald a new era of growth -- but shareholders should start thinking about making an exit if Leqembi proves to be a flop.
