Biogen Inc (BIIB) — Q2 2023 Earnings Call Transcript

Thank you, operator. Good morning and welcome to Biogen's second quarter 2023 earnings call. Before we begin, I encourage everyone to go to the Investors section of biogen.com to find the earnings release and related financial tables, including our GAAP financial measures, and a reconciliation of the GAAP to non-GAAP financial measures that we will discuss today. Our GAAP financials are provided in tables 1 and 2, and table 4 includes a reconciliation of our GAAP to non-GAAP financial results. We believe non-GAAP financial results better represent the ongoing economics of our business and reflect how we manage the business internally. We have also posted slides on our website that will follow the discussion related to this call. I would like to point out that we will be making forward-looking statements, which are based on our expectations. These statements are subject to certain risks and uncertainties and our actual results may differ materially. I encourage you to consult the risk factors discussed in our SEC filings for additional detail. On today's call, I'm joined by our President and Chief Executive Officer, Chris Viehbacher; Dr. Priya Singhal, Head of Development; and our CFO, Mike McDonnell. Chris, Priya, and Mike will each make some opening comments, and then we'll move to the Q&A session. To allow us to get through as many questions as possible, we kindly ask that you limit yourself to one question. I will now turn the call over to Chris.

Thank you, Chuck. Good morning, everybody. I'd like to start off with LEQEMBI. And I think before we really get into all the interesting details of commercialization and competitiveness, I just like to pause for a moment. This is a historic moment in healthcare history. We're talking about the very first disease-modifying treatment that's received full approval from the FDA and reimbursement from CMS. There have been literally dozens of medicines that have failed before this drug ever got to market. And that's important for a couple of reasons. The first is that there is an awful lot we still don't know. We are really at the beginning of a journey to understand Alzheimer's disease and how we can affect this disease. But it's also going to have a big impact on the practice of medicine. Physicians haven't been able to really help patients very much beyond perhaps prescribing Donepezil or similar products. The treatment we are proposing really is going to change an awful lot of how physicians practice and treat these patients. So as we start thinking about the intent to prescribe and how physicians are looking at things, we actually won't know that until we get out there in the marketplace and see how patients respond. ADUHELM did get approved, but as you all know, it never really got launched. So, this is really a first. And whenever you're first, you're going to discover a lot, and much of this is just not that predictable. I would like to call out kudos to our colleagues at Eisai. Within a very short period of time, they were able to get the regulatory filings in the EU, Japan, China, Canada, Great Britain, and South Korea. This is going to be truly a global launch. Now, we just had the AAIC last week, and Priya will cover off a little bit more about that. But something that became obvious is when we look at Donanemab and Lecanemab, these are two very different products. Most people are looking at them as merely A-beta antibodies that remove plaques, but there's a lot more to this story, and it's going to evolve over the months and years. They are indeed different products with different mechanisms due to different bindings and have been studied in different populations, with diverse clinical study design processes and safety profiles. Many of these differences will play out in the marketplace in the coming months and years. It'll be interesting to see how it unfolds, but I would caution everyone; as we get into this, there is a lot of subtlety to this and it'll be quite interesting from a commercial point of view. The launch is underway in the US. We did get full approval earlier this month and the CMS approval is significant for others. This is going to encourage a lot of other companies to invest in research on blood diagnostics. It's also going to be an unusual launch, as there's an awful lot needing to be done. We'll have patient navigators to navigate the processes, understand how treatment will occur, and manage reimbursement. We will be working with physician offices to implement new practices on a daily basis. There is a lot of education around safety and ensuring the right patients are treated. We have reached out to about 700 centers to date. We’re also getting reimbursement beyond CMS. We have Medicaid, for example, in 48 out of the 50 states so far, and we've had a very good response from commercial insurers. Overall, I think the LEQEMBI launch is off to a very good start, and we'll keep you updated as more patients come on board. Now, moving on to another point, we've been working extensively on ensuring we are well-positioned for growth. As you know, we have a mature product profile. Generally, with a mature product profile, you would expect the level of investment to decrease. However, we have relatively high operating expenses compared to our peers, partly due to excessive investment in legacy products. We also have extremely centralized governance, many organizational levels, and a low span of control, averaging three. We've had five different heads of R&D in ten years, which isn’t good for an R&D organization. Consequently, we ended up with products that were relatively high-risk, high-cost, and not necessarily of the highest value. We've undertaken an extensive project to review those R&D programs. Our goal is to make more value-based decisions for existing products without entirely removing promotional efforts. Biogen still holds a 25% market share in multiple sclerosis and is the market leader by a considerable margin. There are numerous patients who depend on Biogen products, and we think we can do that smarter. There's a need for robust investment in new product launches while managing costs. The most shareholder value can be optimized if we succeed with these launches. We need to get decision-making closer to customers, enhance agility in the organization, and focus on high-value projects in R&D. External growth will give us the opportunity to diversify into rare diseases, immunology, and neuropsychiatry. This redesign effort was a bottom-up exercise to ascertain where we need to be as a company to successfully launch new products. We are focusing on internal governance mechanisms, metrics, and accountability. We've conducted a complete redesign of Biogen, which will lead to a gross cost savings of about $1 billion annually, with at least $300 million expected to be invested in growth opportunities. This is an opportunity to ensure that before the product launches this year, we are truly fit for growth. With that, I will turn it over to Priya.

