Biogen (BIIB)

Asset Class: US Stock (Sector: Health Care / Industry: Biotechnology)

Original Investment Thesis (1/2019):  Biogen is a biotech that focuses on neurosciences with a particular focus right now around MS-related diseases and moving quickly into spinal muscular atrophy diseases. Longer-term they are focused on developing/expanding other areas related to neuroscience. These are the diseases that are least understood and in my opinion the ones with the most ‘runway’ ahead of them (as we attempt to solve some really, really, really bad diseases). By the way…1 BILLION people suffer from these diseases worldwide! They are the leading cause of disability and second leading cause of death.

Current Thoughts (10/22/2019): Long term holding.  I picked this up after one of their late state Alzheimer drugs was suspended.  The stock got whacked and looked cheap to me on almost every measure I look at.  That is the whole problem with biotechs…they can invest a ton of money and a ton of time and then poof it all goes up in smoke.  My main issue was this company carries a higher debt ratio than many in the industry which was initially a concern for me (until I put that issue to bed).  I think they will win more than they lose and have a lot of potential in the neurosciences industry for decades to come. UPDATE: Investing?!? HARD! Refreshed my analysis for $BIIB last night and was going to add to this position this AM (pre-market before earnings). Of course, it pops 40% before I get it done. My life in a nutshell! Ha! Anyhoo, good to see it working out as planned.

New Purchase – Biogen (BIIB)

March 2019

I just added a position in Biogen.  I sold off some of my bond holdings to add it.  I also sold a smaller portion of $SIVR (silver ETF) in order to add it.

Here is a PDF with my analysis if you’d like to see what I look at: 

Biogen is a biotech that focuses on neurosciences with a particular focus right now around MS-related diseases and moving quickly into spinal muscular atrophy diseases. Longer-term they are focused on developing/expanding other areas related to neuroscience. These are the diseases that are least understood and in my opinion the ones with the most ‘runway’ ahead of them (as we attempt to solve some really, really, really bad diseases). By the way…1 BILLION people suffer from these diseases worldwide! They are the leading cause of disability and second leading cause of death.

I actually just listened to the Stan Druckenmiller interview on RealVision earlier this week finally and heard him talk about how the biggest part of his philanthropic effort is aimed squarely at neurosciences. He does this for the same reason that Biogen focuses on them. They are a huge problem, with almost no resolution to date. He views it as the most important thing he can focus his billions in wealth on to aid society. He is a smart guy so I’ll trust him on it. Great interview by the way!

I’ve had this company on my shortlist of companies in the healthcare world for a while. This past week the stock got hammered (down greater than 30% from Wednesday’s close) when they announced they were suspending an Alzheimer’s drug that was in Phase 3 trials. Not good news BUT from what I see of this company they are excellent capital allocators on almost all fronts. So, if they think they need to stop expending capital on this then I have no reason to see that as horrible. I’m sure they have had this happen many times (and will many times more). All while still being around to tell the tale. That is part of the game in biotech (and they understand this and have been here before).

About the only thing I don’t like about this company is the debt level. At 46% debt to equity, it carries higher debt than typical biotech companies. They have around $6 billion in long term debt. The average biotech runs around 26% debt to equity. BUT this is not a typical biotech company…it is a behemoth! Earlier in the past decade the company had much lower debt but in 2014 increased debt pretty substantially to 70% debt to equity. Since that time, they have bought back 34 million shares (or around 15% of share outstanding). This would be around $11 billion-ish (using Wednesday’s prices in the $323+ range). Some would argue that that ‘investment’ has now been vaporized due to the large drop late last week. I wouldn’t…each to his own.

Why does the higher than normal debt level cause me very, very, very little concern? I hate companies with debt and especially hate to see a company add to debt when they don’t have to. This should be a huge red flag for me (and is). But this company also generates substantial cash flow and free cash flow. Even with the increase in debt the company can easily service its debt. It could pay off all debt with operating cash flow (based on 2018 figures) in 2 years and all long-term debt in 1 year. These numbers are very similar for free cash flow at 2.3 and 1.1 respectively. The Piotroski F-Score of 7 and the Altman Z-Score of 4.52 also indicate everything is good to go on the debt/financial strength front. So even though the debt level is higher than I’d like there is very little concern that the company is in any financial distress at all.

With the recent price decline, the company is cheap across a variety of financial metrics like PS, PE, PB, PCF, EV/EBIT, EV/EBITDA, EV/REV, Shiller PE and Price to Owners Earnings (against the industry and against its own history). The company also has outstanding ROIC, ROE, ROA, and gross margins over the past decade which is a sign of a great business and/or great management or both. Of course, all of these could deteriorate drastically if they have more instances where they walk away from a major Alzheimer’s drug in Phase 3. That is obviously a/the concern from Wall Street who crushed the stock late last week. My bet is they will have more successes than failures like this one.

It is rare that you get to buy a company that, I believe, is a very wide moat business at a big discount over similar businesses. It is also rare to get to buy that business near what I calculate the Intrinsic Value of the firm to be. I’ve been looking to add a healthcare company to my portfolio for some time and this one is the one. Could this price drop be the beginning of me catching a falling knife in a business that will start to see more and more missteps? Maybe, but that is not what its history suggests. I believe I will hold this stock for a long time and will be a very happy shareholder. I’m purchasing the stock based on the 85% certainty rating I have calculated.

I’m sharing my analysis here. If you have thoughts on this company, I’d love to hear them hit me up on Twitter @joeydean72