Biogen's (BIIB 3.18%) biggest problem in recent times has been growth. The biotech giant's multiple sclerosis (MS) portfolio is facing more and more generic competition, and that's resulted in declining sales. All this has weighed on share performance too, as investors wonder about what the company and its earnings will look like in the future.
Over the past several months, Biogen has worked on the rollout of what could be its next growth driver, Alzheimer's treatment Leqembi. That product recently won regulatory approval. But Biogen's not stopping here. In fact, the company just announced its biggest acquisition by dollar value ever. Here's what you need to know.
A new phase of growth
First, a bit of background. As mentioned, Biogen's looking to develop and acquire products that could power a new phase of growth. The company's biggest drug, Tecfidera, faces generic competition, and in the most recent quarter its sales fell 36%. Total revenue and net income also dropped.
Leqembi, developed with partner Eisai, looks promising, but it could take some time to add to earnings. Biogen even said that the costs of launch and commercialization will surpass the product's revenue this year. It's also important to remember that Leqembi is much more complicated to sell than a pill. It's a treatment given by infusion at infusion centers -- and before patients can access it, they must have a PET scan to confirm their diagnosis. These elements mean it could take time for Leqembi to get off the ground.
Let's move along to Biogen's second potential growth driver, the recent acquisition. Biogen agreed to buy Reata Pharmaceuticals for $7.3 billion, offering the company access to a drug that fits perfectly with its goals of treating both neuromuscular and rare diseases.
Earlier this year, Reata won regulatory approval for Skyclarys, the first ever treatment for Friedreich's ataxia. About 5,000 people in the U.S. have this rare genetic disease characterized by muscle weakness and progressive loss of coordination. Analysts have predicted peak U.S. revenue for the drug of about $1 billion. European regulators are now reviewing the drug, and an approval there could broaden the revenue opportunity.
Adding "significantly" to earnings
As with Leqembi, investors will have to wait to see the benefits of the Reata purchase, and in the near term it's likely to weigh on the bottom line. Biogen is financing the deal through cash on hand and will issue term debt as well. The company predicts the purchase will be "slightly dilutive" to non-GAAP diluted earnings per share this year and neutral next year. But by 2025, Biogen expects the acquisition to add "significantly" to earnings. The deal is set to close in the fourth quarter of this year.
Biogen paid $172.50 per share for Reata, a 59% premium to the share price at the previous close. This isn't a dirt cheap operation, but as mentioned above, Skyclarys and Reata's expertise make a great fit for the company's portfolio. And that solid product fit could pay off over time, since Biogen has the infrastructure to further develop and launch products in the neuromuscular market.
It's also important to keep in mind that Biogen recently announced a plan to cut costs and shift investment into the strongest growth opportunities. The efforts should result in $700 million in net operating expense savings by 2025 -- and $300 million to be reinvested into potential products. Biogen is clearly focused on growth and cost savings.
Reason for optimism?
All this means it's reasonable to be cautiously optimistic about the Reata deal and Biogen's plan moving forward. I say "cautiously" because risks still lie ahead. Skyclarys and Leqembi are both new products. Even if they look promising, it's impossible to predict their success with 100% certainty. Biogen's current drugs are on the decline when it comes to revenue, so the company's future growth depends entirely on these new products -- and potentially others ahead -- that haven't yet proven themselves commercially.
Should you invest in Biogen at this point? If you're a very cautious investor, you may want to wait for some progress along the path to growth. If you can handle some risk, though, picking up some Biogen shares now is a great idea. The company is making efforts to boost earnings and the stock price -- and investors who get in now could reap the rewards over the long term.