Thank you, Chris. We believe that the traditional approval of LEQEMBI is a significant milestone for the Alzheimer's field. We also recognize that the pursuit of effective therapies for Alzheimer's is far from over. Biogen and Eisai are continuing to generate data on LEQEMBI across the Alzheimer's disease continuum. Amyloid pathology can begin years before the onset of symptoms. There is potential to maximize the therapeutic effect of LEQEMBI by treating earlier to delay or even prevent the onset of Alzheimer's. Eisai and Biogen initiated the AHEAD 3-45 trial in 2020 to evaluate this approach. This consists of two sister trials in cognitively unimpaired individuals aged 55 to 80 with intermediate or elevated levels of amyloid on PET screening, evaluated over 48 months. With the approval of LEQEMBI in the US, we also modified our protocol for the AHEAD trial to allow for open-label LEQEMBI rescue should patients progress to early AD while being enrolled in the trial. We believe the clinical profile of LEQEMBI is uniquely suited for the early intervention approach, with robust plaque clearance, low incidence of ARIA, and a longer-duration treatment option to maximize clinical benefit. We are working to improve and simplify the patient journey for LEQEMBI in early AD. Our focus is on two areas: a subcutaneous formulation where the auto-injector to potentially enable at-home administration is underway, and maintenance dosing, evaluating less-frequent dosing in the Phase 2 open-label extension. Regulatory filing is expected by the end of Q1 2024 for both initiatives. We are also continuing to analyze the Clarity AD data, where we have observed consistent reductions in both amyloid and tau PET and improved clinical outcomes to better inform treatment decisions for patients. The Clarity AD study did not use baseline tau PET as an exclusion criterion and enrolled a broad population of early AD patients with varying degrees of tau pathology at baseline. This allowed the generation of data on individuals with low tau burdens, not collected in other Phase 3 programs. At AAIC, Eisai presented baseline characteristics and new analysis containing initial results from the tau PET sub-study of Clarity AD. In this analysis, individuals enrolled in the tau PET sub-study were categorized into high, medium, and low groups based on tau burden measured at baseline. Lecanemab administration showed a clinical effect in the overall population and a large effect size was also observed in the low tau population, representing the early phase of AD. We believe this data further supports the clinical benefit observed with LEQEMBI in the broad early AD population and emphasizes the importance of treating patients early. Biogen plans to build upon our industry-leading position in therapeutics for A beta clearance and tau knockdowns by advancing a multi-target multi-modality portfolio inclusive of other emerging targets in the Alzheimer's disease pathway. This includes programs targeting tau such as BIIB080, a Phase 2 antisense oligonucleotide, and BIIB113, a Phase 1 small-molecule aimed at preventing tau activation. Moving to SMA, the interim results from the response study were presented at the Cure SMA Conference recently and highlight that most participants, investigators, and caregivers reported sub-optimal clinical status across multiple domains at baseline following Zolgensma treatment. This is likely due to incomplete transduction of motor neurons post-gene therapy administration. The internal results at six months show improvements in motor function in most participants as measured by increased total HINE-2 scores from baseline, with no new safety concerns identified. Overall, we believe these results suggest potential additional benefits with SPINRAZA treatment following Zolgensma administration. The R&D organization has spent significant time reviewing Biogen's R&D programs to improve the risk profile and pipeline productivity. We identified programs we want to prioritize and others with low probability-adjusted return on investment were promptly modified or discontinued. This has resulted in a leaner pipeline with greater probability of success and a sharper focus on key programs. All shown here have expected data readouts over the next few years: BIIB080, BIIB105 (ATXN2 ASO in Phase 1/2 study in broad sporadic ALS), BIIB122 (LRRK2 ASO in Phase 2b study for idiopathic Parkinson's disease), and BIIB121 (ASO targeting paternal UBE3A in Angelman syndrome, expected Phase 1 readout mid-2024). In summary, this past quarter, we made significant advancements across our pipeline, notably with the approval of LEQEMBI in early AD. While our substantial review of the pipeline is complete, we will continue to evaluate ongoing and potential new R&D programs using a data-driven approach focusing on risk balance and value creation. I will now pass the call over to Mike.

