Biotechnology is considered one of the most dynamic and profitable sectors, where investment in research and development is necessary for survival. Biogen Inc. (BIIB, Financial) is one of the leading players in this sector, with a proven track record in neurological and neurodegenerative diseases.
The company has a strong portfolio of drugs catering to diseases like multiple sclerosis, Alzheimer’s, dementia and neuromuscular disorders. Some of its key drugs include Tecfidera, Avonex, Plegridy, Fumaderm, Gazyva and Spinraza, Biogen’s top-performing drug, which treats spinal muscular atrophy.
Apart from the revenues generated from these drugs, Biogen has key partnerships with other large pharmaceutical giants, including Roche (XSWX:RO, Financial), AbbVie (ABBV, Financial) and Eisai (TSE:4523, Financial), which generate a significant amount of royalty income, further strengthening its top line.
A good pipeline of drugs
The company's management is reasonably future-oriented and has heavily invested in research and development. The management team's focus on innovation is evident from the fact all the company’s profits are consistently reinvested and there have been no dividend payouts recently. While most of the drugs in its pipeline, such as BIIB087 (Ophthalmology), BIIB067 (Neuromuscular disorders) and BIIB098 (Neuroimmunology), are in their initial stages, the company has a potential star by the name of Aducanumab, which treats Alzheimer’s disease. Close to receiving the Food and Drug Administration's approval, the drug's tests have yielded good results and it has the potential to change the treatment of this incurable disease as well as provide excellent revenue growth.
Solid fundamentals and a reasonable valuation
From a fundamental perspective, Biogen has rock-solid financials. According to GuruFocus, it has an operating margin of 45.83% and a net margin of 23.06%, which are well above the industry standard. In addition, the company's return on equity and return on assets are in the high double-digits, which is a very positive sign for investors.
In terms of leverage, management has been very prudent with respect to Biogen's debt levels and has reduced the debt-to-equity ratio to as low as 0.48, which is lower than most of its industry peers. It also indicates management has the option to increase investments for research and development if they want to adopt a more aggressive approach.
Despite all these positives, Biogen's valuation is reasonable but probably a bit on the lower side. If we were to compare the EV/EBITDA, EV/EBIT and price-earnings ratios of Biogen with competitors such as Amgen (AMGN, Financial), Gilead (GILD, Financial), PTC Therapeutics (PTCT, Financial) and Novo Nordisk (NVO), we would find that it is among the lowest in terms of valuation multiples. The company's forward price-earnings ratio is below 13, which is among the lowest in the industry.
The stock has been on a consistent bull run since mid-2016, when it fell close to its five-year low of around $216. It recently reached a new 52-week high and the company is on track to cross the $400 mark. Another point worth highlighting is Biogen's business predictability rank of five out of five stars. The stock has historically provided annualized returns greater than 12% to long-term investors. At the current levels, the stock could be a good option for potential investors.
Rising competitive threats
Despite the stability of its current market position, as an investor, it is important to be aware of future business risks Biogen could face.
Multiple sclerosis, a key contributor to the company’s revenue stream, is becoming a highly competitive segment as Biogen’s drugs face increasing competition from generics, causing their sales to steadily decline. Spinraza, the star drug of Biogen and its partner, Ionis Pharmaceuticals (IONS), faces a strong threat from Novartis' experimental gene therapy AVXS-101. Management expects this therapy to impact Spinraza’s revenues from 2020 onward as they might be forced to offer discounted pricing. Most of the company’s pipeline drugs are in early stages and it appears there is a heavy dependence on Aducanumab. While the initial test results for Aducanumab have been good, it is important to note the failure of this drug could cause a major setback.
Conclusion
Biogen’s continued revenue growth, low level of debt, current valuation and steady bull run of the stock since mid-2016 are green flags for potential shareholders looking to invest in high-quality biotech stocks. For existing long-term investors, there appear to be no immediate reasons to exit and the near-term future appears reasonably bright. It is important to keep track of the quarterly earnings reports, however, particularly the performance of Spinraza and the future test results of Aducanumab.
Disclosure: No positions.
