When Good Earnings Can’t Hide The Ugly Truth

You know that feeling when your favorite restaurant starts serving smaller portions but jacks up the price? That’s Biogen (BIIB) right now.

Sure, they beat Q2 earnings estimates like a drum, pulling in $2.65 billion in revenue against a $2.32 billion consensus, but scratch beneath that shiny surface and you’ll find the same old story that’s been plaguing this company for years.

I’ve been watching Biogen longer than I care to admit, back when their multiple sclerosis franchise was the golden goose of biotech. Those days feel like watching reruns of “The Ed Sullivan Show” now.

The MS portfolio, still their bread and butter at $1.107 billion, dropped 4% year-over-year. That’s actually better than expected, but here’s the kicker: management admitted to about $75 million in favorable timing adjustments that won’t repeat. Strip that out, and we’re looking at closer to 10% decline.

My neighbor Bob, a retired engineer who thinks he’s the next Warren Buffett, keeps asking me about these biotech names. “But John,” he says, “they’ve got all these new drugs coming!”

Sure, Bob. Let’s talk about those shiny new toys.

ZURZUVAE, their postpartum depression treatment, hit $74.1 million in Q2, up from $27.3 million last year. Sounds impressive until you realize they split revenue 50-50 with Sage Therapeutics (SAGE) and analysts peg peak sales at maybe $300 million annually.

In pharma terms, that’s like getting excited about finding a twenty-dollar bill when you’re hemorrhaging hundreds.

Then there’s LEQEMBI, their Alzheimer’s collaboration with Eisai (ESALF).

Revenue quadrupled to $55 million, which sounds fantastic until you remember they’ve poured billions into this thing and it’s moving slower than traffic on the 405 during rush hour.

The reimbursement headaches and infusion requirements make this drug about as convenient as a root canal. Plus, $35 million of that revenue was a one-time shipment to China, so don’t get too excited about sustainable momentum.

The real story here isn’t in the numbers that beat expectations, it’s in what those numbers represent.

Biogen is essentially playing defense against patent cliffs while trying to rebuild their offense with niche products.

SPINRAZA, their spinal muscular atrophy treatment, fell 8.5% to $392.7 million due to inventory drawdowns and competitive pressure. When you’re competing against gene therapies that offer potential cures, being the old reliable treatment is like being the last VHS rental store in town.

Here’s what caught my attention though: management slashed R&D spending from $505 million to $399 million year-over-year.

Now, I’m all for fiscal discipline, but when a pharmaceutical company starts cutting research spending, it’s usually because they’re either very confident in their pipeline or very worried about their cash flow.

Given that their pipeline consists of a few mid-stage trials and some antisense oligonucleotide hopes, I’m leaning toward the latter.

The biosimilars business continues its slow-motion train wreck, down 8% to $182 million. This was always going to be a race to the bottom, and Biogen seems determined to finish last.

Meanwhile, their contract manufacturing revenue surged 124%, but management was quick to temper expectations, essentially saying “don’t get used to this.”

Look, I get the bull case. The stock trades at a 50% discount to healthcare sector peers, sitting on $2.8 billion in cash with manageable debt that doesn’t mature until after 2035.

The valuation screams “cheap for a reason,” and sometimes that reason turns into an opportunity.

But pharma investing isn’t like picking up a beaten-down retailer that can turn things around with better merchandising. Drug development takes years, costs billions, and fails more often than not.

The pipeline offers some hope with felzartamab entering Phase 3 for kidney diseases and salanersen showing promise in spinal muscular atrophy with once-yearly dosing.

But we’ve seen this movie before with Biogen. Remember when Aduhelm was going to save the company? How’d that work out?

My take? Biogen is a decent company in a tough spot, trying to reinvent itself while managing the decline of its legacy products.

The Q2 beat doesn’t change the fundamental math: they’re still searching for the next big thing while their current big things get smaller every quarter.

At these prices, the stock might be worth a speculative position for patient investors, but don’t mistake temporary earnings beats for a sustainable turnaround story.

Sometimes in investing, as in life, you have to accept that not every story has a happy ending.

Biogen might prove me wrong, but until they do, I’m staying neutral and watching from the sidelines.