In a puzzling move, Biogen disclosed plans Tuesday to spin off its hemophilia business, a smaller but fast-growing piece of its operations, into a separate entity in order to focus on neurology medicines, notably multiple sclerosis treatments. But the idea has puzzled some Wall Streeters, triggering speculation that the biotech may be setting itself up for still bigger things.
The spinoff, which is expected to occur by the end of this year or early 2017, would include two hemophilia drugs — Alprolix and Eloctate — that generated 8 percent of $2.3 billion in product sales during the first quarter. Looked at another way, those drugs generated $640 million in sales over the past 12 months, and some analysts predict the unit could become a $1 billion business.
The plan comes just seven months after Biogen announced a reorganization that involves eliminating $250 million in operating costs and 11 percent of its global workforce of 8,000 people. At the time, Biogen suffered a setback when it had to discontinue a late-stage clinical study to expand the use of its best-selling drug, Tecfidera, a multiple sclerosis treatment.
But in comments to analysts, Biogen Chief Executive George Scangos downplayed the notion that the hemophilia spinoff is anything but a tactical move. “It’s not really a shift in strategy. It is the fact that the business has matured. It is doing very well. It is profitable. It can stand on its own,” he said. The hemophilia product pipeline needs to be developed “aggressively.”
Some Wall Street wags, however, are not so sure.
“In our view, the deal doesn’t help transform the company’s growth outlook, as the entire commercial business faces competitive threats and the pipeline remains quite speculative. As such, this move is a bit perplexing to us,” wrote Piper Jaffray analyst Dr. Joshua Schimmer in an investor note. “That said, there may be something strategic going on behind the scenes beyond shifting of franchises, so we’re still waiting to see what the management team is capable of delivering.”
And RBC Capital Markets analyst Michael Yee wondered why Biogen would want to remove a growing and profitable business that has long-term patent protection that provides diversity and would dilute earnings once the spinoff takes place.
Biogen’s “underlying business is a fairly mature, flattish-to-low single-digit growth multiple sclerosis business that has future competition and various intellectual property questions on Tecfidera,” he wrote in an investor note. “Thus, investors theoretically want more growth and diversification, not less.”
He also pointed out that spinning off the hemophilia unit would not bring in any cash. Before today, investors placed a valuation of $4 billion to $6 billion on the business. “So this seems odd and, perhaps, implies the valuation is not what (Wall Street) perceives if a buyer was not willing to pay up,” he added.
Schimmer speculated that “though the deal may clear the way for something more strategic, the move may also signal a lack of confidence in the (hemophilia) products.” He pointed out that while Biogen was the first to market long-acting hemophilia treatments, competition has intensified that “cloud the long-term growth outlook for the franchise.”
As a result, speculation is rising that Biogen could become takeover bait since the spinoff makes the biotech smaller and, theoretically, easier to acquire, according to Yee. The thinking is that hemophilia and central nervous system businesses are not necessarily equally attractive to larger drug makers.
“There’s got to be more, right?” asked Schimmer. This thinking may also explain why Biogen stock rose slightly on the news.