Thank you, Priya, and good morning, everyone. I'll provide highlights regarding our financial performance for the second quarter, with all financial comparisons versus the second quarter of 2022. Total revenue for Q2 was $2.5 billion, a decrease of 5% at actual currency and 3% at constant currency. Non-GAAP diluted earnings per share in the second quarter was $4.02. Total MS Products revenue was $1.2 billion, down 15% at actual currency and 14% at constant currency. A few recent updates in the MS business this quarter. First, the decline in MS was primarily due to generic entrants for TECFIDERA and broad competition in the MS market. We did not see much in the way of channel dynamics during the second quarter. Second, TECFIDERA's regulatory market protection in the EU was extended for one additional year until February 2nd, 2025. Some TECFIDERA generics have not exited some EU markets fully, and we are monitoring this while enforcing our legal market protections. Regarding TYSABRI, we noted a potential TYSABRI biosimilar launch in the US and EU later in 2023. We are aware of a positive CHMP opinion for the TYSABRI biosimilar in the EU last week, and while no biosimilar launches have occurred, approval and launch could happen in the upcoming months. Moving to SMA, global SPINRAZA revenue was $437 million, an increase of 1% at actual currency and 5% at constant currency. SPINRAZA growth in the US was 12% driven by patient growth. We're encouraged by this past quarter's performance and believe we're progressing toward consistent growth for SPINRAZA. Alzheimer’s disease revenue, which includes ADUHELM and the LEQEMBI collaboration, had a revenue headwind of $20 million in Q2. LEQEMBI revenue represents our 50% of end-market revenue less 50% of commercialization expenses, and we expect similar negatives for 2023 as ramped commercialization expenses will exceed initial revenue. Total anti-CD20 revenue was $433 million, down 1%, including a $12 million operating loss related to LUNSUMIO. Starting this quarter, our pre-tax profit share on RITUXAN, GAZYVA, and LUNSUMIO decreased from 37.5% to 35% due to achieving certain sales targets for GAZYVA as part of our contractual agreement with Genentech. Contract manufacturing, royalty, and other revenue were $198 million, notably higher year-over-year, mainly driven by the timing of batches. Q2 non-GAAP cost of sales was 24% of total revenue, including $34 million of idle capacity charges. We're seeing the cost of sales as a percentage of revenue remaining higher due to product mix and idle capacity charges, particularly as contract manufacturing revenue increases overall cost of sales as a percentage of revenue. For the rest of 2023, we believe contract manufacturing revenue will remain strong and will contribute to a higher cost of sales percentage compared to the 24.1% we saw in Q2. Non-GAAP R&D expense for Q2 includes roughly $13 million in estimated study closeout costs related to BIIB093. As Priya mentioned, we're substantially complete with R&D prioritization, estimating gross savings of about $250 million next year, partially offset by natural increases due to portfolio progression. The decrease in Q2 SG&A expense was attributed to roughly $70 million in savings initiatives, partially offset by approximately $35 million in reinvestments primarily related to launch costs. We expect operating expenses to be lower in the latter half of the year than in the first half as we complete savings from previously announced initiatives and the modest impact from our fit-for-growth initiative. I would like to provide additional detail regarding our new fit-for-growth program. This program will include changes to our operating model involving significant reductions in certain centralized functions. We expect a substantial portion of the $700 million in net annual OpEx savings to result from reducing a net headcount of about 1,000, aligning the company with our business plan and enabling a return to sustainable growth. I reiterate that the OpEx savings shown here are based on an annualized perspective. We believe this is an efficient program with 70% of anticipated gross OpEx savings being net savings. Overall, we expect a modest impact on 2023 expenses and estimate that net OpEx savings will be roughly even between 2024 and 2025, which are incremental to any previously announced cost reduction programs. On our balance sheet, we received approximately $813 million from the sale of our equity stake in Samsung Bioepis during the quarter, ending with $7.3 billion in cash and marketable securities. On June 30th, we held $6.3 billion in debt, putting us in a net cash position of roughly $1 billion. We continue to generate steady, positive cash flow from operations with free cash flow of $416 million in Q2. Lastly, let me discuss our financial guidance for the full year 2023. The business remains on track with our full-year forecast. Today, we reaffirm our guidance, expecting a revenue decline in the mid-single-digit percentage range as compared to 2022 reported results and non-GAAP diluted earnings per share of between $15 and $16. Please refer to our press release for other important guidance assumptions. Now I'll turn it back over to Chris for some closing comments.

