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Every once in awhile it isn't all about the money

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  • Every once in awhile it isn't all about the money

    Excerpt from a stock article that I read about a drug company named Biogen:


    Biogen - Pipeline Setback Looks To Create An Opportunity

    Biogen has seen a huge setback in its pipeline as its Alzheimer's candidate has flunked.

    Despite the setback, I believe the risk-reward has changed for the good at just 8 times earnings as the company has no real leverage, despite issues with the pipeline.

    I like the risk-reward situation at this level, meaning that I have started to buy the dip.

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    Just two weeks ago I looked at Biogen (BIIB) as it was "adding to the pipeline" with the acquisition of Nightstar Therapeutics (NITE) in an $800 million deal. That news was just noise in the devastating news which Biogen has seen in its pipeline, warranting an update on the investment case.

    The investments being made in Nightstar were "neutralised" a few days later as the company sold its biologics manufacturing facility in Denmark in a deal which brings in $890 million in cash. The issue, however, is the blow to the pipeline as the Alzheimer's potential franchise no longer seems a viable route, as Alzheimer's remains a devastating condition for those affected by it, and those trying to develop a medication against it, including Biogen.

    The Devastating News
    Last week Biogen and Eisai announced that they have discontinued their global Phase 3 trials ENGAGE and EMERGE. These trials were designed to evaluate both efficacy and safety of aducanumab in patients with cognitive impairments due to Alzheimer's disease and dementia.

    Following the monitoring of an independent committee, it was concluded that the drug did not deliver on the efficacy, while the trials were not stopped for safety considerations. CEO Michel Vounatsos is obviously disappointed as well, as this once more reiterates the complexity of treating Alzheimer's with so many trials having failed in recent years. Nonetheless, Mr. Vounatsos confirmed that this is not the end of the attempts of Biogen to make a contribution to treating Alzheimer's disease.

    Given this cause and goal, Biogen will present detailed data on the study to inform others which are researching Alzheimer's as well. I really like this data-sharing approach for the good of society at large. The results meant that Biogen has discontinued EVOLVE Phase 2 safety study and the PRIMA Phase 1B study of aducanumab as well.

    The Market Reaction
    Shares of Biogen have collapsed from $320 to $217 in response to the news flow, having a huge impact on the valuation of the business. With some 200 million shares outstanding, that move has wiped out $20 billion from the market value of Biogen, or even a bit more.

    The promise or hopes by many investors and analysts was that the advancing of the Alzheimer's drug into phase 3 and having a fast-track status being designated by the FDA meant that it looked like Biogen was perhaps much closer to marketing a drug for Alzheimer's than it really was in practice. The rapid pace of good news ahead of last week's events led investors to act in a big way to the latest events, perhaps even overreact.

    At current levels, Biogen has a market value of just $43 billion, as net debt of just a billion makes for an enterprise valuation of $44 billion. Reality is that multiples have compressed a great deal with GAAP earnings seen at $27.15 per share this year, plus or minus half a dollar. At $217, that makes for a mere 8 times earnings multiple, as I will not rule out that R&D expenses might drop initially of course, but for the wrong reasons.

    While the pain for shareholders is large, the pain for society at large with current and future patients of Alzheimer's having lost hope on a (quick) solution is of course arguably much larger.
    "Hey Giants, who's your Daddy?"
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