Biogen

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Biogen is a global biotechnology company focused on discovering, developing, and delivering innovative therapies for people living with serious neurological, autoimmune, and rare diseases.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Biogen operates within the biotechnology sector, which is characterized by high research and development costs, long product development cycles, and substantial regulatory requirements. The company’s business is segmented into Neurology, which includes products for multiple sclerosis and neuromuscular disease, and Neuropsychiatry, which includes treatments for Alzheimer’s and dementia. A significant portion of its revenue comes from sales of products that are biologic or biosimilar therapies, and these often rely on proprietary technology or patents. Biogen’s business relies heavily on research and development, requiring significant ongoing investment and is also subject to approvals and regulations by governing bodies.

Revenues Distribution Biogen’s revenue streams are diversified across various product lines and regions. The company’s product portfolio addresses multiple sclerosis (MS), spinal muscular atrophy (SMA), Alzheimer’s disease, and other neurodegenerative disorders. Key products include TYSABRI, TECFIDERA, SPINRAZA, VUMERITY, and LEQEMBI. Sales are broken down geographically:

  • U.S.: a majority of the company’s revenue is generated from within the United States.
  • Europe: The company has a significant revenue stream in Europe, although there is substantial pricing pressure from regulators
  • Other International: Revenue is also generated in other parts of the world like Brazil, Russia, and Japan.

Trends in the Industry: The biotechnology sector is currently experiencing several notable trends:

  • Increased competition: there is significant competition amongst firms for drug development, especially in areas such as oncology, neurology, and autoimmune disorders.
  • Pricing pressures: governments in the EU and, increasingly, the United States are pressuring drug prices. New rules have emerged in the US with the IRA where single sourced products are now being negotiated by CMS and that the manufacturers of small molecules would have to negotiate the price of products 9 years after launch. The prices of branded biosimilars drugs are similarly being negotiated by the government.
  • Technological advancements: improvements in gene therapy, mRNA tech, monoclonal antibodies, and biosimilars are altering the way that drugs are developed and produced.
  • Clinical trial challenges: clinical trials have become costlier and difficult to execute in this sector, due to their size, regulations, and the number of patients required.
  • Increased use of data analytics and real world data analytics to understand more about the disease and target areas where to prioritize new drug development.
  • Increased emphasis on creating value for the patient and for shareholders, and making sure that the company can justify its pricing.
  • There is an increasing focus on targeted therapies, and personalized medicine, which requires significant research and development investment and increases the risk of drug failures.

Margins Biogen’s gross profit margins are generally high, typical of a company with patent protected drugs, but have been declining over the last few years due to increased competition from biosimilars, generics, and increasing regulation. Operating margins have been significantly eroded due to rising research and development and SG&A expenses.

Competitive Landscape The biotechnology market is highly competitive, with many companies, both large and small, vying for market share. These companies include:

  • Large Pharma: AbbVie, Amgen, Bayer, Eli Lilly, Johnson & Johnson, Merck, Novartis, Pfizer, Roche, Sanofi
  • Specialized Biotechnology Companies: Regeneron, Vertex, Moderna, Alnylam, Ionis.
  • Emerging Biotech: many smaller firms and start-ups focused on niche therapeutic areas. Biogen differentiates itself through a broad range of therapies that includes several best-selling treatments for multiple sclerosis and spinal muscular atrophy.

What Makes Biogen Different? Biogen is one of the few companies that have several treatments for neurology. As the company states, “Biogen has a portfolio of life-altering, pioneering therapies across neurological, immunological, and rare disease indications.” It also focuses on collaboration, which allows it to expand its reach into new areas while reducing investment risk. Other notable strengths are the company’s manufacturing capabilities and its long history with experience in the biotechnology sector.

