Biogen’s (BIIB, Financial) shares dipped 8% on June 7 after its experimental multiple sclerosis drug, Opicinumab, failed to meet the main goal of improving some symptoms in a mid-stage study. According to Reuters, as the drug failed to improve overall physical and cognitive function of its MS participants, there can be an unlikely future late-stage study conducted on the drug. Nonetheless, the company said it would continue to analyze its collated drug data.
Multiple sclerosis
MS is the most widespread disabling neurological condition that affects young adults ages between 20 and 40 years old. MS is more prevalent in areas further away from the equator.
(Healthline Media)
As commonly assumed, our body moves through our direct or indirect volition with use of our soft-tissue muscles to move the dense skeletal bones and reach a productive outcome. Regardless of physical build, what powers this movement comes from the signals from our brain and transmitted by millions of nerve cells to the smallest parts of our body. These nerve cells are covered by a special structure inherent to all human beings, called the myelin sheath. Each nerve cell has its own myelin sheath. The myelin sheath in return induces nerve cell transmission.
Try flicking your big toe right now. That action alone had induced a nerve transmission speed of 41 meters per second or 91.7 miles per hour -- let alone, flicking your toe did not even take a second.
MS is an autoimmune disease. Our immune system usually protects us from foreign bacteria or disease. Derived from Greek, auto mean ‘self.’ In this case, an autoimmune disease means that the body’s cell structures attack its own self. Primarily, the covering, myelin sheath, is being attacked by the body’s immune system, leaving scar tissue behind once the inflammation and damage had been done to the nerve cell structure.
As a debilitating result, the individual would then have slower response time, poor balance reaction, muscle weakness, and several other cases one can think if an individual can no longer control his muscles effectively. The disease affectation does not stop in any MS limbs, the disease also affects the MS’ capability of talking, swallowing, eye sight, and other natural senses that we usually take for granted every day.
To see an inspiring video regarding individuals who try to overcome this debilitating medical condition, here is a link to an ESPN feature video entitled “Catching Kayla.”
(Image from ESPN)
One great thing about Biogen is that the company was able to address this debilitating disease late in 2012 with Tecfidera. Tecfidera is taken orally and expected to address relapsing remitting stage of MS, which is the most common manifestation of MS.
(Healthline Media)
Market price devaluation
Biogen’s market value depreciation did not just start a couple of days ago. In March 2015, the company was valued at an all-time high of roughly $110 billion. During these times Biogen was exceeding market expectations of its product sales that was more likely brought by its potent MS drug Tecfidera.
Some bad news arrived in the second half of 2015, which started to send Biogen’s shares tumbling down. First was when its other trial drug, Aducanumab, which was expected to tackle another debilitating neurological disease- Alzheimer’s, presented mixed results. The study is still ongoing. In addition to this, Biogen revised its earnings forecast lower, which resulted into its biggest drop since the financial crisis.
Biogen may have successfully served the human civilization by discovering Tecfidera. In addition to this, the company has some more MS drugs that contribute heavily to its product sales. These drugs are Avonex, Plegridy, Fampyra, and Tysabri. These MS drugs contribute massively to Biogen’s sales, roughly at 94% in a three-year average. In addition to these drugs, the company also has drugs for the blood-clotting disorder hemophilia, and skin disease psoriasis. Not to discount any pharmaceutical breakthroughs in MS drugs, several other drug companies has MS drugs, too. This includes Novartis, Bayer, Teva Pharmaceuticals, among others. Further, Novartis’ Gilenya drug was actually the first oral MS drug approved by the U.S. Food and Drug Administration in 2010.
With those 2015 happenings, accompanied by the recent Opicinumab update, the company now had lost actually lost almost half of its valuation in the last 15 months. The company currently has a market valuation of $53 billion.
Tecfidera growth
Tecfidera had its first full year of sales in 2014, in that year the drug delivered 230% growth. In fiscal year 2015, Biogen reported Tecfidera’s sales growth of 25%. This is quite a tempered growth compared to other blockbuster drugs out there.
Recent first quarter filings revealed that Tecfidera demonstrated negative 5% growth on a quarter to quarter basis. Biogen’s second most valuable drug, Avonex, also delivered poor sales growth of negative 11% when compared to the recent quarter. Overall, Tecfidera sales grew 15% when compared to first quarter of 2015.
Patent expiration
According to Biogen’s recent annual filing, Tecfidera has most of its patent expiring in 2018, Tysabri has its patents expiring between 2017 and 2023. Avonex and Plegridy have most of their patents expiring between 2019 and 2026.
Spinoff plans
According to a Wells Fargo Securities report, Biogen is expected to spin-off its hemophilia business by early next year. This would enable Biogen to focus entirely to its neuro-medicine business, such as the ongoing MS and Alzheimer’s trials and also spinal muscular atrophy discoveries.
Under the hemophilia business, Biogen has two drugs -- Alprolix and Eloctate. Both of these drugs were approved in the first and second quarter of 2014. Both drugs were only contributing less than 5% to overall product sales by Biogen, yet the couple grew its contribution by 176% to 8% in the recent quarter.
Share dilution and debt creation
Any positive reference to both (share dilution and debt creation) may deter any conservative investor. Nonetheless, Biogen has been actively buying its shares back for the past decade. The company successfully reduced its shares by 34% in that time frame. The company also performed a huge buyback operation, worth $5 billion, last year when its annual average price to earnings (p/e) ratio was at 20x. In the same fiscal year, the company added the almost equivalent amount to its debt.
Biogen had a more conservative debt to equity (d/e) ratio in the past 10 quarters. Only in late 2015 had its very conservative d/e ratio of just 0.06 jumped to 0.65 on average. The company currently has net debt of $2.9 billion.
Dividends
Biogen has not issued any dividends. The company has this statement in its recent annual report regarding dividends: “The dividend yield of zero is based upon the fact that we have not historically granted cash dividends, and do not expect to issue dividends in the foreseeable future.” (p. F-41)
Valuations
Currently, Biogen’s p/e multiple is at 15x, while its price to book value multiple is at five times. The S&P 500, on the other hand, has 19x p/e and 2.7 p/b.
Summary
Lack of dividend commitments in the past and in the foreseeable future, high p/b multiple, disappointing MS drug (Opicinumab) study, and increased debt intake may deter any vigilant investor. Nonetheless, having positive results for its Alzheimer’s, MS, and SMA studies accompanied by a renewed focus on these segments after a 2017 spin-off, would probably give rise (again) to the company’s currently neglected shares.
Disclosure: I do not hold any Biogen shares.
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