2023-09-29 16:46:22 ET
Summary
- Biogen's stock has increased by over 30% since the release of my bullish note on the company in June 2022, primarily driven by the approval of its Alzheimer's drug, Leqembi.
- Leqembi is now fully approved and eligible for reimbursement - peak sales could be over $8bn by 2030.
- In my last note I shared detailed product-by-product revenue forecasting and DCF analysis to get to a share price target over $300.
- 12 months on I present my new calculation - I now see Biogen struggling to break the $300 per share mark and believe it is currently priced fairly by the market.
- Under its new CEO the company plans to lose 1k staff, utilize M&A and try to improve clinical study success rates. My feeling is the market expects this as a minimum.
Investment Overview
At the end of August 2022, I provided - via a note for Seeking Alpha - some forecasting for Biogen's ( BIIB ) current product portfolio, and drug development pipeline. I used these forecasts to create a forward income statement to 2030, and completed discounted cash flow analysis to try to establish a price forecast for Biogen shares going forward.
Using the perpetuity growth rate method, I established a share price target of $250, and using EBITDA multiple analysis, a substantially higher target of $363. The average of the two prices was $306. At the time, Biogen's share price was trading at a 10-year low value of ~$197 per share - largely due to the commercial failure of its controversial Alzheimer's Disease drug Aduhelm.
In short, while Biogen has not met my $300 per share target, it is nevertheless up over 30% since my bullish note was published. Fast forward 13 months and there have been a lot of changes at Biogen - which I will cover in this post - but in many ways the investment opportunity remains centered around the company's ability or inability to succeed in the Alzheimer's space.
Leqembi Success Crucial To Biogen - Assessing The Opportunity
Although I would like to claim credit for my accurate forecasting, Biogen's gains since my note in June have been primarily driven by a single asset - Lecanemab, the anti-amyloid antibody drug directed against Alzheimer's, and now fully approved by the FDA as Leqembi.
Biogen and its partner Eisai were hopeful that Lecanemab - a drug with a broadly similar mechanism of action to Aduhelm, and a similar target, amyloid beta, the "sticky" protein deposit that accumulates in the brains of Alzheimer's patients - could be everything that Aduhelm proved not to be. Effective, safe, and trusted by the wider scientific and physician community.
In September 2022 the two pharmas were able to celebrate as Lecanemab met its main goal in a pivotal Phase 3 study, cutting cognitive and functional decline in patients with early-stage Alzheimer's by 27% compared to placebo in a 1,800-patient, 18-month study.
Where the companies had to dig deep into Aduhelm's data to find any evidence of efficacy, with lecanemab, the new data seems to validate the anti-amyloid thesis - already favoured by the Food and Drug Agency, who used amyloid removal as a surrogate endpoint when approving Aduhelm.
Biogen will split profits from commercial sales of Leqembi 50/50 with Eisai. Leqembi was granted accelerated approval in January this year, but importantly, the drug received full approval in July.
The Centers for Medicaid and Medicare ("CMS"), who oversee Medicaid health insurance plans, refused to provide reimbursement for Aduhelm based on its conditional-only approval, and took the same stance with lecanemab, but following the full FDA approval the CMS has indicated it will help patients access the drug, although they will be required to sign up to a patient registry.
Leqembi is by no means a perfectly safe drug - with three patient deaths in the drug's pivotal study linked to instances of brain swelling, or "amyloid-related imaging abnormalities" ("ARIA") - and patients will have to undergo MRI scans before using the drug to check if they have a genetic risk factor for ARIA, but it seems that Biogen and Eisai have been able to win over the scientific and physician community that the rewards outweigh the risks.
There has been a lot of debate about what peak revenue figures will look like for Leqembi. Eisai and Biogen have set an annual list price of ~$26.5k, and Eisai has said it expects ~10k patients in the US to be using the drug before the end of 2023, and that it expects to achieve annual sales of $7.3bn by 2030. Other figures that have been circulated are ~$3bn in annual sales in 2028, and ~$13bn in total sales between 2023 and 2028.
