Shares of Biogen (BIIB) fell more than 34% last week following the news that both phase 3 trials, Engage and Emerge, of Alzheimer’s drug aducanumab, are being discontinued due to futility, notes Jason Clark, contributing editor to The Prudent Speculator.
While there have been a number of struggles in this area by Biogen and competitors, some past strong data had many investors optimistic about the future potential of the Alzheimer’s treatment.
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“This disappointing news confirms the complexity of treating Alzheimer’s disease and the need to further advance knowledge in neuroscience. We are incredibly grateful to all the Alzheimer’s disease patients, their families and the investigators who participated in the trials and contributed greatly to this research,” said CEO Michel Vounatsos.
Vounatsos continues, “Biogen’s history has been based on pioneering innovation, learning from successes and setbacks. Driven by our steadfast commitment to patients and our strong business foundation, we will continue advancing our pipeline of potential therapies in Alzheimer’s disease and innovative medicines for patients suffering from diseases of high unmet need.”
While the news is quite negative and results in material lost potential future revenues and profits, we think the sell-off was well overdone through a long-term investment lens.
Yes, we understand that Biogen is facing looming pressure from generics in the next few years for its drug Tecfidera and potential competition from Novartis (NVS) for Spinraza, but we also believe its pipeline isn’t a one-trick pony, and BIIB’s neurology portfolio and pipeline deserve some credit.
Beyond the Alzheimer’s setback, the firm’s pipeline has seen progress in multiple sclerosis, pain, Parkinson’s and amyotrophic lateral sclerosis. We also note that Biogen has the financial ability to undertake additive M&A should leadership deem it desired or necessary.
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We continue to be pleased to see Biogen turn in strong free cash flow and we note that its cash and marketable securities totaled $6.6 billion at the end of Q4, which provides plenty of firepower to grow via acquisition or continue to heavily invest in its drug pipeline.
No doubt, the analyst community has turned on BIIB, with one Wall Street firm slashing its target price from $400 to $257, even as its EPS estimates for the next three years dropped by an average of only five cents per annum to $28.52, $28.90 and $28.74 for 2019, 2020 and 2021, respectively.
True, Biogen may not merit as rich a multiple after the Alzheimer’s failure, but the shares now trade for less than 8 times next 12-month earnings estimates. We have lowered our target price to $424, but we think the stock is very undervalued.
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