The rising cost of prescription drugs, or “price gouging” as some would say, was the prevailing theme within the biotech sector in 2016, sending Biogen Inc (NASDAQ:BIIB) and BIIB stock lower by about 10%. This was fueled by criticism from presidential candidates, who promised — if elected — they would bring reform to what they perceived as a corrupt drug industry.
One of the players on the political radar was Biogen, whose drug Spinraza, used to treat spinal muscular atrophy, took tons of backlash for its high price tag of $125,000 per dose. That amounts to $750,000 for the first year of use and $375,000 each subsequent year for life.
The huge Spinraza price tag aside, the drug is considered by several analysts to have significant growth potential in the quarters and years ahead.
Biogen Has a Full Arsenal for Growth
But to what extent can Spinraza elevate BIIB stock? Aside from the risks often associated within the sector from the standpoint that FDA rulings can make or break biotech companies, the backlash for Biogen from price gouging — if you want to call it that — is not going away.
In the case of BIIB stock, the company has added a few more risks of its own, while eliminating a few others. In December the Cambridge, Mass.-based firm appointed a new CEO. Michel Vounatsos, who has a strong sales and marketing background, took over effective Dec. 19 with the goal of bringing stability and credibility back to the company.
At the Goldman Sachs Group Inc’s (NYSE:GS) Healthcare CEOs Unscripted event in Boston last week, Vounatsos said one of his main goals, beyond getting Spinraza to market, was to accelerate growth in the company’s multiple sclerosis (MS) business. Combined with the company’s pending orphan genetic disease fighting drug Nusinersen — which analysts also believe could become a blockbuster — Vounatsos takes the helm with a full arsenal, making Biogen and BIIB stock look very attractive.
The Risk Vs. Reward Is Positive for BIIB Stock
The shares closed Monday at $299.02, up 1.4%. The stock has risen 5.8% year to date, besting the 1.5% rise in the S&P 500 Index, BIIB stock is also one of the top-performers in the iShares NASDAQ Biotechnology Index (ETF) (NASDAQ:IBB), which has risen almost 8%.
Despite the solid 2017 start for Biogen, the shares are still down some 1.5% over the past three months, largely for the concerns highlighted above.
However, from a valuation perspective, it’s tough to ignore the compelling opportunity BIIB stock presents. The shares are priced at just 17 times fiscal 2016 EPS estimates of $20.20 per share, which is about four points below the average stock in the S&P 500 Index. And based on fiscal 2017 estimates of $21 per share, the forward P/E drops to 14.
Assuming BIIB stock was price on par with the rest of the market, it would trade today at around $380 or about 25% above current levels.
Bottom Line for BIIB Stock
The company will report fourth-quarter fiscal 2016 earnings results on Jan. 26. For the quarter that ended in December, analysts expected $4.99 per share on revenue of the $2.95 billion, translating to year-over-year growth of 11% and 3.7%, respectively. With profits projected to grow at almost four times the rate of revenue, the reckless spending often associated with biotech doesn’t seem to apply here.
And assuming Biogen can guide with confidence for 2017, BIIB stock should reach $350 to $365 in 2017, delivering 15% to 20% gains.
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.