I have opted to allocate $4bn in annual sales to Biogen in 2030, with the drug 10% of that figure next year, then 25% in 2025, 40% in 2026, and 55%, 70% and 85% of that figure in 2027, 2028, and 2029. It's possible that, after the Aduhelm debacle, the market is more nervous about making bold predictions second time around, even if it is on surer ground with Leqembi.
Biogen's new CEO Christopher Viehbacher - the former head of French Pharma Sanofi ( SNY ) that was appointed in November last year to replace Michel Vounatsos, who paid the price for his failure to make aduhelm commercially viable - also sounded a cautious note during the company's Q2 2023 earnings call, telling analysts:
So as we start thinking about intent to prescribe and how physicians are looking at things, we're actually not going to know that until we actually get out there on the marketplace and see how patients respond. ADUHELM did get approved. But as you all know, it never really got out of the blocks, and never really got launched. So this is really a first. And whenever you're first, you're going be discovering an awful lot and a lot of this is just not that predictable.
With patients likely requiring a PET scan before being eligible for Leqembi, and then needing to visit a dedicated centre at least monthly to receive an infusion, and potentially undergo further scans to check for instances of ARIA, all while submitting additional data to CMS, Biogen's CEO is right to be cautious, and state that Leqembi will be a tough sell in the marketplace initially. Viehbacher did recently tell an audience at the Morgan Stanley ( MS ) healthcare conference, however, that "nothing that we're seeing says that the Esai guidance can't be met which is 10,000 patients by the end of their fiscal year, which is the end of March".
My optimism around peak sales is based around the additional approvals Biogen may be able to secure in Europe, the United Kingdom, Canada, Asia etc., as well as improvements Biogen and Eisai can make to Leqembi over the next several years that may make the process of undergoing treatment less arduous.
For example, Biogen says it is already working on a subcutaneous version of the drug which could even be self-administered by patients at home, and the company is also working on creating a "maintenance" market, as well as a plaque clearance market, identifying patients earlier, and becoming better at identifying which patients are most likely to respond well to the therapy.
These types of changes give me confidence that Eisai's projection for $7.3bn revenues in 2030 can be met, or even exceeded, and although I'd stop short of projecting double-digit billion revenues, I think $4bn is a reasonable target for Biogen.
In my forecasts for Biogen's Central Nervous System ("CNS") disease division, I am also including revenues from three pipeline assets that Biogen is developing. BIIB080 is an antisense oligonucleotide ("ASO") therapy that targets tau - another protein that can build up inside Alzheimer's patients' brains, that could potentially be complementary to leqembi, if approved - a Phase 2 study is underway.
The other two are therapies target Parkinson's Disease - BIIB121 is another ASO that Biogen is developing alongside partner Ionis Pharmaceuticals ( IONS ), in a Phase 2 study, and Essential Tremor - BIIB124, also known as SAGE324, an investigational oral neuroactive steroid (NAS) GABA A receptor positive allosteric modulator ((PAM)), is being developed alongside long-term collaboration partner Sage Therapeutics ( SAGE ), and has successfully met endpoint in a Phase 2 study.
Naturally, there is a risk than none of these three therapies are successfully approved, but given Biogen's pipeline contains several more assets targeting Alzheimer's, Parkinson's, and other movement disorders, I have selected these three as the standout prospects.
The End Of Biogen's Era Of Dominance In Multiple Sclerosis
Biogen's revenues from its Multiple Sclerosis franchise in Q2 2023 fell to $1.2bn, from $1.43bn in Q2 2022, and three of its key assets - Tecfidera, Plegridy, and Avonex - have now lost their patent protection and are subject to competition from generic drugs. Generics usually carry a much cheaper price tag than the original drug, since generic drug manufacturers do not have to invest in drug discovery R&D, or experimental clinical studies).
The progress of Vumerity, a "fumarate" drug with a better record of gastrointestinal tolerability than Tecfidera, had been good, although sales fell from $265m in 1H22, to $254m in 1H23, as total MS revenues fell from $2.82bn, to $2.34bn. Revenue from this division has fallen from $8.5bn in 2019, to $7.8bn in 2020, $6bn in 2021, and $5.5bn in 2022.
