Description

BIIB:

Biogen (BIIB) is currently one of those unusual situations where everyone knows the story, but it is still a misunderstood and compelling opportunity. The FDA has approved Aduhelm, a treatment for Alzheimer’s, but controversy and political pushback has clouded the future of what will be an extremely profitable drug. Thus, buying here in the ~$350/share range is a low-risk entry, returns of +20%-30% very likely over the next 18 months.

As a very brief re-cap for anyone unaware, BIIB has been a mature biotech company for some time now. Its crown jewel multiple sclerosis drug is in decline due to competition from generics, and the pipeline is seen as lackluster. All of this recently changed in dramatic fashion when the FDA unexpectedly approved Aduhelm, Biogen’s Alzheimer’s drug: https://www.fda.gov/news-events/press-announcements/fda-grants-accelerated-approval-alzheimers-drug

There are two main points here, first that the Alzheimer’s market is enormous. This is widely known, so I do not want to spend much time on it, but a short run-down on the economic impact of the disease can be found here:

https://www.ajmc.com/view/economic-burden-of-alzheimer-disease-and-managed-care-considerations

The second point is that the decision by the FDA to approve this drug was highly controversial and has generated an immense amount of push-back. It has not just been media coverage either. Congressional Democrats have announced they are launching a probe into the Aduhelm approval process. Even the outside expert advisors the FDA used are expressing serious concern. And when I say serious concern, I mean that multiple scientists resigned from the guiding committee, with one calling it the “worst approval decision that the F.D.A has made…” https://www.nytimes.com/2021/06/10/health/aduhelm-fda-resign-alzheimers.html 

This sequence of events, with the approval opening the door to a massive TAM but generating incredible controversy, explains why BIIB spiked so hard on approval and sold off so much afterwards. From here, it might seem difficult to forecast the uptake and ultimate future of Aduhelm, especially for a non-biotech specialist such as myself. Fortunately, and uniquely, we have an excellent historical proxy to guide us in the form of another biotech stock that had a lucrative but controversial approval: Sarepta (SRPT) and its drug Exondys 51, which was approved in 9/19/2016.

There are multiple parallels between Sarepta’s Exondys 51, which is a treatment for Duchenne muscular dystrophy, and Biogen’s Aduhelm. Both drugs are for dire unmet medical needs that cause a slow progressive decline in the unfortunate patients. Because the decline is so slow and varies so much between individuals, it’s extremely difficult to design a trial that can cleanly show drug efficacy. And, for both Sarepta and Biogen, that’s what happened. Their trials produced results that were promising but not definitive. In both cases, citing the severity of the disease and the unmet need, the FDA went ahead and gave a conditional approval. Now, the drugs can be marketed and sold but are required to be tested again in a post-approval trial. If the trial fails, the drug will be removed from the market.

We do not need to compare the approval process for the two drugs in detail, since that is in the past, but I would like to note that the Biogen approval was actually more robust. For Sarepta, both the FDA advisory committee and the internal FDA scientists agreed that Exondys-51 should not have been approved. Only an unprecedented intervention by a high-ranking FDA official, Janet Woodcock, enabled the drug to be marketed. In the case of Biogen, although there was controversy, the FDA was far more unified in agreeing that Aduhelm should be approved. (https://www.accessdata.fda.gov/drugsatfda_docs/nda/2021/Aducanumab_BLA761178_Stein_2021_06_07.pdf )

Moving on to the post-approval sequence of events, the historical example of Sarepta becomes much more germane. First, we have an exuberant spike in the stock on the unexpected approval, and then the uncertainty sets in. The idea that the drug may only be on the market for a limited time is a worrisome concept, and that opens the door to many other bearish arguments. “The drug won’t be on the market for long. The insurance companies won’t cover it or let them make a profit on it. Uptake will be limited.” Looking at a chart of Sarepta for 4Q16 shows how those fears played out.

You can clearly see the exuberance around the approval, then the fear and doubt creeping in, and finally the stock grinding up on the successful drug launch. Sarepta then went on to do extremely well in 2H17 and 2018.  Biogen is currently at that exact same spot in its launch trajectory, making this a great entry point. There are several dynamics at work here to explain this: namely, the FDA approval is by far the most important event. After that, all the controversy and bearish points mentioned above are largely noise.

Running a confirmatory trial sounds like a major issue, but it is extremely rare to have a drug (ex safety concerns) actually pulled from the market. Even if the potential exists, both Sarepta and Biogen are allowed years to run their confirmatory trials (and profitably sell their drugs in the meantime). Sarepta has until 2026 for their trial ( https://clinicaltrials.gov/ct2/show/NCT03992430 ) and Biogen has until 2030. That’s a lot of years of blockbuster drug sales regardless of the ultimate trial readout.

The other bearish points are even easier to rebut, again using Sarepta as a historical proxy. It turns out it is extremely difficult, and goes against human nature, to deny sick people a promising treatment. The insurance companies never tried too hard to block coverage of Exondys-51, and uptake was widespread. I am confident that human nature has not changed, and that the process will play out the same way for Biogen. The controversy and drama around the approval process will not alter that. The average person, when they learn their loved one has been diagnosed with a terrible disease, will turn to Aduhelm for help, not read through the minutia of FDA minutes.

From here, readers can model Aduhelm sales as they wish, but it is easy to arrive at some large figures. Unfortunately, ~500K people every year are diagnosed with Alzheimer’s. Most of them are covered by Medicare, won’t have to pay out-of-pocket, and are desperate for treatment. So, unlike a typical drug launch, there will be very few barriers to adoption. One can easily get to sales of $10bn in 2025, well before the 2030 deadline for the confirmatory trial.

Conclusion:

Thanks to the soap opera drama and controversy currently surrounding Biogen at the moment, it's possible to buy it today with very little of this upside priced in. I'll spare you the Warren Buffet quotes, and hopefully leave you convinced that this is a stellar opportunity to buy an very underpriced asset with a bright future. The historical example of Sarepta gives me a high degree of confidence that Aduhelm will not just be successful, but will achieve blockbuster status. Meanwhile, conventional wisdom on the remainder of Biogen's pipeline is quite bearish. Even if the pundits are right, the bad news is already priced in. If they are wrong, there is incidental upside to my bullish thesis. Over the next 18-24 months, Biogen will cut through the controversy, buck the odds, launch a block-buster drug, and re-rate much higher.

Catalyst

A value stock is about to buck the odds and successfully launch a block-buster drug, while sporting a valuation that offers a strong margin of safety should disaster strike.