Biotech giant Biogen (BIIB 3.18%) can't seem to keep its name out of the news. After a recent major approval for its Alzheimer's disease (AD) medicine Leqembi, the company just announced that it would acquire Reata Pharmaceuticals, a company that focuses on developing treatments for serious and life-threatening diseases.
Biogen has been a relatively volatile stock to own over the past few years, but could this new acquisition move help the company turn things around?
What Reata Pharmaceuticals brings
The acquisition of Reata Pharmaceuticals will cost Biogen $7.3 billion in cash. It certainly isn't the largest acquisition we have ever seen in the biotech industry, but it isn't insignificant, either. Why did the company decide to make this move? The key asset in the transaction is Reata's Skyclarys, a treatment for Friedreich's ataxia (FA) that earned approval from the U.S. Food and Drug Administration (FDA) in February.
FA is a rare, progressive, degenerative genetic condition that attacks the nervous system and causes muscle weakness, coordination problems, and more. Until now, treatment for patients with FA focused on addressing the symptoms of the disease. Skyclarys is the first FDA-approved drug for FA. Being the only game in town, Skyclarys could be lucrative although its patient population isn't large.
Reata estimates that its total addressable market in the U.S. will be about 4,500 patients. But Skyclarys should also earn approval in Europe, where it is currently under regulatory review. Some analysts project annual sales of $1.5 billion for Skyclarys by 2030. Reata Pharmaceuticals does have three other programs, but they are all in the very early stages.
There is also Leqembi to consider
Skyclarys will join Leqembi among Biogen's newer approvals as both earned the green light this year. So they could grow their sales for years before worrying about generic competition. Leqembi addresses a significant unmet need, as few AD therapies have made it past every clinical and regulatory hurdle.
According to some analysts, it could generate sales of $12.9 billion between 2023 and 2030, half of which -- about $6.5 billion -- will go to Biogen per its agreement with its partner on this program, Esai.
What should investors do?
Biogen's revenue has declined in recent years as its best-selling products face stiff competition, generic or otherwise. So the company needs to turn things around. Biogen's top line should start growing again thanks to Leqembi and Skyclarys. And with the backing of Biogen, Skyclarys could perform even better. Biogen is a much larger biotech than Reata Pharmaceuticals and has the funds, personnel, and infrastructure necessary to accelerate Skyclarys' commercialization efforts.
BIIB Revenue (Quarterly) data by YCharts
The acquisition of Reata Pharmaceuticals, whose programs are all in neurology, works well for Biogen since that is also one of the company's main focus areas. Biogen's expertise could help it advance Reata's programs that are in the earlier stages faster.
But there are hurdles to consider, too. Biogen has said that expenses related to the commercialization of Leqembi will exceed revenue for this year. Further, the acquisition of Reata won't positively contribute to the company's bottom line until 2025. The company has been cutting expenses, which should help get profits moving in the right direction, eventually.
However, there remain a lot of moving parts and a lot of uncertainty about Biogen's midterm prospects. Will Leqembi and Skyclarys live up to the projections analysts have made? Will the company cut expenses enough to move things in the right direction again? These questions would be less important if Biogen had delivered excellent financial results in recent years, but it hasn't.
In my view, the company's future is still too uncertain, and most investors should avoid the stock for now unless they are comfortable with heightened risks and volatility.
