It’s High Time for Biogen to Buy or Be Bought: Baird

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Biogen Inc.’s (Cambridge MA) core multiple sclerosis (MS) drugs franchise is fast approaching stagnation, and its pipeline is risky. This makes it the best time for the biotech giant to forge smart acquisitions that can be immediately accretive to its earnings and revive growth.

But some observers suggest throwing in the towel sooner than later and selling out. Investment firm Baird Capital released a research report on Biogen’s stock on Wednesday, June 22, highlighting the growth risks faced by the flailing biotech company.

Baird maintained its Neutral rating on the stock, while reaffirming its price target of $268, which represents an upside of 17% over last close at $229.02. Analysts Brian P. Skorney and Neena M. Bitritto-Garg stated in the report:

“We continue to see the firm facing headwinds towards the back half of the year as MS sales flatten and clinical data catalysts dry up. The company is ripe for an effective deal, and with valuations coming back in over the last year, we think it’s time for Biogen to buy or be bought.”

This analysis should not come as a surprise, since the company’s performance clearly reflects the underlying weakness; even the possibility of a buyout has already been speculated by more than a few research firms.

Pushed by a broader sector biotech selloff and mugged Friday by the Brexit, Biogen stock has fallen by 25% so far this year; the iShares NASDAQ Biotechnology Index (IBB), in contrast, has been down 27% in the same timeframe.

This also makes the company cheap and ripe for acquisition, some say. The MS drugs franchise is the core revenue-generating segment of the company, contributing at least 80% to its total revenue.

Biogen’s heavy reliance on just one franchise adds significant risk to its growth going forward, especially as the MS market suffers from pricing pressures, rising competition, and contracting untreated patient pool.

Most of the risk is posed by the company’s top-selling drug, Tecfidera, which contributed 34% to the overall company revenue last year. The MS drug was associated with a rare, potentially fatal brain infection known as PML last year, which led to a sharp sequential decline in its sales. As the safety concerns emerged, analysts slashed their forecast for peak annual sales of the drug from $9 billion to $5 billion.

Biogen management has been taking strict measures to save Tecfidera’s market share, by increasing promotion and marketing expenses for the drug. This resulted into a slight increase in Tecfidera’s sales in the latest quarter; however, given the rising pricing and competitive pressures, future sales growth remains at risk.

Still, the sell-side continues to maintain a bullish stance on the stock. Out of a total of 24 analysts covering the stock, 15 rate it a Buy, while the remaining nine suggest a Hold. The average 12-month price target assigned by the analysts is $332.83, which represents an upside of 41.9% over last close. Shares closed the week down 4% at $229.02.

Steve’s Take: I have to admit when I saw the Baird report calling for Biogen to either buy another company or sellout, I was skeptical, especially about the “sellout” notion. After all, Biogen has been among the five biggest biotech stocks by market capitalization for as long as I can remember (along with Gilead, Amgen, Celgene and Regeneron).

But then I read Cheryl Swanson’s piece for the Fool in which the savvy owner of Kauai-based Swanson & Associates picked Biogen as her candidate the next buyout target. In her view, the big biotech’s share price has been “overly punished, significantly improving its buyout appeal in the eyes of acquisitive drugmakers.” She goes on to name Botox-maker Allergan as a possible buyer.

While pointing out that Allergan and Biogen may seem like “strange bedfellows,” Ms. Swanson suggests that Biogen’s multiple sclerosis franchise has some strategic overlap with Allergan’s central nervous system franchise.

Any such deal would be humongous–somewhere in the $100 billion range, according to Cowen. “But these days, “buy or be bought” has become the mantra in the healthcare sector. And as unthinkable it is for me to contemplate the name “Biogen” disappearing from the landscape, in the health insurer space, names like CIGNA and Humana are well on their way to vanishing in the merger mist.

Wake up, Steve. The times, they have been a changing.

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