Biogen Inc. (BIIB, Financial), the $53.7 billion Massachusetts-based biotechnology company, reported its first-quarter 2017 results in April. Biogen delivered 3.1% revenue growth to $2.81 billion and a contrasting 23% profit decline to $747.6 million, resulting in a 26.6% margin compared to a 35.6% margin in the same period last year.
The biotech experienced a 32.5% increase in its total costs and expenses, which resulted in lower overall profits in the recent quarter. In particular, Biogen recorded a 405% increase in its amortization of acquired intangible assets to $448.5 million.
According to company filings, this acquired amortization was mostly in relation to impairment and amortization charges related to Biogen’s U.S. and rest of world licenses to Forward Pharma's intellectual property related to Tecfidera in the recent quarter.
The company has about $347 million left in charges for the remaining three quarters of fiscal 2017 (1).
“I am very pleased with the results of the first quarter. We saw continued stability in our MS business, executed a strong launch of SPINRAZA, grew market share for our biosimilars business across Europe and reinforced the intellectual property for Tecfidera.”
“Furthermore, we continued to build our neurology pipeline with the anticipated addition of our new Phase 2-ready anti-tau antibody.”
“We are encouraged by the progress we made launching Spinraza in the U.S., and, following the positive CHMP opinion, we are ramping up pre-launch activities in Europe. The value this therapy provides to patients is compelling, and we are working to accelerate patient access globally. Overall, I believe we’re building positive momentum at the company, and I look forward to leading Biogen into a new and exciting era.” -CEO Michel Vounatsos.
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Valuations
Biogen is undervalued compared to its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 15.9 times versus an industry median of 31.5 times, a price-book (P/B) ratio of 4.7 times versus an industry median of 3.9 times and a price-sales (P/S) ratio of 4.8 times versus the industry’s 11.9 times.
The company did not have a trailing dividend yield.
Average 2017 sales and earnings per share expectations indicated forward multiples of 4.9 times and 16.9 times.
Total returns
Biogen has underperformed the broader S&P 500 index in the past five years with 14.3% total returns versus the index’s 15.3%. In addition, it has reported 4.5% total losses versus 9.9% total returns so far this year (Morningstar).
Biogen
Biogen was founded in 1978 in Geneva, Switzerland. The biotech is now incorporated in Delaware and is headquartered in Massachusetts.
According to filings, Biogen is a global biopharmaceutical company focused on discovering, developing, manufacturing and delivering therapies to people living with serious neurological, rare and autoimmune diseases.
Biogen’s marketed products include Tecfidera, Avonex, Plegridy, Tysabri, Zinbryta and Fampyra for multiple sclerosis (MS), Fumaderm for the treatment of severe plaque psoriasis and Spinraza for the treatment of spinal muscular atrophy (SMA; 2).
The company has cemented its expertise in treating MS and is now seeking to solve other debilitating neurological diseases such as Alzheimer's, Parkinson's and amyotrophic lateral sclerosis.
Biogen also develops, manufactures and markets biosimilars through Samsung Bioepis. Under this agreement, Biogen is currently manufacturing and commercializing two anti-tumor necrosis factor (TNF) biosimilars in certain European countries.
In fiscal 2016, Biogen generated 71.8% of its revenue in the United States. The remainder came from the rest of the world.
Biogen also reported a complete list of its products (medications) and its sales performance. In the recent quarter, the company generated 90.4% of its total revenue from three products: 40% from Tecfidera (MS drug), 27% from Interferon (MS drug) and 22.9% from Tysabri (MS drug). Interferon included both Avonex and Plegridy.
In the quarter, Tecfidera revenue grew 1.3% year over year, Interferon revenue fell by 3.3% and Tysabri revenue rose by 14%.
Top drug expectations (Tecfidera, Interferon and Tysabri)
Tecfidera
Biogen anticipates relatively stable demand for Tecfidera in 2017 on a global basis, with patient growth in its international markets offsetting modest patient declines in the U.S., primarily resulting from increasing competition from additional treatments for MS, including Ocrevus.
According to filings, Biogen’s arrangement with the Roche Group (RHHBY, Financial) allows the former to receive a tiered royalty on Ocrevus’ U.S. net sales, ranging from 13.5% to 24%, if annual net sales exceed $900 million. In addition, Roche Group’s Genentech is solely responsible for development and commercialization of the aforementioned drug.
Further, the U.S. Food and Drug Administration approved Ocrevus for the treatment of relapsing MS and Primary progressive MS in March of this year.
Interferon
The biotech expects overall Interferon revenues will continue to decline compared to prior-year periods as a result of increasing competition from Biogen’s other products as well as other treatments for MS.
