News hit the Street last week that Biogen Inc (BIIB) plans to spin off its hemophilia drug business as its own publicly traded company. Hemophilia treatment is potentially a very lucrative business — but with the biotech sector already beaten down and narrow room for competition, can the standalone company survive?
With just 400 Americans born with the disease per year, this new company will need laser focus to win and hold a slice of the market.
A lot of patients currently being treated are already using medication from established suppliers like Bayer AG (ADR) (BAYRY). Baxalta Inc (BXLT) has also been a huge disruption since its entry into the market, and Novo Nordisk A/S (ADR) (NVO) will step into the arena too as soon as it can get its therapy through Phase III clinical trials.
With all of those businesses rubbing shoulders in a cramped market, competition can get extremely expensive. However, BIIB has done a decent job of peeling away its competitors’ hold on patients because of the way its therapies replace the clotting factor over the long term, allowing for less frequent and less taxing treatments.
But it’s only going to get harder to win new prescriptions as the bigger names strike back with similar therapies.
A Growing Business for BIIB
BIIB’s hemophilia business is growing 89% a year right now, and the two drugs being talked up as part of the spinout generated $182 million last quarter alone.
When the spinout goes into effect later this year or in early 2017, we could see as much as $2 billion in annual revenue stream, which is pretty good! But a more realistic scenario is that competition in the hemophilia market will get more intense and the new company emerges earning about half of that revenue.
I think the biggest challenge for the new company will be its limitations in such a specialized niche market. These programs are certainly exciting, both for hemophilia patients and the people working to develop the drugs, but they’re ultimately product line extensions and not a disruptive leap into a new area of research. While the spinout business will be profitable, its margins are probably not as good as BIIB as a whole, which can be punishing in the tough biotech group.
I’ve talked before about the “have and have not” dichotomy we see in biotech, where 10% of the companies generate almost all of the profit in the sector and the other 90% are mostly speculative moonshots hoping for FDA approval and a real product somewhere in the future. This spinout would probably rank on the lower end of the profitable 10%, meaning there will always be 20 or 30 other biotech companies with more attractive long-term prospects and better profits in the here and now.
So BIIB is spinning this business out because it’s viable, but holding the bigger company back in the long term. This is more of a graceful exit than a split with mutual benefits. As an independent entity, the hemophilia business can take its best competitive shot and then entertain acquisition offers — but it will likely never grow large enough to be an acquirer itself.
For BIIB, this is a great way to clarify its own profile and ambitions. Almost all of the products in its development pipeline revolve around autoimmune and central nervous system (CNS) diseases, building largely on the existing multiple sclerosis portfolio to relieve other similar conditions. That’s a healthy business on its own, making up about 90% of the company’s revenue stream right now and still growing at an annualized rate of around 7% a year.
With a lengthy pipeline to fuel additional clinical upside, BIIB is a mature business and a kingpin of the biotech elite.
The spinout company will survive, but comparing the two, I know which piece I’d buy first.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
