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Morningstar | Biogen Reports Strong First Quarter, Remains Undervalued in Wake of Aducanumab Failure

We're maintaining our $327 fair value estimate for Biogen following strong first-quarter results, with 11% top-line growth and 15% non-GAAP EPS growth, and we continue to see shares as significantly undervalued in the wake of aducanumab's failure. For the remainder of the year, we expect revenue growth to sink to the single digits (first-quarter performance had a tailwind from a one-time sale of hemophilia inventory to Bioverativ), but that non-GAAP EPS growth will remain strong, benefiting from the end of most late-stage Alzheimer's R&D obligations. We're largely below consensus on the firm's prospects for Tecfidera (we assume generic entry in 2021, following IPR) and Spinraza (we assume slight declines in sales beginning in 2020), but we do include almost $2.4 billion in revenue by 2023 from the firm's extensive pipeline in neurology and adjacent areas. Biogen management expects key data from 10 programs by the end of 2020, which we think provides potential for positive catalysts. While uncertainty surrounding Biogen shares remains high due to the Tecfidera IP status and impending Spinraza competition, we think the resilience of the firm's MS franchise exemplifies the sustainability of cash flows, and that the firm's MS portfolio and neurology pipeline continue to support a wide moat.

We were encouraged by solid growth for Spinraza in the quarter, and we expect continued double-digit growth for the remainder of 2019 as Novartis' gene therapy Zolgensma will likely launch slowly in the second half of 2019. However, we do assume mid-single-digit declines for Spinraza following 2019. Biogen management now sees 45,000 SMA patients in its global markets, well above the prior estimate of 20,000 that focused largely on North America and Europe. We assume that pricing in these additional markets would be significantly lower, and we're cautious on Biogen's ability to penetrate these markets substantially, but we believe this offers upside to our base case for Spinraza.

The pending Nightstar acquisition had a net positive impact on our fair value estimate (more than countered by the aducanumab failure, in our last update), as we think both clinical-stage retinal degeneration programs have potential approaching $1 billion. We think Biogen will continue to add to its pipeline with smaller deals, as the firm has signaled that it also expects to continue to ramp up its share repurchase activity, given recent share prices (Biogen has spent $1.1 billion so far in 2019 on share repurchases and has authority for $6 billion more). We like that management appears to be fighting the temptation to make a big acquisition to counter the hit from aducanumab's failure, particularly given the high number of clinical programs with data expected through the end of 2020. Among these potential positive catalysts, we're most encouraged by potential for Vumerity (patent through 2033, and head-to-head data versus Tecfidera in mid-2019), NSR-REP1 from Nightstar (data second half of 2020), and Ionis-partnered ALS programs (data from SOD1 program in second half of 2020). However, significant upside also exists if Biogen can establish efficacy of tau in progressive supranuclear palsy (data second half 2019), alpha-synuclein targeting in Parkinson's (data second half of 2020), or either of its two stroke programs (data 2020-21).