Biogen Stock Fell Too Far on Unfortunate News

Investing in biotech stocks has its up days and its down days. For investors in Biogen (NASDAQ:BIIB) — and more importantly millions of Alzheimer’s patients around the world — yesterday was a down day. On Thursday, Biogen stock plunged more than 30% on the cancelation of stage 3 clinical trials for a blockbuster Alzheimer’s medication.

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The massive drop was truly an unsettling surprise for BIIB shareholders as the drug was seen as a multi-billion blockbuster and game-changing medication for treating the disease. It really did come out of nowhere.

The question now is whether to cut bait or fish. Was the drop enough to get investors excited about Biogen stock again?

Given its huge revenue drivers, now cheaper price and still large pipeline, the answer is a resounding yes.

What Happened at Biogen?

Biotech stocks trade based on expectations. Something positive happens and then investors send the stock skyward and wait for the next big event to occur. It’s all about what’s coming down the runway. Expectations build upon that. This is true for large biotech stocks as well.

For Biogen, the expectation build-up had to do with its Alzheimer’s drug candidate aducanumab. The drug was in the class of monoclonal antibody medications. Basically, aducanumab was designed to break down the beta-amyloid plaques that can build up in the brain. These amyloids interfere with communication between brain cells and cause Alzheimer’s and mild dementia. Back in 2014, BIIB saw some serious success with aducanumab during an early-stage study. It actually seemed to reduce the build-ups.

Thanks to this very positive early trial, Biogen decided to skip over smaller phase 2 studies and move the medication into larger and more advanced stage 3 testing. The idea was that Biogen could skip through the process and land a Food and Drug Administration (FDA) approval much faster. And there was a good chance for that considering how well it did early on.

For Biogen stock, this would have been a major win on several fronts.

For starters, there have not been any new Alzheimer’s therapies approved in more than 15 years. meanwhile, the Alzheimer’s Association pegs more than 5.8 million Americans currently living with the disease. Biogen was looking at a potential blockbuster with huge revenue implications. And it potentially needs that revenue to fill the coming declines in its multiple sclerosis portfolio.

Unfortunately for BIIB and Alzheimer’s patients, they’ll have to wait a bit longer.

Biogen and its partner Eisai reported that they would discontinue two late-stage trials for the drug after doing a futility analysis. An independent data-monitoring committee came to the conclusion that aducanumab was “unlikely to meet the primary endpoints” in either study.

With expectations for the company to score a major blockbuster, investors abandoned Biogen stock. BIIB fell 30% — or $90 per share — and had its worst day of trading in nearly 2 decades.

Biogen Stock May Be Worth Snagging

Biogen stock’s loss was tremendous and goes to show just how much investors were valuing the drug as part of BIIB’s future prospects. But perhaps, investors have taken Biogen down too much on the news.

For starters, Biogen isn’t a fly by night clinical-stage biotech stock. It’s just the opposite. The firm has a portfolio of some pretty big blockbusters already. Thanks to winners like Spinraza and Tysabri, BIIB’s portfolio managed to see a 10% jump in sales last year to more than $13.45 billion. Moreover, that portfolio managed to generate more than $5.3 billion in free cash flows and impressive earnings.

And it’s using those profits in a smart way. The key is that Biogen has been building a full pipeline to create a multi-franchise neurology portfolio. This includes its recent buyout of retinal degeneration specialist Nightstar Therapeutics (NASDAQ:NITE). So yes, losing Alzheimer’s does stink, but the biotech’s rich pipeline and cash flows give it plenty of wiggle room to buy or develop a pipeline. According to CFO Jeff Capello, adding up cash flows, cash on hand and its ability to leverage up and “you get a $37 billion number, which gives us a lot of capacity to add to the business.”

It’s a song and dance we’ve heard plenty of times before. But Biogen has the firepower to make it work. It can buy a pipeline successfully.

For that pipeline potential and drugs already producing revenues, Biogen stock is going for dirt cheap. After yesterday’s 30% haircut, you can now snag the biotech firm at just 8.7x free cash flows and a trailing P/E of just 10.50. That’s bargain-basement pricing for a biotech leader. For example, Amgen (NASDAQ:AMGN) can be had for a P/E of 14, while Gilead Sciences (NASDAQ:GILD) is closer to 16.

Nibbling at Biogen Stock

Given the steep drop and perhaps overreaction that sent Biogen stock into extreme value territory, investors with a longer-term timeline may want to consider snagging some of the firm’s shares.

The lost of the Alzheimer’s drug does hurt, but BIIB still has plenty in the tank to get it through. And with today’s valuations, there’s a decent margin of safety associated with shares. The time to start buying could be now.

Disclosure: At the time of writing, Aaron Levitt held a long position in the iShares NASDAQ Biotechnology Index (IBB) -which holds GILD, BIIB and AMGN.

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