Can Biogen Inc. (BIIB) be the Cure to your Portfolio?
Tuesday, Febraury 21st, 2017
Biogen is in the healthcare sector and the biotechnology industry. The company develops and manufactures therapies for neurological and autoimmune diseases across the world. This includes therapies for Multiple Sclerosis, Non-Hodgkin’s Lymphoma, and Chronic Lymphocytic Leukemia. The company is also currently in Phase III clinical trial for therapies to combat Alzheimer’s disease.
The current price for BIIB is $286.82 and the 52-week range is $223.02 - $333.65. Biogen reached an all-time high of $480/share in March 2015. The company has pulled back substantially since that all time high, and as an investor it would be important to understand what factors created the pullback. Examining the valuation ratios, all compare favorably to industry averages.
The current Price/Earnings ratio is 17.09, which is below the industry average of 59.68. This is a positive as we like to see valuation ratios below the industry average as it shows we are getting a good value for that given metric. Price/Sales of 5.45 is below the industry average of 6.28. Price/Cash Flow of 14.25 is also below the industry average of 24.70.
Price/Tangible Book value of 13.38 is below the industry average of 24.04, but it is more than double its Price/Book value of 5.14. This can be partly attributed to goodwill of $3.7 billion on the balance sheet. This high amount of goodwill is most likely a result of acquiring smaller biotech companies to garner patents or drug combinations.
Many of the valuations for companies in the industry are high due to speculation biotech companies will hit the next big drug or be acquired by a larger firm and develop different patents. Many companies in this industry are overpriced and carry substantial risk. Unlike many companies in the industry, Biogen appears to have reasonable valuations.
Sales have grown by 1.2% quarter over quarter versus the industry average of 9.0% and has seen a decline of 6.4% year over year versus the industry average which has increased by 10.9%. It is important to question and understand why Biogen’s sales lagged the industry average.
Looking at EPS growth, for a quarter over quarter comparison BIIB saw a decline of 20.6% and the industry average fell by 56.7%. Year over year BIIB saw EPS growth of 10.2% and the industry average fell 36.0%. The numbers provided by the industry average appear to be skewed by some companies that witnessed a bad quarter and a bad year.
Looking closer at BIIB, declining EPS paired with growing sales for the quarter over quarter comparison is a question that should be addressed. By looking at the income statement we can see a litigation charge of $454.8 million in the quarter. This is a result of a settlement and license agreement with Forward Pharma.
Turning to the balance sheet, a current ratio of 2.55 is a positive as the company has ample liquidity. This is even more apparent when observing a quick ratio of 2.26 as this calculation excludes inventory from current assets. Total Debt/Equity of 53.7% is very manageable and well below the industry average of 85.3%.
Looking forward to December 2018 and using a forward multiple of 16.5 Estimated GAAP EPS of $20.74 gives us a target sell price of $342.21. This is just 19% away from the current price. To provide a margin of safety, we will not buy a company unless it has more than 30% estimated growth. While Biogen has many positives, it may be prudent to wait for the stock to pullback before you consider adding this company to your portfolio.
Do you have a question or a company you'd like us to take a look at? Email us at Brent@WilseyAssetManagement.com or Chase@WilseyAssetManagement.com.