Biogen (BIIB) faces a unique combination of business risks, as well as risks specific to the biotechnology industry. The company-specific risks indicate the long-term sustainability of the company’s profits.
Business concentration risk
Biogen earns more than 80% of its total revenues from its multiple sclerosis (or MS) drugs. The company is a leader in the MS market, with 47% market share and commercially successful drugs such as Avonex, Tecfidera, Tysabri, and Plegridy. Tecfidera, Biogen’s recently launched oral MS drug, has been able to beat its competitors, Sanofi’s (SNY) Aubagio and Novartis’(NVS) Gilenya.
However, the MS market continues to be extremely competitive with companies such as Teva Pharmaceuticals (TEVA), Pfizer, and Merck actively developing new MS therapies. In April 2015, the Food and Drug Administration (or FDA) also approved Momenta and Novartis’ generic version of Copaxone, a blockbuster MS therapy by Teva Pharmaceuticals (TEVA). This decision was upheld by the US Court of Appeals in June 2015, paving the way for other generic versions of Copaxone to enter the market.
In addition, there has been a cannibalization of Biogen’s traditional drug sales by its newest innovations. Avonex’s and Tysabri’s sales dropped partly as a result of patients switching to Tecfidera. These trends can result in stunted future growth for the company.
Biogen is attempting to expand its reach in Europe and other emerging economies, however, it is facing pressures from price-regulating bodies in these areas. In the UK, the company had to offer substantial price discounts for Tecfidera to enter the market. Germany stated that Tecfidera does not offer any additional benefit over the existing MS drugs, forming a basis for denying premium pricing for the drug.
R&D failure risk
A major portion of Biogen’s valuation depends on the probable success of the drugs in the research and development pipeline. The company posted better-than-expected early stage results for its Alzheimer’s disease therapy BIIB037 in March 2015 and has announced major late-stage trials for the drug. The two 18-month studies, each comprising about 1,350 patients, should be a substantial investment for Biogen.
Competitors such as Eli Lilly and Pfizer had also attempted to develop Alzheimer’s drugs based on the same technology. However, they failed in their late stage trials. This background is resulting in uncertainty regarding Biogen’s Alzheimer’s therapies.
Another much-awaited drug in Biogen’s early stage pipeline is the anti-LINGO therapy for acute optic neuritis, a disease related to the nerve cells between the eyes and the brain. According to Credit Suisse, the therapy can earn up to $10 billion after commercialization.
However, after the development of Avonex and Amevive, the company has not singularly developed any novel drug for more than ten years. All of its blockbuster drugs such as Tecfidera, Tysabri, Alprolix, and Eloctate have been co-developed. Because anti-LINGO is being developed without a partner, it raises uncertainty regarding the company’s capability to successfully commercialize the drug in the market.
Biogen earns about 27% of its total revenues from international markets. A strong dollar leads to decreased demand for its costly drugs such as Tysabri and Tecfidera.
Investors who are interested in the Biogen stock can limit their exposure to these risks by investing in the iShares NASDAQ Biotechnology ETF (IBB). Biogen accounts for 7.48% of IBB’s total holdings.