Biogen

Key Statistics

Enterprise Value = $48.05 billiion

Operating Income = $6.301 billion

EV/Operating Income = 7.62x

Earnings Yield = 12%

Price/Revenue = 3.49x

Debt/Equity = 53%

Free Cash Flow/EV = 13%

The Company

Biogen is a biotech firm. They sell high-margin drugs that treat a variety of different illnesses. Much of their pipeline is acquired through research & development and they also achieve growth through acquisitions.

They run a phenomenal business. Their gross margins are presently 87% and their operating margin is is 48%. Revenues & profits consistently grow every year.

Each of their blockbuster high-margin drugs has a similar lifecycle. Massive amounts of money will be spend for years attempting to develop a new drug. It’s uncertain if the drug will be successful. It’s also unknown if it will be approved. Eventually, if the drug is approved and it is successful, it will experience explosive growth. Eventually, generics will come along, and that will eat into the profit margins, and revenues will decline.

A good example of this product life cycle is evident in TYSABRI. TYSABRI is a drug that treats multiple sclerosis and Crohn’s disease.

TYSABRI’s life cycle is typical for that of many blockbuster drugs. It experiences explosive growth in the beginning. It may be approved for use in one country, then expands to others. As generics are released, revenues decline and revenues & margins start to fade away.

Therefore, a firm like Biogen must constantly invest in R&D to develop new blockbuster drugs that can serve as new sources of revenue.

Fortunately, Biogen accomplishes this. They have a rich research pipeline and are constantly developing new drugs and new sources of revenue, resulting in strong growth in revenue and earnings per share.

Due to Biogen’s rapid growth from 2010-2015 thanks to drugs like TYSABRI, the stock price and valuation experienced rapid growth in the mid-2010’s. In 2014, the company traded at an absurd multiple of 60x EV/EBIT.

Since those lofty heights, the multiple has contracted even while the company continued to grow. The stock price has mostly remained stuck in a trading range while revenues, cash flow, and earnings have grown.

My Take

Biotech stocks in the mid-2010’s went through a bubble. Thanks to their rapid growth and high margins, investors relished these stocks and bid them up to absurd valuations.

It is much like what occurred in the 2000’s to companies like Microsoft. At the peak of the internet bubble, Microsoft traded at a EV/EBIT multiple of 50. Throughout the 2000’s, Microsoft’s stock went nowhere even while the business continued to grow. The multiples continued to decline as the business grew into the valuation. By 2012, Microsoft traded at an absurdly cheap multiple of 7x EV/EBIT.

I think the same thing is happening with Biogen. Biogen was bid up into an absurd bubble. As growth began to wane for a bit, investors dumped the stock, but the business continued to execute. Now, it trades for a bargain basement multiple.

Biogen has multiple drugs at different stages of their lifecycle and they have a robust research pipeline, with multiple drugs in development. Drugs like TYSABRI are waning, but there are also drugs in earlier stages of their product lifecycle that are still growing.

Current drugs that are still growing are:

SPINRAZA (treats spinal muscular atrophy)

BENEPALI (treats arthritis), IMRALDI (treats psoriasis), and FLIXABI (anti-inflammatory, treats arthritis).

Biogen trades like it is never going to develop another blockbuster drug again. Fortunately, they have drugs that are currently in their growth phase of their development. They also have a rich research pipeline, shown below, with multiple drugs at various stages of their development.

One of the most promising drugs in development is Aducanumab, a novel treatment for Alzheimer’s disease. It has shown tremendous promise in clinical trials, which you can read about here. The FDA recently accepted Biogen’s application on August 7th and expects to reach a decision in the first quater of next year. You can read about this here.

If approved next year, Aducanumab is a potential catalyst for the valuation to rise again.

Even if that doesn’t happen, Biogen is a strong company at an absurdly cheap valuation with many different drugs in the research pipeline so that it can continue growing.

7.62x EV/EBIT seems like an absurd valuation for such a high quality company. There are retail stocks in secular decline that trade at this type of multiple. Meanwhile, the balance sheet is safe and there is a high degree of financial quality, limiting the downside risk. Debt/equity is 53% and the Altman Z-Score is 4.24, implying practically zero bankruptcy risk.

They are also aggressively returning capital to shareholders. Total share count has declined by 12% in the last year.

Random

I’ve been listening to a lot of Ladytron.

PLEASE NOTE: The information provided on this site is not financial advice and it is for informational and discussion purposes only. Do your own homework. Full disclosure: my current holdings.  Read the full disclaimer.