This Healthy Drugmaker Is Undervalued

Karen Andersen: Biogen is known as the dominant player in the multiple sclerosis market, where it holds a 40% share of a $20 billion market. We think this position, and a novel pipeline with drugs in MS and other neurological diseases, supports the firm's wide moat rating.

Biogen's stock was one of the favorites of the large-cap biotech rally over the past few years, but slowing sales growth for MS drug Tecfidera hit the stock hard in the summer of 2015, in what we see as an overreaction. Political uncertainty surrounding the election and media focus on drug prices have soured the market for drug stocks in general since last fall, but political reforms that would alter the competitive landscape for Biogen or other large-cap biotechs look unlikely. Biogen recently traded at a 30% discount to our fair value estimate, while biotech overall is trading at about a 20% discount to our fair value estimates.

We think the market overestimates Biogen's future reliance on MS and underestimates its potential to expand its neurology portfolio into Alzheimer's, pain, and rare genetic diseases. Neurology has been one of the toughest markets for biotechs to enter, but we think Biogen's strategy and genetic validation for its programs support higher odds of approval. In addition, Biogen has almost $7 billion in cash to use to supplement its portfolio, which could allow five-year earnings growth to exceed our 9% estimate.