SAGE - Biogen Should Resume Strong Growth With Zuranolone Approval

2023-03-07 02:47:50 ET

Summary

• Biogen Q4 revenue was down 7% y/y.
• Zuranolone is a breakthrough depression therapy with an August 5, 2023, PDUFA date.
• Leqembi could generate strong revenue with full approval, but reimbursement remains an issue.

Biogen ( BIIB ) has been a roller-coaster ride for investors for several years now. Back in 2015 it ran up to over $440 per share. It dropped as low as $205 in 2016 but got above or near $350 in 2018 and 2021. Despite some fair ramps of newer drugs, particularly Ocrevus and Spinraza, revenue has declined as older drugs have hit patent expirations or new competition. I believe that with two drugs with high potential sales due for FDA decisions in July and August, Biogen could again be on the verge of big gains. But burned in the past, investors are not yet pricing these potential future revenues, at least not fully, into the current stock price. While there is no guarantee that the FDA (or other national regulators) will approve either drug, I believe both approvals are likely. For those who can stand the risk, Biogen looks like an attractive choice both for the short (6 month) and long terms. Before digging into the two potential drug approvals, I will look at Q4 2022 results, which illustrate why Biogen is not currently priced as a growth stock.

Q4 2022 Results

Biogen Q4 2022 results were reported on February 15, 2023. Revenue of $2.54 billion was down 7% from Q4 2021. GAAP net income was $0.55 billion, up 49% y/y. GAAP EPS was $3.79, up 52% y/y. Non-GAAP numbers were also up y/y: net income was $587 million, up 17% y/y, while EPS was $4.05, up 19% y/y. Despite the positive profit numbers, cash flow from operations was negative, for a loss of $195 million. Biogen remains profitable, but the rising y/y profitability is will fade if revenue continues to decline.

Biogen is one of the oldest of the biotechnology pharmaceutical companies, and for several years has been showing its age. Early successful therapies, mainly for multiple sclerosis, have both been seeing patents expire and increased competition from newer drugs. For years Biogen management has known it needs to renew its drug portfolio, but that has not worked out very well, so far. The details are in the following chart:

Biogen Q4 therapy revenues, compiled from press releases by the author

With the exception of Spinraza and Ocrevus, Biogen's biggest money makers, Tecfidera, Avonex/Plegridy, and Tysabri are in obvious decline. Spinraza is licensed from Ionis ( IONS ). Ocrevus does not provide as much revenue as the MS drugs it drives from the market, since Biogen only gets royalties from its commercial partner Genentech/Roche. Even the recently introduced biosimilars Benepali, Imraldi, and Flixabi are seeing declining revenue as multiple other biosimilars compete in the market, taking share and driving prices down.

So much for the doom and gloom. Now on to the hope for a revenue ramp in 2024. Presuming two new drugs with high revenue potential get FDA and payer approvals.

Zuranolone Potential for Depression

Zuranolone is waiting for an FDA decision as a therapy for MDD (Major Depressive Disorder) and PPD (Post-Partum Depression). The FDA filing for zuranolone has a PDUFA (deadline for decision) date of August 5, 2023. This is with partner Sage Therapeutics ( SAGE ) [see also Sage Therapeutics Looking to FDA Approval of Zuranolone ]. Biogen has a substantial ownership stake in Sage.

If approved, this is likely a very big market. 14 million Americans have been diagnosed with MDD and there are about a half-million PPD cases annually. How large the final market will be depending on exactly what label Zuranolone gets and how it competes with drugs that are currently on the market, including relatively cheap generic versions of Prozac. That in turn will depend on how both the FDA and doctors think about the data generated during zuranolone's clinical trials. There were five major MDD studies and two PPD studies. There has been the usual debate in the analyst community about how good the results of those studies are.

The results of the clinical trials can be seen in the zuranolone presentation , slides 13 to 18. The main point of criticism is that one of the seven clinical trials failed to produce positive results. That seems, to me, to be outweighed by the preponderance of data showing significant patient improvement after a 14-day treatment. Zuranolone appears to act much more rapidly than drugs currently on the market, with patients achieving significant improvement as early as day 3 of dosing. It has a strong safety profile and can even be added to other therapies. It also seems to show symptom improvements continuing after the 14-day course of treatment is stopped. Keep in mind these are statistical results. MDD has a variety of causes, including mainly psychological ones, so not every patient will benefit from any particular therapy.