With patent protections lost, and new assets struggling for growth, my forecast is that Biogen's MS drugs franchise shrinks to a $1.6bn revenue contribution by 2030.
Last year, I had included $500m of revenues from Orelabrutinib, a Bruton's tyrosine kinase ("BTK") inhibitor in-licensed from Chinese Pharma Innocare, but, despite paying $125m for the licence to the drug two years ago, Biogen ended its interest in the drug this February.
Under its new CEO, Biogen seems to be decisively moving away from MS - although it is still working on two Phase 1 stage assets, according to its Q2 20230 earnings presentation . I am sharing my forecasts for the MS and CNS divisions below.
Biogen product and pipeline revenue forecasts - MS / CNS (my table and assumptions)
Neuromuscular, Depression, Biosimilars, New Market Opportunities
With lost revenues in its MS division being more than offset by the growth of the Alzheimer's franchise, and Parkinson's and Essential Tremor drugs, so that in 2030 Biogen records ~$6.6bn of revenues from these two divisions, versus $5.4bn last year - at least as far as my forecasting is concerned - it's time to break down forecasts for the remaining four divisions.
As far as neuromuscular is concerned, I am forecasting revenues to continue to slide by ~3% per annum, as they did between 1H22, and 1H23, owing to more competition in the marketplace, from Novartis' ( NVS ) Zolgensma and Roche's ( RHHBY ) Evrysdi, even if Biogen claims studies show treatment with Spinraza following use of Zolgensma can be beneficial.
QALSODY, an (Ionis partnered) antisense drug that targets SOD1 mRNA, won an accelerated approval in April, albeit in a subset of Amyotrophic Lateral Sclerosis patients, meaning peak sales volumes are unlikely to exceed $500m, and a confirmatory study will need to be conducted and meet endpoints to avoid the drug being withdrawn from the market altogether.
SKYCLARYS is the commercially approved drug Biogen secured via its $7.3bn acquisition of Reata Pharmaceuticals in July. New CEO Viehbacher has made it clear he wants to build the company through M&A, and move away from an era of struggling to develop effective drugs itself, although the Reata deal appears expensive, with SKYCLARYS, indicated to treat the muscular disease Friedreich's Ataxia, the only asset of genuine note, and unlikely to become a blockbuster (>$1bn per annum revenue generation).
I have included the pipeline asset BIIB121 - indicated for Angelman Syndrome - in my forecasts - although it remains at the Phase 1 study stage. The new CEO has been focused on discontinuing numerous clinical studies at the company, but as with CNS, I am picking out BIIB121 to succeed. Yet another Ionis partnered asset, although Roche's recent failure with a similar drug has led analysts to doubt whether this type of drug can succeed in a debilitating indication like Angelman's.
Biogen and its other long-term partner Sage suffered a major setback this year when their depression med Zuranolone did not secure an approval in major depressive disorder. The drug did win approval in the smaller indication of post-partum depression - a potential $500m market, it has been estimated, but Sage's share price took a major hit on the denial in MDD.
Meanwhile, Biosimilars has been a successful division for Biogen in terms of new approvals, with four commercially marketed drugs now in its portfolio, revenues fell 10% between 1H22 and 1H23, as the biosimilars market slightly fails to live up to its hype. Nevertheless, anticipated approvals for three more biosimilars - for Regeneron's $8bn selling eye disease therapy Eylea, and two autoimmune therapies in Actemra and Cimzia - has persuaded me to forecast for peak division revenues of ~$1.7bn by 2030.
I am forecasting that the new CEO's efforts can deliver three more product approvals for the late-stage pipeline assets Dapirolizumab pegol, and Litifilimab, both indicated for systemic lupus erythematosus ("SLE"), achieving blockbuster sales by 2030 between them, and for BIIB131 in ischemic stroke. BIIB131 is a plasminogen activator, and Phase 2 studies indicate it has the ability to improve functional outcome in patients, but it should be acknowledged that this asset is far from guaranteed to be approved.