Recent Concerns/Controversies and Problems

  • Biosimilar Competition: Biogen has been significantly impacted by the entry of biosimilars for some of its blockbuster drugs like TYSABRI. This has led to lower revenue and margins, and put pressure on profitability. The patent expiration of TECFIDERA, expected in 2028, will create substantial competitive pressure on the company.
  • Pipeline Failures: Several of Biogen’s pipeline drugs have had either negative clinical trial results or have faced regulatory delays or rejections, adding further uncertainty to the company’s future prospects.
  • LEQEMBI launch: The launch of LEQEMBI has faced challenges due to slow uptake and poor reimbursement and a complicated administration procedure. The drug also has a limited pool of patients and has seen limited usage among patients. However, management expects uptake in the second half of the year. They have secured CMS reimbursement with additional approval requirements being lifted.
  • Spinraza competition and legal challenges Spinraza continues to face competition, including from the recently approved Evrysdi. In addition, they face ongoing patent litigation from competitors, especially against patents protecting the route of administration.
  • Inflation Reduction Act Impact: The new IRA laws may create new issues for the company to deal with as drug prices will be negotiated by the government, affecting future revenue streams.
  • Restructuring: Biogen has undertaken restructuring efforts, including layoffs and organizational changes. While these may help cut costs, they may also lead to operational disruptions and hurt team morale in the short term.

Financials (In-Depth)

  • Revenue: The company is projected to generate between $10.0 billion to $10.2 billion in full-year 2024 revenue from a combination of its marketed products and commercialized pipeline programs. There has been a significant decline in revenue from TYSABRI due to competition, and this decline is being partially offset by the growth in other drugs like LEQEMBI.
  • Profitability: Gross profit margin was ~77%, while operating profit margins continue to be pressured by an increasing operating expense, high SG&A, and rising R&D expenses. The company had a net income of ~120 million in Q2 2024, which has been heavily impacted by collaboration profits and other similar changes, and there has been substantial variability in earnings.
  • Cash flows: Net cash from operating activities was ~2.0 billion and capital expenditures totalled 370 million. The company has had significant positive cash flow from operations due to low capital expenditure requirements. As a result, the company has been actively engaging in strategic M&A and buyback.
  • Debt & Liquidity: The company maintains a comfortable cash balance and has low debt. The Debt to Equity ratio is 0.22, while debt as a percentage of capital is ~18%. They have a credit rating of BBB, but the recent acquisition may put some pressure on the company. They have good liquidity in the form of cash and short-term investments. The company has been using debt for acquisitions and buybacks. The debt level has been increasing, but continues to be below the levels at which it can be considered dangerous.
  • Share repurchases: The company continues share repurchases and has ~4.9 billion allocated to share repurchases. These share repurchases may add to shareholder value, and can also improve earnings per share.
  • Guidance: The management forecasts total revenue in the range of $9.7 billion to $10.0 billion for 2024, with earnings in the range of $11 to $12.5 per share. They expect that they will see growth from new products, including Leqembi, while the effects of competition and other adverse conditions may continue to affect revenue from legacy programs. Management expect that margins will expand over the course of the year.

Understandability: 4 / 5 While the basic idea of the business is easy to understand-developing and marketing pharmaceutical drugs, the specifics of each drug, clinical trial process, manufacturing process, and the regulatory hurdles are difficult to understand. In addition, understanding a lot of their financials requires a strong grasp of accounting principles, so one might say that it is hard to understand for regular people. Therefore, a score of 4 is justified, as it requires an above-average understanding of finance and health-related industries.

Balance Sheet Health: 4/5 Biogen appears to be in a reasonably good financial position:

  • They have low debt and good cash balances.
  • They have very low working capital and capital expenditure requirements.
  • However, their high operating expenses and amortization may affect earnings in the future, but this is well within their control. They might be forced to take on more debt to acquire a competitor, but their current leverage gives them the freedom to do so. The company has a very low cash conversion cycle.
  • They have very volatile earnings, but that is to be expected from a company with a high research and development requirement, and they rely on few blockbuster products for the majority of the revenue. Overall, they have a good financial position, so they are given a rating of 4.