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Morningstar | Maintaining $420 FVE After 3Q Results; Share Prices Incorporate Amyloid Antibody Failure

Biogen had a solid third quarter, with 12% top-line growth and 17% bottom-line growth driven by multiple sclerosis franchise stability and growth for spinal muscular atrophy therapy Spinraza, and we're maintaining our $420 fair value estimate. Key subset analysis for the phase 2 study of Eisai and Biogen's amyloid antibody BAN2401 will be presented on Oct. 25 at the Clinical Trials on Alzheimer's Disease meeting in Barcelona, and we expect results will continue to support BAN2401's safety and efficacy. However, if this updated data reveals that an imbalance in APOE4 carriers between the high-dose arm and the placebo arm drove the initial positive results in July, we would not expect to lower our estimates for aducanumab, as historical data has varied significantly among amyloid antibodies based on their design, and the two drugs have different target binding. We still assume $10 billion in amyloid antibody sales by 2027 if both amyloid antibodies are approved, using a 60% probability of approval for both drugs. Even if we remove both amyloid antibodies from our valuation, we arrive at a fair value estimate near $350, above recent trading levels.

In addition, this $350 valuation factors in virtually no long-term success for the remaining early-stage Alzheimer's pipeline (including tau programs), which we think is unrealistic. Beyond Oct. 25, we expect several key catalysts in 2019 to culminate in the final analysis of aducanumab's phase 3 Alzheimer's program in early 2020. We are removing pain drug BIIB074 from our model following a sciatica trial failure. Our model did not include sales for the lupus UCB collaboration, which also had a recent midstage trial failure. We've also included Biogen and Ionis' second ALS program in our model, and we remain bullish on genetically driven drug development in neurodegenerative diseases. We still see Biogen's steady neurology focus and increasingly diverse portfolio and pipeline supporting a wide moat.

As we discussed in our July 26 note, the phase 2 study of BAN2401 had strong efficacy data at the highest dose, with a significant slowing in decline as measured by ADCOMS (30% slower decline) and ADAS-Cog (47% slower decline) versus placebo, and a trend to a benefit on CDR-SB (26% slower decline). The analysis to be presented on Oct. 25 will include subgroup analysis that should clarify whether this strong efficacy was driven by the imbalance among APO4 genetic variants between the highest-dose arm (30% of patients) and the placebo arm (70% of patients). There is not clear evidence showing a difference in the rate of decline for APOE4-positive and APOE4-negative patients, although patients who are APOE4-positive tend to get the disease at a younger age and are also more likely to experience ARIA-E (brain swelling). We're encouraged by the directionally positive data for the second-highest dose group, which had an even higher proportion of APOE4-positive patients than the placebo group (90%) yet still saw positive trends on clinical decline.

While aducanumab's phase 3 data (expected in early 2020) stands out as the largest catalyst for Biogen, several smaller data readouts should drive the firm until that time, and our overall expectations for Biogen's pipeline remain above consensus. This includes phase 1 tau antibody BIIB076 (Alzheimer's data by early 2020), phase 2 tau antibody BIIB092 (PSP data in 2019), phase 1 antisense therapy BIIB067 (ALS data by 2019), head-to-head data for BIIB098 against Tecfidera (2019 data and launch), and data for ophthalmology gene therapy BIIB087 (by early 2019).

Turning to Biogen's MS and SMA therapies, we continue to assume lower-than-consensus revenues in the long term, due largely to competition. In MS, Tecfidera and Tysabri sales stabilized in the third quarter, but in the long run, we now expect low-single-digit MS franchise declines annually, driven by competition for patients from other orals and declining pricing power. This factors in the approval of BIIB098 in late 2019, which should help Biogen see a higher retention rate for new fumarate patients, but also potential oral competition in the U.S. from Celgene (ozanimod in 2020), Johnson & Johnson (ponesimod in 2020), and Merck KGaA (Mavenclad in 2019). While SMA drug Spinraza continues to grow strongly, particularly outside the U.S., we assume sales flatten in 2019 and begin to decline by 2020, as Novartis' gene therapy should launch in 2019 and Roche's oral therapy risdiplam could launch by 2020.