Biogen Q3 Earnings Review: Why I Remain Optimistic Despite Difficult Quarter

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Biogen reported its Q3 earnings yesterday, October 30.Revenue was $2.5bn, and non-GAAP EPS was $4.08.Growth was generally flat or declining for many key assets, with the performance of the AD drug ...

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(NASDAQ:BIIB) the central nervous system disease drug developer based in Cambridge Massachusetts, reported its Q3 earnings yesterday, Wednesday, October 30. First, let's look at some headline figures - revenues came to $2.5bn for the quarter - down 3% year-on-year. Cost of sales on a GAAP basis were $639m, R&D expense $543m, and SG&A $588m (respectively $593m, $491m, and $556m on a non-GAAP basis). GAAP diluted earnings per share were $2.66 - up from $(0.47) in Q3 2023, and $4.08 on a non-GAAP basis - down 6%. Biogen increased its full-year 2024 guidance and now expects non-GAAP diluted EPS to be between $16.10-$16.60, an annual gain of ~11% year-on-year at the midpoint with a low-single digit decline in revenues, and \"core pharmaceutical revenue expected to be roughly flat versus the full year 2023\". Operating income is forecast \"to grow at a high-teen percentage versus the full year 2023 with the maintained expectation of a mid-single digit percentage operating margin improvement\". The market's reaction to the news, which exceeded consensus expectations on normalised EPS and revenues, and narrowly missed on GAAP EPS, has not been positive, however. Shares fell from over $180 per share, to ~$175, a loss of ~3%, and at the time of writing, Biogen's market cap valuation is $25.62bn. Digging Into The Detail - Flat Growth, Concerning Declines We can see a breakdown of how Biogen earned its revenues in Q3 in the following table (from Biogen's Q3 earnings presentation). Biogen revenue breakdown - Q3 (earnings presentation) Biogen's Multiple Sclerosis franchise has been its traditional strength, but as I pointed out in my last note: Several of its biggest-selling drugs within this division - Tecfidera, Tysabri, and to a lesser extent, Plegridy - have lost their patent protection, and are experiencing revenue declines. The MS division's revenues fell from >$8.5bn in 2019, to \"only\" $4.7bn last year. On a nine-month basis, the MS division has delivered $3.3bn of revenues in 2024, versus $3.5bn in 2023, so the likelihood is that division revenues will be down again in 2024. I noted in my last post (covering Q2 earnings) that Vumerity, seen as a long-term replacement for best-selling Tecfidera (over $4.4bn of revenues in 2019), is struggling for growth in its markets, and in Q3, revenues actually fell year-on-year, from $166m in Q3 2023, to $158.1m last quarter. In rare diseases, the spinal muscular atrophy therapy Spinraza continues to be the key asset, but its revenues fell in Q3, to $381.4m, versus $448.2m in the prior year, and on a nine-month basis revenues fell from $1.33bn to $1.15bn. The next biggest revenue generator in rare disease is Friedreich's ataxia drug Skyclarys, which Biogen acquired last year through its ~$7.3bn buyout of Reata Pharmaceuticals. Approved in February last year, Skyclarys earned $102m of revenues in Q3, and could be set for \"blockbuster\" (+$1bn per annum) peak revenues, the market believes. The third asset in this division, Qalsody, indicated for amyotrophic lateral sclerosis (\"ALS\"), delivered only $11.1m of revenues, and $21m across the nine-month period. Meanwhile, the biosimilars division showed little in the way of meaningful growth - benepali (rheumatoid arthritis), imraldi (Crohn's disease), flixabi (ulcerative colitis) and byooviz (advanced macular degeneration, a form of eye disease) delivered a combined $197m of revenues in Q3, versus $194m in the prior year, and $592m on a nine-month basis, versus $582m in the prior year. Anti CD20 revenues essentially refer to royalties received from Genentech - a subsidiary of Swiss Pharma Roche Holding AG (OTCQX:RHHBY) on the MS drug Ocrevus and Rituxan, an autoimmune and cancer therapy, and this division continues to drive steady, if unspectacular growth. Biogen has confirmed that contract manufacturing revenues in 2024 will be lower than in 2023. All Eyes On Leqembi - A Hard Sell & A Poor Quarter With its main divisions either shrinking, or struggling for growth, the key focus for the Q3 earnings call was inevitably on Leqembi, Biogen's Alzheimer's Disease drug. Leqembi, for numerous reasons, is proving to be a hard sell despite the nearly 6m Alzheimer's patients in the US alone. And despite the lack of competition, Eli Lilly and Company's (LLY) Kisunla is the only other Alzheimer's therapy to be approved in the past 20 years. I am discounting Aduhelm, Biogen's first anti-amyloid AD drug, as it has now been shelved altogether. Aduhelm was shelved because its efficacy was highly questionable, and it was associated with potentially harmful side effects, most notably amyloid-related imaging abnormalities, a type of swelling of the brain. Leqembi was able to make a much more powerful case for approval in its pivotal clinical study than Aduhelm - according to Eisai, the Japanese Pharma that in Biogen's partner on Leqembi, earning a 60% share of all revenues and profits: LEQEMBI's FDA approval was based on Phase 3 data from Eisai's, global Clarity AD clinical trial, in which it met its primary endpoint and all key secondary endpoints with statistically significant results.9,10 The primary endpoint was the global cognitive and functional scale, Clinical Dementia Rating Sum of Boxes (CDR-SB). In the Clarity AD clinical trial, treatment with LEQEMBI reduced clinical decline on CDR-SB by 27% at 18 months compared to placebo. Kisunla slowed cognitive decline by 39% in its own pivotal study, but was only approved in July, so it is not yet known how it may affect sales of Leqembi. Nevertheless, both drugs have a similar mechanism of action, targeting amyloid beta removal (the \"sticky clumps\" of protein that build up in the brains of AD patients), and both come with safety risks around ARIA (multiple brain scans are required before a patient can be approved treatment), must be infused at