Finally, I forecast that Biogen continues to collect a solid income from its royalty share of Ocrevus revenues - Roche's MS drug has been forecast to drive $6bn in peak sales in 2030, as part of a ~$30bn MS market. In sense, then, Biogen will continue to have a significant stake in MS going forward. I am forecasting Rituxan royalty revenues to fall, however, as this older drug faces increasing competition within oncology markets.
Biogen - remaining divisions product sales forecasts (my table and assumptions)
Forward Income Statement, Discounted Cash Flow, Target Share Price
As shown in the table above, my - slightly optimistic - product by product forecasting sees Biogen increasing revenues at a CAGR of 8% between 2023 and 2030, with double-digit growth being experienced 2024, 2025, and 2026. The key drivers of growth I expect to be Alzheimer's / Parkinson's, which will account for over 30% of all revenues by 2030, neuromuscular, which will account for ~17%, biosimilars, which will account for ~10%, and new market opportunities ~15%, with Ocrevus royalties accounting for 9%.
Biogen - income statement forecast (my table and assumptions)
Shown above is my forecast income statement table, which sees Biogen's revenues grow in each year, reaching $16.2bn by 2030 - a few hundred million less than I forecast last year, with a very different looking product portfolio.
One of the new CEO's targets has been to reduce operating expenses - despite the fact Biogen has traditionally been an exceptionally profitable business, as we can see above, Viehbacher has introduced a "fit for growth" initiative that he believes can save the company ~$1bn in gross OPEX by 2025, and $700m of net OPEX. Ironically, given the name of the initiative, "fit for growth", the project will kick off by shrinking Biogen's headcount by ~1k staff.
I have reduced Biogen's OPEX as a percentage of total revenues from 70% in 2023, to 68% by 2030, as a result with Biogen's debt reportedly standing at $7.3bn as of 1H23, and cash reportedly standing at $7.3bn, I am not including much in the way of interest expense, although I am setting a higher tax rate of 20% per annum.
Biogen - DCF analysis - WACC calc. (my table and assumptions)
I share my weighted average cost of capital calculation above, and it has increased substantially since my calculation last year, from less than 10% to over 13%, reflecting the significant elements of risk in the business - new product approvals, inflationary headwinds, pressure on drug pricing, and prevailing market conditions, for example.
Biogen present day share price target (my table and assumptions)
Finally, we arrive at my share price target, which has - predictably - fallen from last year, from an average of $306, to an average of $276 - a 7.2% premium to today's traded price.
Concluding Thoughts - Is Biogen Stock A Buy, Sell, or Hold Based On Revenues Forecasting / DCF Analysis
In this post I have tried to provide an objective overview of Biogen's business, and the direction the new CEO wants to take the company in, as well as what products I believe can be successful in the marketplace, which will experience falling sales, and what that all means for Biogen's valuation today.
Ultimately, I am less optimistic than I was last year, partly due to some failures - such as the MDD failure for Zuranolone, the failure of the BTK-inhibitor in MS, and the failure to defend expiring patents in the MS division, and partly due to the scale of the rebuilding challenge in front of the new CEO.
The one major positive for Biogen has been the full approval of Leqembi, which becomes central for Biogen's performance going forward. Even being relatively generous with leqembi forecasts, however, my analysis suggests that Biogen is priced at about the right price today, and although we can have confidence that under Viehbacher Biogen has the potential to substantially grow revenues, the market is already pricing this growth in.
Since Biogen does not pay a dividend, and with share buybacks not front and centre of Viehbacher's agenda, I believe that Biogen may well struggle to grow its share price to over $300 in the next 12 months, and would give the company a "hold" recommendation.
The company will need to make some major M&A deals, and improve its record of developing pipeline drugs into commercial ones, in order for my opinion on that to change. Biogen is one of the most intriguing companies in Pharma, and it faces a great many challenges at the present time. I expect the new CEO to face a challenging year ahead, with the market's expectations possibly unreasonably high.
For further details see:
Biogen - Revised Revenue Forecasting To 2030 - New CEO Faces Major Challenges