With its stock down close to 30% ($92 per share) on Thursday, the market is showing just how much value it placed on Biogen Inc. (BIIB, Financial) getting its Alzheimer's drug to market. Even Morningstar had the drug’s approval probability at 60%, which means the stock is a massive bargain after the company ended trials for the potential blockbuster treatment.
CEO Michel Vounatsos said the “disappointing news confirms the complexity of treating Alzheimer’s disease and the need to further advance knowledge in neuroscience,” and Baird analyst Brian Skorney said that failure of the studies for aducanumab “should be the final nail in the coffin,” using the theory that buildup in the brain of a sticky substance called Beta amyloid played a critical role in the disease. In other words, it’s back to the drawing board.
But to lose $18 billion in market value over this seems more than strange, especially considering the last five years have been a bumpy ride for the stock.
Yet Biogen is one of the best pharmaceutical manufacturers in the world, with a neurology portfolio and drug pipeline that continue to warrant investment. In fact, the drugmaker’s pipeline wasn’t just reliant on bringing an Alzheimer’s treatment to market because it has products in the works for multiple sclerosis, amyotrophic lateral sclerosis, Parkinson’s disease, strokes and pain. Every drug in its pipeline has multibillion-dollar profit potential.
More importantly, the company is still looking to earn $28 to $30 per share in 2019 and again in 2020 regardless of its pipeline. So, in two years, Biogen is set to payback 26% of its current market value in net income. The company generates an impressive 35% return on equity, which has risen from $22.64 to $66.29 per share in the last decade. It also earns 24% on invested capital and 18% on assets, all while spending just over 20% of its gross profit on research and development.
Management is smart. Instead of continuing to dump money into futile efforts with aducanumab, Biogen can now refocus. Again, the biotech giant has a solid list of products on the market. It’s not a one-hit wonder, but the stock is being pummeled like aducanumab was one of its only drugs.
Hedge funds love to trade Biogen stock. It’s estimated that about 12% of the shares are traded on a daily basis. It is not unusual for the stock to fluctuate by five to 15 points a day, helping funds to book short-term profits. But for investors that can withstand the bumpy ride, the long-term capital gains potential is still well worth it.
Disclosure: I am not long or short BIIB.
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