Biogen Inc (BIIB), one of the biggest biotech companies on the planet, enjoyed a nice bounce Thursday after reporting first-quarter earnings. The stock, which has moved mostly downward so far in 2016, gained 5% on what was a down day for all three major indices.
The interesting thing about investors’ reaction to Biogen earnings report is that, while earnings themselves were better-than-expected, it wasn’t thanks to particularly strong organic growth.
Biogen reported a 7% increase in sales to $2.7 billion, but it actually missed estimates. The miss was thanks in part to the negative impact of exchange rates, but also thanks to a shortfall in its multiple-sclerosis drugs — currently its core business.
Meanwhile, the 25% earnings increase that beat expectations came because of lower SG&A and R&D expenses, plus a lower share count. Sometimes, this kind of growth can be concerning, as it seems unnatural and, in turn, unsustainable.
That’s not the case for Biogen, though — hence Wall Street’s applause.
The Biogen Bull Case
I’ve been following Biogen for some time, especially because I find the broader biotech landscape quite interesting. Investors have gotten a dose of reality with regard to early-stage companies in the space. While biotech is thought to be riskier (thus holding the potential for outsized gains) Wall Street seems to have cooled, to an extent, on hype and extreme multiples.
Biogen is not the same breed as those early-stage plays, though. As I’ve mentioned before, it’s one of the biggest biotech plays in the world, having pioneered many of the immunological and gene-therapy approaches dominating the business. With ten drugs on pharmacy shelves booking roughly $10 billion a year in revenue, this is a tried-and-true business, not some high-flying long shot.
This is especially true since margins on the company’s drugs are high enough to support business even if politics force prices downward — which has been one of the main recent headwinds for biotech. BIIB currently enjoys a net margin around 35% compared to the roughly 20% to 30% that more conventional Big Pharma manufacturers command.
But the cherry on top — and the reason the company’s prospects still look good despite a small sales miss — is that the company has a strong pipeline. And in the world of pharma, pipeline is the most important word.
Bottom Line on BIIB
As management noted on the Q1 earnings call, Biogen is expanding beyond its core multiple-sclerosis drugs — the ones for which sales slowed a bit in Q1.
To that end, the company has the recent European approval of Benepali in its back pocket, on top of a positive opinion from the Committee for Medicinal Products for Human Use for Flixabi and Alprolix. Plus, Biogen is in Phase-3 clinical trials for an early Alzheimer’s drug and spinal muscular atrophy treatment.
These drugs will eventually translate to strong sales, especially as foreign currency headwinds die down. When that happens, the one-two punch of organic growth and “unnatural” growth related to spending, share count and expenses will make earnings even more impressive.
Right now, the company is slated for 10% earnings growth for the long haul, which itself is solid for a multi-billion dollar industry leader, but I wouldn’t be surprised if the company can expand those numbers.
That’s why I’m bullish on Biogen despite the sales miss. BIIB’s bounce Thursday means Wall Street seems to share my sentiment.
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.
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