Biogen Stocks Quick Snapshot: Should You Buy?

Biogen stocks first caught my attention because Warren Buffet’s Berkshire Hathaway entered a $192 million position in the company. Berkshire bought 648,447 shares back at the end of 2019. And since then, the share price has climbed to more than $340 a share in the first half of 2020.

However, recently the Biogen stock price has fallen back to around the $250 range. Buffet’s historical stand had been to avoid the biotech industry. So, I thought that it would be interesting to find out why Berkshire invested in the company.

Perhaps market conditions have changed, there’s competitive advantages in the company, or maybe simply the stock is undervalued. Either way, there will be valuable lessons for investors to understand such shifts. Let’s find out!

 

Biogen Stocks Overview

Well, if you try to look at the company’s profile, you will see that the company deals with quite a number of drugs. But in short, Biogen deals mainly with the development, manufacturing and  delivering therapies for treating neurological and neurodegenerative diseases around the world.

 

Product Segment Breakdown

I shall not bore you with the details with all the weird drug names for now. But i think what we need to understand is the company’s core focus and potential growth area. We can sum it up in the snapshot below:

Source: Biogen 2019 Annual Report

What you need to know is that the company’s number one focus currently is in Multiple Sclerosis (MS) and Neuroimmunology segment. Below are the key drugs under this product segment:

  1. Tecifidera
  2. Avonex (Interferon)
  3. Plegridy (Interferon)
  4. Tysabri
  5. Vumerity
  6. Fampyra

Base on the breakdown by product types, MS segment takes up more than 74.1% of the total revenue in 2019. Well, such specialization can be a good or bad thing.

Understand that the key barrier to entry for biopharmaceutical companies is derived from the patents they hold. This allows them to enjoy a high profit margin for the number of years that the patents are valid for. Effectively, they are running a monopoly in the category.

Source: Biogen 2019 Annual Report

Having said that, we want to highlight here that Tecfidera takes up a significant amount of revenue shares at 38.95%. Back in June 2020, Biogen failed to defend it’s patent for Tecfidera pertaining to the battle with Mylan.

This has resulted in entrance of generics competing away Biogen’s market share for Tecfidera. The recent quarterly report has seen an overall drop in revenue for Tecfidera. It represents a substantial -19% quarter-on-quarter or -14% year-on-year basis.

Source: Biogen Q3 2020 Earnings Presentation

The rapid decline in Tecfidera sales, due to the entrance of generics, is expected to continue in the near future. As such, we need to discount the earnings of this supposed blockbuster drug when assessing Biogen stocks value.

 

Product Revenues by Region

Understand that Biogen’s key business focus is still predominantly in the U.S. But the fractional make-up of the entire portfolio has decreased over the past few years.

Hence, the rapid decline in Tecfidera sales in the U.S is a strong minus for the company’s value.

Source: Biogen 2019 Annual Report

However, having said that, it doesn’t necessarily invalidate Biogen stocks as an investment opportunity. Biotech companies thrive on it’s patent and pipeline of discoveries. Potential future patents will provide them the barriers to entry from other competitors.

Below shows the snapshot of the company’s pipeline of neuroscience programs as of Q3 2020.

Source: Biogen Q3 2020 Earnings Presentation

However, this may be difficult for outside investors to understand. How exactly sustainable and profitable will these pipeline of programs be in the long run?

The way the company’s skilled workforce manoeuvres through such an intricate business environment, is an intangible asset itself. We need to assess it’s effectiveness over a longer time frame.

As such, let’s take a step back to look at the broader view of Biogen from a financial perspective. This will help us assess the company’s ability in managing and driving its business for last 10 years.

 

Biogen Stocks Key Financials

Return On Invested Capital

First, let’s take a look at the Return On Invested Capital (ROIC) of the company over the past 10 years. You can see from the graph below that Biogen seem to be managing it’s business pretty well. There is a rising trend of ROIC especially in the recent years, hovering at an average of 25% or more.

Biogen Stocks ROIC

Data reference from https://stockrow.com/BIIB

In fact, I looked back on Biogen’s financial report and saw that Tecfidera first recorded sales was in 2013. This amounted to $876 million in sales and rising to $2.9 billion in 2014.

This means that the company was allocating resources efficiently prior to the launch of Tecfidera, with ROIC between 15% – 20%. But the flagship product must have added substantial profits to the company causing the ROIC to increase steadily thereafter.

This number does indicate a certain level of effectiveness in the company’s management in allocating resources.

 

Operating Profit Margin

We can also see from the trend of Biogen’s EBIT margin over the past 10 years. It was staying consistently above 25% and rising. With such a strong operating profit margin, it does imply some extent of competitive advantages that the company enjoys.

Biogen Stocks EBIT Margin

Data reference from https://stockrow.com/BIIB

 

Return On Equity

Another good measure of whether a company has durable competitive advantage is to look at the Return On Equity (ROE). ROE values of between 15-20% is considered good. We can see that the company has consistently attained high ROE. In recent years it has even reached the 30-40% range.

 Prior to 2013 when Tecfidera was launched, ROE values in preceding years were still more than 15%.

Biogen Stocks ROE

Data reference from https://stockrow.com/BIIB

Based on the above few key measures, Biogen does seem to have good business economics. This is so even if we look at the period prior to the launch of Tecfidera.

 

Future

Biogen Stocks Future Growth

Apart from the pipeline of neuroscience programs, we want to highlight the company Alzheimer’s disease candidate, aducanumab. The drug is pending review by an advisory committee for approval on 6 Nov 2020.

According to the Alzheimer’s Association, there are more than five million Americans living with the disease. This could potentially generate up to $3.7 billion or more in annual sales for Biogen. This is because there are currently no alternatives available to slow its progression.

 

What’s Next

To sum up, we saw that Biogen’s focus was on the segment of Multiple Sclerosis (MS) and Neuroimmunology. While the company’s dependence on Tecfidera is definitely not favourable, the company still shows signs of competitive advantages. They still have a pipeline of projects that can create growth in the future.

Key financial measures seem to indicate that the company can thrive even without Tecfidera. While the bottom line will be impacted by Tecfidera’s decline, the long term aspect of the business is still desirable.

There may be potential pleasant surprises such as if aducanumab got approved. But we will work only on the basis of sustainable earnings based on the historical operation of the company. 

If we discount 20% or 40% off the bottom line due to Tecfidera’s impact, it will give rise to a P/E ratio of 10 and 13.4 respectively based on a market price of $250.

I think it’s fairly valued for its long term sustainable earnings. There is no compelling margin of safety per se in this aspect. However, what this also means is that, at $250, we are not paying more for the company’s future growth prospect.

This might be an opportunity for a long term investment. But expect Biogen stock price to swing wildly on the result of whether aducanumab will be approved or not.

If your circle of competence is in this area, it can help you decide whether to invest in Biogen stocks or not. Either way, we sure hope you have benefited from our sharing here. Happy investing!

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