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Biogen faces no easy opportunities

December 21, 2016
Life sciences

When Biogen’s newly named chief executive was asked on conference call Tuesday to name Biogen’s top priority, he said it was to find a treatment for Alzheimer’s disease. “The No. 1 challenge is also an opportunity,” he said.

The problem for Michel Vounatsos, who is set to take over as chief executive next month, is that Biogen faces more than one equally difficult opportunity.

Alzheimer’s disease is the white whale of biotech. The disease arguably represents the largest unmet medical need that the developed world faces. As such, potential rewards are massive. It was excitement over an early-stage Alzheimer’s trial that pushed Biogen’s share price above $475 less than two years ago.

However, the risks are just as significant: Dozens of clinical trials have failed to find a solution over the past decade. Eli Lilly’s experimental treatment was the most recent to fall short last month.

The risks are magnified by slowing growth in Biogen’s core business. Net income grew by just 7% in the third quarter from a year ago; that figure grew by 13% in the third quarter of 2015.

Other potential problems loom: Biogen faces a verdict on a key patent challenge to its best-selling multiple sclerosis drug Tecfidera early next year. Tecfidera accounted for more than one-third of total sales in the most recent quarter.

The company also has benefited in the past from frequent price increases on Tecfidera and other central nervous system drugs. Mr. Vounatsos was mum on the call about Biogen’s pricing strategy going forward, and it is unclear whether such price rises will be sustainable in the future. These problems could materialize well before any verdict on the Alzheimer’s program.

The appointment of Mr. Vounatsos, formerly head of Merck & Co.’s primary-care business, is itself a surprise. He joined Biogen in April after 20 years at Merck, just three months before current CEO George Scangos announced his retirement. Biogen said over the summer it would consider internal and external candidates, but It is fair to wonder just how attractive outside candidates found the opportunity.

The initial investor reaction was negative: Shares fell when the appointment of Mr. Vounatsos was announced Monday, before recovering Tuesday morning.

The good news: The cupboard isn’t entirely bare beyond the Alzheimer’s program. Biogen could win regulatory approval for a spinal muscular atrophy treatment next year.

And Mr. Vounatsos won’t have the burden of high expectations. Shares trade 40% below the high set in the 2015 market mania. At less than 14 times forward earnings, there is room for positive surprises.

An Alzheimer’s win would certainly wash away the business’s other worries. But investors considering buying the stock would be wise not to overlook the other challenges Mr. Vounatsos faces.

By Charley Grant

Source: Wall Street Journal

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