Pharma companies spend billions on research and development, but sometimes their fortunes are beyond their own control. A case in point: Biogen Inc. (BIIB, Financial), which has been whipsawed by two recent events.
In June, a federal district court in West Virginia ruled that a key patent protecting Biogen's top-seller, Tecfidera, was invalid. Biogen lost to the generic drug company Mylan NV (MYL, Financial), which is likely to roll out a generic multiple sclerosis medication in the near future. While Biogen said it would appeal the verdict, it is a serious threat to a drug that delivers more than $4 billion in annual revenue. Some observers suggest the two companies might negotiate a settlement.
In August, it received good news from the U.S. Food and Drug Administration. The agency announced that Biogen, in collaboration with Japanese drugmaker Eisai Co. Lt.d (TSE:4523), had received approval for an investigational treatment for Alzheimer's disease. The drug, aducanumab, could give Biogen a position in the multibillion-dollar market for Alzheimer's treatments. Eisai is one of five pharma companies with a product already in the market, Aricept.
Such is a season in the life of a pharma company, with billions of dollars routinely on the line. The buffer for such companies is known as the "pipeline," products under development or going through the testing process. This is what the top of the pipeline contains, according to Biogen's website:
While we can't foresee what will happen to the company in the future, we can draw some lessons from its management in past years.
Financial strength
At first glance, the score of 6 out of 10 suggests this is a company with problems, but when we look more closely, we find Biogen is stronger than it appears.
All that red on the first five lines of the table indicate debt is a problem, especially when compared with its past debt holdings. Yet, the interest coverage of 36.35 tells us the company has enough operating income to cover its interest expenses more than 36 times over.
The Piotroski F-Score is what we might expect for a stable company, while the Altman Z-Score tells us Biogen is financially strong and in absolutely no danger of bankruptcy.
What should blow us away, though, is the WACC vs. ROIC ratio; the weighted average cost of capital is just 3.14% while the return on invested capital is 30.63%. That means the company is earning almost 10 times as much on its capital as it costs to raise it.
Profitability
That WACC vs. ROIC ratio alerted us to the fact this company is very profitable, and that's reinforced by the rare 10 out of 10 rating for profitability. Both margins are very high, suggesting a wide moat, and compare favorably with the margins of other companies and of Biogen's own past.
The return on equity and return on assets metrics are also exceptional.
On the growth lines, we see revenue growth is healthy, well into the double digits. However, the growth rates for the profitability metrics, Ebitda and earnings per share (before non-recurring items) are even higher, signalling increasing efficiency.
Valuation
We begin with a new GuruFocus display feature, the GuruFocus Value visualization. Starting from the bottom and going to the top, we see the range rise from "Significantly Undervalued" to "Possible Value Trap, Think Twice." The black line is the "GuruFocus Value" line, while the light blue line represents the share price:
According to this graphic (and its underlying formulas), Biogen is "Modestly Undervalued."
Note how the background colors, from green to red, reflect the ups and downs of the market, and the peak in the center reflects the near record heights Mr. Market made in recent days.
Turning to the conventional valuation table, it begins with an 9 out of 10 rating. That means the stock is likely undervalued, and we get confirmation of that from three metrics.
The price-earnings ratio, long the most-favored indicator among market watchers, is just 8.05, meaning it is less expensive than most of its competitors and peers and lower than it has been in its own recent past.
The PEG ratio, representing the price-earnings ratio divided by the five-year Ebitda growth rate, is 0.53. In using this ratio, 1.00 is considered fairly valued, so this score shows Biogen stock is undervalued.
Our third measure is provided by the discounted cash flow calculator, which also serves up an undervalued result (although I am skeptical that the fair value is really that high):
Dividend and share buybacks
Obviously, Biogen does not pay a dividend, opting instead to devote all its free cash flow to growth.
However, shareholders have not been forgotten as the company has actively bought back its shares, reducing the share count by just over 35% over the past 10 years:
In December 2019, the board of directors authorized up $5.0 billion in stock repurchases in 2020 and potentially beyond.
Gurus
Biogen is popular among the gurus, with 20 of them holding stakes at the end of the second quarter.
PRIMECAP Management (Trades, Portfolio) held the largest position with 15,631,932 shares, representing a 9.87% stake in Biogen. The holding also represented 3.59% share of PRIMECAP's assets. It reduced its stake by 2.09% in the second quarter.
After a reduction of 12.7% in his holding, Jim Simons (Trades, Portfolio)' Renaissance Technologies held 3,905,922 shares at the end of the quarter.
The Vanguard Health Care Fund (Trades, Portfolio) held 3,714,536 shares after adding 17.86%.
Conclusion
Considering the fundamentals reviewed here, as well as the confidence of gurus, we can conclude Biogen is a very well run company, and is to likely to continue on the same path.
That would mean more financial strength, profitability and shareholder returns by way of share buybacks. What may not last, though, is the current valuation that the GuruFocus system pegs as "Modestly Undervalued."
According to the data we've seen, this could be a chance for value investors to put Biogen on their shortlists, assuming they can live with the modest debt. Growth investors may also see this as a potential entry point for a stock with the potential to move much higher—assuming it successfully navigates external shocks. Income investors will pass this by since it has no dividend.
Disclosure: I do not own shares in any companies named in this article.
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