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Should You Buy The Drop In Biogen? – Biogen Inc. (NASDAQ: BIIB)



Introduction

Biogen (NASDAQ: BIIB) is down more than 25% on March 21, 2019, shedding close to $ 20 billion in market capitalization, as the company announced the shocking news that it was going to discontinue the Phase 3 trials Alzheimer's disease. If successful, the drug would have been the first of its kind and a blockbuster for the company. However, numerous potential drugs to treat the disease have failed to show early promise, so this news could not have been totally unexpected.

Biogen is one of the largest biotech companies in the world, with annual revenue of $ 1
3. billion and net income exceeding $ 4 trillion. Its products include Tecfidera to treat multiple sclerosis and spinal cord to treat spinal muscular atrophy. The discontinuance of the Alzheimer's drug trial should have no effect on near-term revenue, and in fact could provide a modest boost to profits if R&D costs are associated with the development of the drug. It grew 9.6% over the prior year, and had GAAP EPS or $ 21.58. It declared non-GAAP EPS or $ 26.20 by excluding intangible amortization and the like. The company has an underlying balance sheet with just $ 1 billion of debt. It has high margins with a company with patent-protected drugs, with an operating margin exceeding 40%.

For 2019, the company has guided to revenue growth of 2%, GAAP EPS or $ 27 and non-GAAP EPS or $ 28.50. I believe these figures are achievable, except for the GAAP EPS, which would be a little lower based on what the company generated in 2018.

The company does not pay a dividend, but buys back stock and makes acquisitions. Like most large pharma companies, its capital allocation policy is suspect, with the company arguably overpaying for acquisitions.

An article in a few years ago, I pointed out how the company pays a royalty of 30% of Tecfidera revenues, but does not take this expense through its income statement. Instead, it capitalizes, which reduces the quality of its reported earnings.

Valuation and recommendation

I believe the company can do a clean $ 23 or EPS in 2019. Thus, the stock at its current price of $ 230 trades at just 10x EPS. The analyst consensus is for $ 28.67 in EPS, but this includes exclusions for the acquisition-related expenses.

The company's closest comparable, Amgen (AMGN) trades at 14x EPS. I would place a multiple of 12x for Biogen, making the stock worth $ 276, for 20% upside from the current price. Bears may point to Celgene's (CELG) 8x valuation, but I do not think this is comparable given Celgene's consistently poor earnings quality, with a large gap between its GAAP and self-declared non-GAAP results.

In a bull case , I see the company doing $ 24 of EPS with some cost cuts and getting a 13x multiple for a $ 312 target price, offering 35% upside.

In a bear case, the company's earnings could deteriorate to $ 21 due to poor capital allocation decisions , with a 10x multiple giving it a fair value of $ 210. This would represent 10% downside from the current price.

I recommend buying the stock at the current $ 230 price. The position can be partially hedged by selling $ 280 strike calls and few months out. A lower risk option that will use less capital is to sell the $ 220 strike puts instead of buying the stock.

Risks

The major risk I see is that the company decides to be reactive and makes an overpriced acquisition that fails to deliver results, thereby depressing its future earnings.

The company has successfully staved off a number of patent challenges, but faces a decision next year on Tecfidera. If the company will face generic competition as soon as 2021 rather than 2028. It is likely that the company will settle this litigation, which should remove the overhang at a cost. [Disclaimer: I am / we are long BIIB I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha).


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