When Biogen (NASDAQ:BIIB) reported earnings last month, there were several headline-making developments. Decelerating sales of the biotech's main growth driver, multiple sclerosis drug Tecfidera, and mixed data from a promising Alzheimer's candidate are certainly worth attention. In response, the market hammered the stock.
Although the two main developments were certainly newsworthy, they weren't the only important revelations made that day. Amidst all this excitement, you may have missed something important. Now that the dust has settled following the report, it's a good time to take a second look at the latest quarter to see what was buried.
Since launching Tecfidera in early 2013, Biogen's revenue has nearly doubled. The $883 million in sales reported for the oral multiple sclerosis therapy comprised 40% of total revenue for the quarter. It's no wonder that warnings of a slowdown in its U.S. uptake had such a negative effect on the stock. Tecfidera is now such a significant source of revenue that the company had to lower full year growth estimates from a midpoint of 15% to a midpoint of 7%.
In the earnings announcement, and subsequent media coverage, the planned beginning of fixed pricing in Germany received an outsized portion of responsibility for the deceleration.
While the situation in Germany may be responsible for the quarter-to-quarter decline in Tecfidera sales, there's a more worrying figure leading to the sustained loss in the stock's market value. During the earnings call, it didn't take much prodding from analysts to get management to admit it now expects Tecfidera volume in the U.S. to remain flat for the rest of the year. Improved pricing could mitigate the effect in the quarters ahead, but for now an estimated 0% volume gain could indicate a bigger problem.
Just weeks ahead of announcing those flattened growth expectations, the company reported a second case of progressive multifocal leukoencephalopathy in a patient taking Tecfidera. PML is a brain infection caused by a fairly common virus that almost never affects generally healthy people, but Tecfidera (like many other MS drugs) suppresses the immune system.
Physicians need to weigh the risks of immunosuppression when prescribing Tecfidera to slow the progression of MS. One reason for its highly successful launch was a favorable safety profile. The abrupt slowdown in Tecfidera uptake could be due to physicians reevaluating the drug's risk-to-benefit profile following the second reported case of PML. This wouldn't sink the program, but could severely limit its potential going forward.
Market saturation for Tecfidera is bad news indeed, but it's not all doom and gloom at Biogen. Another growth driver frequently overlooked is the company's partnership with Roche Holding AG (NASDAQOTH: RHHBY). The pair collaborate on blood-cancer therapies Rituxan and Gazyva. Partnering with the world's oncology leader has its benefits, not least of which is access to an enormous dedicated salesforce.
Roche's U.S.-based reps are doing a fine job, as evidenced by a 10.6% gain in U.S. sales for the pair during the second quarter compared with the same period in the year prior. In its earnings announcement, Biogen highlighted its $338 million share of net revenue for the quarter. That's just a small portion of Biogen's top line, but it's extremely high-margin. Do a little digging though the latest financial statement, and you'll notice that $332.2 million from that filters down to operating profits. That's nothing to sneeze at. So far this year, contributions from the partnership comprise nearly 27% of Biogen's operating income.
Why the company glossed over a double-digit gain from a franchise worth so much of its bottom line is a mystery. What isn't hard to figure out is how the company intends to return those profits to shareholders. Earlier this year, Biogen's board of directors approved $5 billion for share repurchases over the next five years.
Given the stock's recent plunge, and the $4.5 billion in cash and marketable securities it ended the quarter with, those buybacks will probably occur sooner rather than later. At recent prices, the authorization could result in a 6.8% share reduction. When calculating earnings per share, we all prefer growth of the numerator, but shrinking the denominator boosts your portion of profits just as well.
Beyond the numbers
I'll admit that share repurchases aren't nearly as exciting as Biogen's post-earnings headlines, but that doesn't diminish their importance. I also think you should know its main growth driver probably reached a saturation point in its single largest market. Finally, who wouldn't want to know a collaboration requiring little, if any, company resources is on pace to boost the bottom line by a few points this year?
If you're like most investors, seeing the stock tank after reading the headlines may have had you joining the stampede. While the negative developments were certainly worth a haircut, going beyond the headlines shows us things aren't nearly as bad as they seem on the surface.
Looking ahead, investors will want to keep an eye on two exciting programs, one in MS and one in Alzheimer's. First up will be results from a mid-stage study with BIIB033, or anti-Lingo-1 expected next summer. To date, MS therapies work to slow the progression of the disease, but there is nothing on the market that can restore myelin damaged by the immune system. Biogen's anti-Lingo-1 candidate has already shown statistically significant improvement of optic nerve function in patients with acute optic neuritis. Should these results carry over to MS patients, anti-Lingo-1's success would make Tecfidera's efficacy pale in comparison.
News for Biogen's Alzheimer's candidate is a bit further out. Biogen initially reported extremely impressive clinical results for the drug, but subsequent reports were not as favorable. However, these more recent unfavorable results from a lower dosage of aducanumab may have been skewed by a small trial size. With two large phase 3 trials already under way, we should know if this was the case several years from now. Should either Anti-Lingo-1 or aducanumab succeed, investors buying up Biogen at recently depressed prices will do extremely well.