As you may have heard this summer, Biogen (BIIB +1.79%) is taking out a $1.5 billion-dollar loan to fund its acquisition of rare disease drug developer Reata Pharmaceuticals (RETA +0.00%) for $7.3 billion in cash. When all's said and done, the move will mark the start of a new era for the business in which it'll test the waters outside its familiar markets.
Shareholders may well see significant benefits -- assuming the new addition can contribute as planned. But will Reata make for a stronger investing thesis for Biogen?
NASDAQ: BIIB
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What this purchase will do for the stock
Buying Reata Pharmaceuticals will accomplish a couple of things for Biogen. First, it'll gain control of Reata's newly approved drug Skyclarys, which is the only medicine approved to treat Friedreich's ataxia. This rare and degenerative hereditary disease causes trouble with movement.
Per a report by Coherent Market Insights, the market for drugs that treat Fredreich's ataxia was worth $777 million as of mid-2022 although it could grow larger than $2 billion annually by 2030. That should help to shore up Biogen's top line over the coming years, and given that it brought in more than $10 billion in 2022, the purchase is likely to be a moderate driver of growth.
The company will also get Reata's phase 1 program for diabetic peripheral neuropathic pain (DPNP), which affects as many as 50% of people with diabetes, or around 4 million people in the U.S.
While there is no guarantee that the early-stage program will ever make it to the market, buying Reata does advance management's goal of diversifying into making drugs for rare diseases. Management estimates that the deal will lead to higher earnings per share (EPS) as soon as 2025, and the transaction is slated to close before the end of this year.
But the acquisition comes with a cost. Right now, Biogen has cash and cash equivalents totaling nearly $6 billion, and it also has roughly $6 billion in debt. After taking out the $1.5 billion in fresh debt it needs to close the deal, which, as a reminder, is for $7.3 billion in cash, it'll be even more leveraged. That isn't a major concern at the moment.
What's key is that it simply won't have much cash on hand after finalizing the transaction. It'll still have plenty of marketable securities that it could liquidate to generate cash, of course -- but there's a risk that it would do so at a loss.
NASDAQ: RETA
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In short, don't expect the company to have enough dosh to make another major acquisition for a while. In the trailing-12-month period, it had free cash flow (FCF) of more than $1 billion, so it could take a few years before it's in a position to make another big play.
Should investors jump at this opportunity?
Over the last five years, Biogen's trailing-12-month revenue fell by 24%. Buying Reata is unlikely to be only part of generating growth on an ongoing basis. The output of its pipeline, including the commercialization of its latest Alzheimer's disease drug called Leqembi, should be a far bigger driver. In that light, it wouldn't make much sense to buy this stock on the basis of the acquisition alone.
Furthermore, diversifying the pipeline away from focusing solely on the most common neurological disorders, while positive, is not without risks. There is a chance that Skyclarys will not be able to provide enough benefit to patients to get significant uptake. There's also a chance that the pre-clinical programs in Reata's pipeline will ultimately turn out to be worthless.
Still, in the long-term view, it's undeniable that the bull thesis for Biogen stock will be a bit stronger once the transaction closes. If you weren't keen on buying it beforehand, you probably shouldn't change your mind as there are better growth stocks for the same level of risk. On the other hand, if you were waiting to pounce on the appearance of a catalyst for growth to justify a purchase, now may be the time.
