Raising Our Fair Value Estimate for Biogen

In a shocking turn of events during Biogen's BIIB third-quarter update, Alzheimer's disease drug candidate aducanumab will be filed with the Food and Drug Administration in early 2020 based on a more complete analysis of the two phase 3 studies, Engage and Emerge. We had removed the drug from our valuation model in March (and lowered our fair value estimate for Biogen by $58 per share) after the firm discontinued the studies based on a futility analysis. However, new data and a discussion during today's earnings call have persuaded us to add the drug back into our model, but instead of our prior 60% probability of approval, we're assigning a 30% probability, due to uncertainties surrounding weaker data in the Engage study. As a result, we're raising our Biogen fair value estimate from $353 per share to $383, and shares remain undervalued despite significant share appreciation on Tuesday. If additional data released at the Clinical Trials on Alzheimer's Disease meeting in December are able to address our concerns, we could return to our prior 60% probability of approval.

We continue to award Biogen a wide moat based on the stability of its MS franchise, diversification in neurology with Spinraza, and a solid neurology pipeline, although we highlight the high uncertainty that comes from having an innovative, high-risk pipeline. Financial results in the quarter supported this thesis, with 2% growth in MS revenue and 17% Spinraza growth driven by ex-U.S. uptake. We continue to assume Tecfidera could see generic competition in 2021 in our base case, and a hearing in November will likely be followed by a ruling by early 2020. We remain bullish on the pipeline beyond aducanumab, with data readouts beginning to come more frequently by mid-2020, including phase 2 Parkinson's data and data on Biogen's recently acquired ophthalmology gene therapies.

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