Given all that, I think it is highly likely the FDA will approve zuranolone. Of course, there is risk that will not happen. Another consideration is that Biogen will not be able to start selling zuranolone immediately even if the FDA decision is positive. This class of drugs must also be reviewed by the DEA and assigned its class schedule. That review process should be three months long. So, first sales might be in November 2023. Ramping up new drugs can be a long process; one we can watch for is zuranolone in 2024.

Leqembi Potential for Alzheimer's

Most investors are now familiar with the Aduhelm saga and its impact on Biogen's stock price. Likely because investors felt burned by that experience, the reaction to positive news for the Alzheimer's therapy Leqembi has been relatively muted. The FDA granted accelerated approval to Leqembi on January 6, 2023. However, Medicare (Centers for Medicare and Medicaid Services), in ruling it would not pay for Aduhelm treatments despite the FDA approval of the drug and no other therapy being available to slow decline due to the disease, had previously ruled that accelerated approvals of anti-amyloid drugs would not quality for reimbursements. Fortunately, partner Eisai and Biogen had already generated data from a larger Phase 3 trial. On the same day, January 6, Eisai made a submission for full approval based on data from the Phase 3 study. In that Clarity study Leqembi met the primary and all key secondary endpoints with statistically significant results. The most troubling side effect, ARIA (amyloid-related imaging abnormalities), was also within expectations.

On March 5, 2023 the companies announced that the FDA had accepted the new Leqembi filling for full approval . The PDUFA date is July 6, 2023. There will be an Advisory Committee before that, which should give us more insight. Given the accelerated approval and strong Phase 3 data, I think that full approval is more likely than not. The more interesting investment question is whether insurers, primarily Medicare, will agree to pay for the drug. Their real previous objection was based on cost, so we might see a repeat. Billions for cancer drugs that often don't work, not one cent for an Alzheimer's drug, even if it does work for some patients. I am optimistic given the data and the lower price (compared to Aduhelm) of $26,500 per year. I understand those who believe the risk is too high to tolerate until more is known.

Rest of Pipeline

The Biogen pipeline is extensive. It is more diverse than it was a decade ago, branching out from multiple sclerosis to other neurological diseases and rare diseases. The pipeline, aside from zuranolone and Leqembi, is not likely to have any significant impact on revenue or profits in 2023 or 2024. There is a potential therapy, tofersen, before the FDA. The tofersen Advisory Committee meeting is scheduled for March 22, 2023, followed by a PDUFA date of April 25, 2023. There are some known questions about tofersen that could derail its approval. If approved, it would be for the ultra-rare form of AML (amyotrophic lateral sclerosis) caused by mutations in the SOD1 gene. Tofersen is an RNAi medicine licensed from Ionis. I see it as a proof-of-concept medicine, with the science possibly leading to viable therapies for more common forms of AML and other neurodegenerative diseases. It would not be a big revenue generator even if approved by the FDA and global regulatory agencies.

Analysis

Biogen's revenue will continue to decline if the FDA (or payers) declines to approve both zuranolone and Leqembi. It is still profitable, but profits will need to continue to be plowed back into research and development, and acquisitions or licensing of potential therapies, in order to create the potential for more future revenue.

If either zuranolone or leqembi is approved by the FDA, other national regulators, and by insurers, then I expect truly significant income. The only questions would be the pace of the ramp and the ultimate run rate. The ramp will likely be particularly slow for Leqembi, given the diagnostics that need to be done before a prescription is written. My guess is that both will be approved, but the caveats are more numerous for Leqembi.

I think the market is largely discounting both possible approvals. Currently Biogen's PE (price to earnings ratio, forward) is 17.43, which is a bit high for a company with declining revenue, but very low if we figure on either a zuranolone or an Leqembi approval, much less both. The stock price did jump from the roughly $200 to $225 level last summer to a wider range of about $250 to $300 level since September 29. Despite not counting in the approvals at the current stock level, failure to get the first approval would likely send the stock plummeting. Getting the first approval is likely to send the stock closer to its five-year high of just over $400, given investor psychology. The stock price, if Biogen receives both approvals, will be based, at first, on investor enthusiasm. There will still be the worry of reimbursement, particularly for Leqembi. If Leqembi gets reimbursement approval analysts will be looking at projected income for, say, 2025, and the stock price will likely become based largely on that.

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