specialised treatment centres, and are expensive - $32k annually for Kisunla, and $26.5k for Leqembi. According to Biogen's Chief Financial Officer (\"CFO\"), speaking on the Q3 earnings call: We again saw sequential growth for LEQEMBI with third quarter global in-market sales booked by Eisai of approximately $67 million, and that's up 66% versus the second quarter. LEQEMBI in-market sales in the US were $39 million, that's up 33% versus the second quarter. While the 66% growth sounds impressive, these are not the numbers Biogen was hoping to be quoting, more than 18 months after it was first awarded \"accelerated approval\" by the FDA, and 15 months since its full approval was granted. Eisai has suggested it expects to drive over $350m of revenues from Leqembi in fiscal year 2024, and, as I wrote in my last note, the Pharma has formerly quoted a revenue figure of ~$2bn per annum by 2026, and over $8.5bn by 2032, by which time over 3m patients globally will be eligible for treatment with the drug. After yesterday's update, however, these numbers now seem a long way off. There are initiatives Biogen and Eisai can pursue, a subcutaneous version of the drug is being tested, and research into how the drug may best be used is ongoing. On the earnings call, Biogen's Head of development Priya Singhal told analysts:  Encouraged by data showing expanded benefits with continued LEQEMBI treatment and beyond just the removal of plaques, we continue to pursue maintenance storing options. We expect regulatory decisions on maintenance dosing for both the IV and the subcutaneous auto-injector next year in 2025. Furthermore, the AHEAD 3-45 study, evaluating the ability of LEQEMBI to prevent or delay Alzheimer's in preclinical or presymptomatic AD enrolled well, and we just completed enrollment this month in October. I look forward to us providing updates as this trial advances.  At the same time, Biogen CEO Chris Viehbacher conceded that \"we're still spending hundreds of millions of dollars every year on the LEQEMBI R&D\". Biogen has been working on AD therapies for over a decade, and while progress has underpinned some of its biggest share price gains, for example, post-Aduhelm approval in 2021, when Biogen's share price nearly touched $400. The company appears to be no closer to convincing the market, physicians, patients, or health insurers that it has a viable solution or a lucrative solution to treating this devastating disease. Pipeline Prospects The reality is that Biogen targets some of the toughest disease indications and that means that inevitably, many programs will fail and billions of dollars of R&D spending may be wasted. That may explain why the drugs that do succeed tend to drive very healthy profits for Biogen - operating income as a percentage of revenues across the past three years has been 19%, 30%, and 31%. The narrowing of the margin in 2023 is arguably concerning. Biogen does not pay a dividend, and profitability is key to driving share price growth. Hence, Biogen needs to commercialise more products if it wants to grow the top line, and the bottom line, and restore investors' faith, which has clearly been shaken by the lackluster performance of Leqembi - shares trade at a lower value today than they did in 2013. Biogen pipeline (earnings presentation) As we can see above, in the short term, the approval of a higher dose form of nusinersen (Spinraza) might revive the drug's revenue growth trajectory, a subcutaneous form of Leqembi could help overcome patient resistance to the drug, and litifilimab, in systemic lupus erythematosus (\"SLE\"), is a potential blockbuster. GSK's benlysta earned $1.7bn in this indication in 2023. Looking further ahead, felzartamab may help bolster an emergent kidney disease franchise, alongside CD40L antibody dapirolizumab pegol - in Phase 3 studies, like litifilimab. Cemdomespib, another asset acquired via the Reata buyout, is being evaluated in patients with diabetic neuropathic pain, and there are more candidates targeting MS, AD, and Parkinson's Disease -- these are tough diseases to treat, but arguably, Biogen has the most experience of any global pharma in trying to treat them. Final Thoughts: A Tricky Quarter, But Biogen Is An Acquired Taste As The Current Valuation Makes For A Tempting Entry Point In my opinion, what much of the above analysis and reporting suggests is that Biogen is not an opportunity that will suit every investor. High levels of failure in clinical studies, some dubious assets - most notably Leqembi - drug products whose best revenue years are now behind them, and what likely looks to outsiders to be some irresponsible spending on R&D undermines the bull case for this company. A couple of factors play in Biogen's favour, however. The company is extremely profitable, and pretty much always has been, and its market cap valuation, for a company driving revenues over $10bn, and promising EPS of over $16 per share, is exceptionally low. Forward price to earnings (\"P/E\") ratio is close to ~10x, which is an enticing figure that suggests buying Biogen stock may be a wise decision. It's just possible that the billions invested in Leqembi will result in a \"blockbuster\" asset, if the planned improvements can be implemented, and even if they are not growing much, many of Biogen's key assets will continue to deliver hundreds of millions of dollars in revenues every quarter for years to come. Every time I complete an analysis of Biogen, I start out believing the company deserves a downgrade to at least a \"Hold\" call, but then, when I consider its valuation, and compare it to pharmas driving similar revenues per annum - Regeneron Pharmaceuticals, Inc. (REGN) and Vertex Pharmaceuticals Incorporated (VRTX), for example, whose market caps are respectively $90bn and $122bn, I reevaluate, and issue another \"Buy\" call.  Even after a difficult Q3 earnings, that is precisely what I am going to do again. Biogen may not be an investment for everyone, and its product portfolio and pipeline may be imperfect in multiple ways, but the potential adds up to substantially more than a $25bn market cap valuation, in my view, Leqembi or no Leqembi.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2480092036"}