Tysabri
Biogen anticipates relatively stable demand for Tysabri in 2017 on a global basis, with patient growth in its international markets offsetting modest patient declines in the U.S. primarily resulting from increasing competition from additional treatments for MS, including Zinbryta and Ocrevus.
Spinraza
Spinraza is the first treatment for spinal muscular atrophy. Spinal muscular atrophy (SMA) is a genetic disease affecting the part of the nervous system that controls voluntary muscle movement.
Spinraza has been granted orphan drug designation in the U.S., European Union and Japan. In April 2017, the European Medicines Agency's Committee for Medicinal Products for Human Use adopted a positive opinion, recommending the granting of a marketing authorization in the EU for Spinraza for the treatment of SMA.
Patent expiration
(10-K)
Pipeline
(10-K)
Note, Ocrevus has already been approved in the U.S., but biosimilar adalimumab and Gazyva have no updates yet. Other recent progress in Biogen’s pipeline and new agreements can be read here.
Sales and profits
Over the past three years, Biogen has recorded average sales growth of 18.2%, profit growth of 25.7% and profit margin of 31.8% (Morningstar).
Cash, debt and book value
As of March, Biogen had $924 million in cash and equivalents and $6.51 billion in borrowings—including other financing arrangements—resulting in a debt-equity ratio of 0.57 times compared to 0.63 times in the same period last year.
As observed, Biogen added $1.15 billion in shareholder equity, primarily through an increase in retained earnings, while reducing borrowings by $26.3 million.
Thirty-six percent of Biogen’s $21.2 billion in assets were identified as goodwill and intangibles. Further, the biotech’s book value grew 11% to $11.5 billion compared to the same period last year. To review, goodwill and intangible assets also grew at a similar rate as the book value in the same period.
Cash flow
In the recent quarter, Biogen’s cash flow from operations fell 77% to $235.2 million compared to the first quarter 2016. In addition to lower profits for the period, the company also recorded higher cash outflow in its accrued expenses and liabilities. The income tax assets and liabilities contributed to the lower cash flow.
Capital expenditures including intangible asset acquisitions were $1.07 billion, leaving Biogen with $830 million in free cash outflow compared to $860 million free cash flow in the same period last year. Despite having cash outflow, Biogen handed out $583.6 million in stock repurchases.
In 2016, Biogen authorized its 2016 share repurchase program. According to filings, the company was able to repurchase 4.1 million shares of common stock for $1.2 billion.
A rough estimate suggests Biogen was able to repurchase a good amount of its shares for an average price of $293 a share—15.6% higher than today’s share price of $253.37 (at the time of writing).
As of February of this year, Biogen had also allocated $302.7 million in contributions to its recently spun off hemophilia business, Bioverativ (BIIV, Financial).
The biotech has not been active in issuing debt in recent years, except for a $6 billion debt issuance in fiscal 2015, which was primarily used to perform a $5 billion share repurchase program.
With the 2015 share repurchase program, the company repurchased and retired approximately 16.8 million shares of common stock for $5 billion. Based on this information, the company repurchased shares for an average price of $297.6 per share during that time.
Conclusion
Biogen delivered strong results overall in its first quarter of operations for the year. A closer look reveals one of its primary revenue generators, Interferon (Avonex plus Plegridy), has failed to grow. The company confirmed this and expects the segment will continue to decline for the remainder of the year.
Biogen noted it expects other competing products, including its own, to capture some of the revenue lost from Interferon's decline. In review, the Interferon segment contributed about 28% to total revenue in fiscal year 2016 and 27% in the recent quarter.
The company also has promising business arrangements should expectations be met—Ocrevus with Roche Group and a biosimilar with Samsung Bioepsis. Biogen also has Spinraza (see above).
In addition, Biogen has several blue sky elements on its balance sheet and a conservative free cash flow share buyback ratio, an average of 74% for the past three fiscal years.
Meanwhile, 25 analysts recommend an average price target of $318.59 a share—25.7% higher than today’s share price. Applying flat revenue growth and a 30% discount to the number of shares outstanding results in a value of $267 a share.
In summary, Biogen is a buy with limited upside to about $280 a share.
Notes
(1) 10-Q
(10-Q filing)
(2) 10-K
"We (Biogen) also have certain business and financial rights with respect to Rituxan for the treatment of non-Hodgkin's lymphoma, chronic lymphocytic leukemia (CLL) and other conditions, Gazyva indicated for the treatment of CLL and follicular lymphoma and other potential anti-CD20 therapies under a collaboration agreement with Genentech Inc. (Genentech), a wholly-owned member of the Roche Group (Roche Group)."
Disclosure: I have shares in Roche and Biogen.
