Shares of biotech blue-chip stock Biogen (BIIB -0.48%) were walloped in July, with its stock losing 21% of its market value based on data from S&P Capital IQ. The primary culprits were weaker-than-expected second-quarter earnings results and early stage data involving Alzheimer's drug aducanumab that didn't exactly thrill investors.
Make no mistake about it, the bigger of the two downside catalysts was Biogen's weaker Q2 earnings results. In fact, after beginning the week at over $400 per share, Biogen shares briefly dipped below $300, intraday, following its earnings release.
For the quarter, Biogen announced that its sales increased 7% to $2.59 billion, with adjusted EPS improving a whopping 21% to $4.22. The primary growth driver remained oral multiple sclerosis therapy Tecfidera, which delivered revenue of $883 million compared to $700 million in the prior year. Despite this growth, Tecfidera sales came up short of Wall Street's expectations, and the $163 million in international sales were particularly light in the Street's eyes. Challenged unit pricing in Germany was one of the main culprits that Biogen noted. On a comparative basis, Biogen beat the Street's EPS forecast by $0.12, but was shy of the $2.71 billion in expected revenue.
Source: Biogen.
The greater damage came from Biogen's full-year guidance. Biogen reduced its full-year sales growth expectations to a range of 6%-8% ($10.3 billion-$10.5 billion) from its previous forecast, which had called for 14%-16% sales growth. It also reduced its full-year EPS forecast to a new range of $15.50-$15.95 from a prior forecast of $16.60-$17. Wall Street had been expecting $16.75 in EPS on $11 billion in sales.
Adding insult to injury, just a few days prior to its Q2 release, Biogen released additional data from its phase 1b study involving aducanumab, and the data, while still showing statistical significance, wasn't as amazing as its top-line release a few months prior. The mental acuity score for the placebo group of patients demonstrated a smaller decline than before, while the 1 mg and 6 mg doses didn't appear to offer as strong a benefit as the 3 mg and 10 mg doses. The good news is the updated data for the 3 mg and 10 mg doses still appears to be statistically strong.
The question investors have to ask is whether or not this drop in Biogen is a buying opportunity or a genuine yellow flag to keep your distance.
On one hand, there's a compelling reason to keep your distance. Tecfidera's peak sales potential is somewhere around the $4 billion range, and based on its quarterly results it's on pace to deliver $3.5 billion-$3.7 billion in 2015. The MS space is getting more and more crowded, and Biogen has probably squeezed most of its momentum out of Tecfidera by now. That doesn't mean the drug won't remain a cash flow cow for Biogen, but we're probably well past any more upside revenue surprises.
On the other hand, Biogen has levers it can pull to boost its shareholder value, including cost cuts, share buybacks, and perhaps even instituting a dividend. Even if Biogen begins seeing a top-line slowdown, there are ways for management to move the needle.
So what should you do? My suggestion would be to hang tight. I see little reason to rush into owning Biogen, particularly with Alzheimer's disease drugs having such a high failure rate. Although Biogen has two potential mega-blockbusters in its pipeline (aducanumab and anti-lingo-1), they both are in indications where the failure rate is high. With that in mind, I suspect Biogen could be range-bound for a while until its outlook clears a bit.
