Biogen (BIIB 3.18%) is an intriguing stock right now. Its business has struggled to generate growth in recent years, but some recent catalysts could turn things around. For starters, the company's Alzheimer's treatment, Leqembi, obtained approval from the Food and Drug Administration (FDA) earlier this year. Plus, it announced a significant $6.5 billion acquisition last month that could bolster its portfolio of drugs.
An acquisition can quickly impact a company's financials. Below, I'll look at what this deal means for Biogen's business, and whether it makes the stock a better buy moving forward.
A deal that gives Biogen a promising drug
On July 28, Biogen announced that it would be acquiring Reata Pharmaceuticals for approximately $6.5 billion ($7.3 billion when including debt). Biogen expects the deal to close before the end of the year.
Reata focuses on making products that treat life-threatening diseases. It has one approved product in Skyclarys, which is the first approved treatment for Friedreich's ataxia, a rare genetic disorder that can cause severe damage to the nervous system and create mobility issues; more than 95% of patients are in a wheelchair by the time they are 45. In the U.S., it affects one in every 50,000 people.
Skyclarys can help improve nerve function for people with the disease. It has the potential to be a blockbuster drug with analysts projecting its sales may top $1.5 billion by 2030.
The FDA approved the drug earlier this year and so it may still take a while for it to generate any significant revenue. Up until now, Reata has generated revenue from collaborations and last year its sales totaled $2.2 million. It also incurred a net loss of $311.9 million, which suggest that at least in the short term, Reata could weigh down Biogen's earnings.
Biogen desperately needs revenue growth
A big problem with Biogen is that it has been struggling to keep its sales from falling for the past few years. In its most recent quarter, for the period ended June 30, sales fell 5% year over year to $2.5 billion. The company's core business, which centers around multiple sclerosis drugs, totaled $1.2 billion and declined by 15% from the prior-year period.
BIIB Revenue (Quarterly YoY Growth) data by YCharts
At just 15 times earnings, the healthcare stock looks cheap. But without a growing business, it can resemble a value trap. The acquisition of Reata will help add to the company's rare disease portfolio, which includes Spinraza, a treatment for spinal muscular atrophy. It generated $437.1 million in revenue last quarter.
Biogen does have other products in its pipeline but there's not a big growth catalyst on the horizon. Qalsody (tofersen) is a treatment for amyotrophic lateral sclerosis (ALS) that has obtained accelerated approval from the FDA. But late-stage clinical trial data hasn't been overly convincing and it might not obtain full approval. However, even at its peak, it may bring in just $300 million in annual revenue.
Does the acquisition make Biogen a buy?
While the acquisition of Reata can boost Biogen's sales in the long run, it likely won't turn the healthcare company into a growth machine anytime soon. Biogen's future is still going to be largely dependent on Leqembi. At its peak, the Alzheimer's drug could reach $10 billion in annual sales. The company will, however, split the profits on the drug with its development partner, Eisai.
For investors who are willing to be patient with the commercialization of Leqembi (it may not be until 2024 that it starts generating meaningful revenue), Biogen could be a good contrarian investment to hang on to now. But this is not a risk-free stock -- its Alzheimer's treatment could soon face competition from Eli Lilly, which may obtain approval for donanemab in the near future.
While the Reata acquisition can help diversify Biogen's business, it isn't a game-changer. The safe approach is to keep an eye on Biogen and see what other moves it may make in the future, but as of now, the stock still isn't a suitable option for most investors.
