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Biogen (NASDAQ: BIIB ) stock has come down from its recent high. A successful Phase 2 trial of an Alzheimer's drug sent BIIB stock soaring. However, the stock has pulled back after the company reported its second-quarter results on July 24.
Although a successful Phase 3 trial could send BIIB stock soaring to new highs, such an achievement is by no means a sure thing. Anyone who buys BIIB stock should decide to do so based on drugs whose Phase 3 data has already been reported.
BIIB Stock Was Volatile After a Phase 2 Trial
BIIB stock fell in recent trading, as the initial euphoria about the successful Phase 2 trial of its Alzheimer's drug, BAN2401, faded. Biogen partnered with Japanese drug company Eisai (OTCMKTS: ESALY ) on BAN2401. Despite the successful Phase 2 test, it will be years before the drug can be approved, and it may never be approved.
BIIB stock peaked just before it reported its Q2 results. BIIB stock has since given back most of the gains it made after the company announced the results of the BAN2401 study. As cooler heads have prevailed, investors have realized that the drug still has to undergo Phase 3 trials.
Furthermore, as our own James Brumley pointed out , the drug is supposed to bind with amyloid beta plaque, thereby preventing synapses in the brain from becoming clogged. However, although such clogs are believed to be the cause of Alzheimer's, that theory has not yet been proven. If the theory is found to have been incorrect, the prospects of BAN2401 and another Alzheimer's drug that Biogen is testing, aducanumab, will be harmed. Enrollment for a Phase 3 study of Aducanumab was recently completed.
Don't Make Decisions Based on a Phase 2 Trial
Whether any of the Alzheimer's drugs work, investors should not make investment decisions based on one Phase 2 trial, especially when it comes to Biogen. BIIB has broadened its focus in the last few years.
The company once focused on developing multiple sclerosis drugs. Biogen's first move outside of MS did not involve Alzheimer's drugs, but spinal muscular atrophy, or SMA, treatments. In 2012, it began development of what became a drug called Spinraza with Ionis (NASDAQ: IONS ). An SMA treatment. Spinraza came on the market in early 2017, and its sales growth more than doubled year-over-year in Q2.
Biogen stock trades at a forward price-earnings ratio of about 13.7. The average price-earnings ratio of BIIB stock over the last five years is about 25.3. However, one must also consider the drugmaker's earnings outlook.
Over the last five years, its net income rose by an average of 23.7% per year. From 2018 through 2023, Wall Street expects its net income to rise at an average rate of about 7.5% per year. Granted, if one or both of its Alzheimer's drugs achieve blockbuster status, its net income will rise much more quickly.
However, the way things stand now, the company's current valuation appears to be fair, given the reduction in the growth of its profits.
Treat BIIB Like an Established Drug Company
Also, investors should treat BIIB as a pharma company comparable to Novartis (NASDAQ: NVS ) or Sanofi (NYSE: SNY ) and less like a biotech startup. Although Biogen stock began as a startup biotech equity, the market capitalization of BIIB stock has risen to nearly $68 billion. Moreover, with its move into drugs that are not related to MS, BIIB is no longer a one-trick pony.
Furthermore, with all of the drugs it sells in the market and the treatments it's developing, one drug will not make or break this company. Given the price-earnings ratio in the low teens and the projected high single-digit growth rates of its net income, I believe that BIIB stock is as close to a hold as an equity can get.
Final Thoughts on BIIB Stock
Investors should not base their trading decisions on BIIB stock on a successful Phase 2 trial. Over the last month, in the wake of the Phase 2 trial of BAN4201, BIIB stock moved higher and then gave back most of its gains. While any investor can understand the urgency of finding an effective Alzheimer's treatment, a successful Phase 2 trial is far removed from full approval.
Moreover, a low price-earnings ratio and an improved but average profit growth level give investors little reason to buy or sell BIIB stock. Investors could do well with Biogen stock if the company is able to develop a successful Alzheimer's treatment. In the absence of such a success, prospective buyers should base their investment decisions on the company's current products, not speculation about its future.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You canfollow Will on Twitterat @HealyWriting.
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