Thank you, Mike. In addition to re-engineering our cost base, we're also re-engineering the marketed portfolio of products. We've had two approvals this year: QALSODY and LEQEMBI in the United States. Looking ahead to the rest of the year and early next year, we have important milestones for our portfolio. We expect a decision by the PMDA in Japan in Q3 and by the EMA in Europe in Q1 next year. We also expect a decision from the FDA on zuranolone next week and continue to evolve LEQEMBI. As Priya said, we're planning to submit regulatory dossiers for LEQEMBI subcutaneous in Q1 next year and for maintenance dosing as well. Additionally, we are looking through external growth opportunities to expand our portfolio into rare diseases, immunology, and neuropsychiatry. With that, Chuck will turn it back to you to invite questions.

Thanks, Chris. Operator, can we please poll for questions?

Hey. Good morning, guys. Thanks for taking my question, and congrats on all the developments. We recently saw some competitor data at a medical conference. I'm curious, what are the most important learnings you've taken away on the overall beta-amyloid class efficacy and safety profiles? Can you expand on your latest views on how you expect the competitive dynamics to play out in this space and the impact on your overall launch strategy?

Thanks for the question, Brian. This will be super interesting from a commercial perspective because there are many different factors at play here. As I've mentioned, the markets are thinking there are two A-beta antibodies that simply remove plaque, and that’s just part of the story. First, these products target the issue in different ways. Soluble protofibrils, the most neurotoxic forms of A-beta, are targeted by Lecanemab while Donanemab does not focus on these. This may impact our perspective, as it indicates the need for maintenance therapy over time. The differences in study populations are crucial too. Lecanemab focused on an earlier population—about two-thirds were MCI and one-third mild—while Donanemab was the reverse, affecting progress rates between patients. Priya noted how low tau patients in Lecanemab's study are distinct from those in Donanemab's, adding more to our efficacy proofs. Also, consider the varying endpoints used; Lecanemab utilized the gold standard CDR sum of boxes, while Lilly had a proprietary designed endpoint. Safety will also be a key issue. If neurologists have previously seen ARIA, they know how uncommon it is, even in placebo groups. So, attention to MRIs for monitoring will be new for many doctors. Viewing safety primarily from a data perspective at a conference is fruitful, but observing it through MRIs raises concerns. Ultimately, this richness in detail will help shape physician preferences as we forge ahead. Multiple blood diagnostics will also emerge, and I believe treatment for early patients will evolve, benefiting LEQEMBI more significantly as we’ve studied more patients from the get-go. Ultimately, while Lilly may highlight subpopulation results, physicians focus on broad coverage for their patients, an area where we expect LEQEMBI to show significant advantages.

Thanks, Chris. Can we poll for the next question, please?

Yes, good morning. Mike, just to confirm we're aligned here on the numbers related to cost savings. So, with OpEx at $4.5 billion for 2023, should we think of that as moving to $3.8 billion in 2025? How will this savings break down between SG&A and R&D? Will R&D fall below $2 billion? Additionally, could you comment on gross margins for those years?

Yeah. Mark, thanks for the question. Your math is correct—our goal is to achieve a full run-rate of the $700 million in net savings by 2025. Therefore, if we go from an OpEx of $4.5 billion to approximately $3.8 billion, savings will come from both SG&A and R&D. We've made significant savings in R&D as previously highlighted, and will continue improving efficiency in clinical trials. Overall savings will mix from both sides, with an estimated higher weighting on SG&A. Regarding gross margins, we expect trends to continue similar to what we've seen, as declining high-margin MS products and increasing contract manufacturing will drive down margins. So, we do anticipate lower gross margins, but hope to recover as LEQEMBI becomes profitable.

Thanks, Mike. Please let's move to our next question.

Hi. Thanks for taking my question. Are you perceiving differences between the academic community and community settings regarding interest in using LEQEMBI and coordinating treatment? Could you provide more details on how effective the CMS registry is now that it's set up? Are there more questions being asked?

On the registry, feedback indicates this is manageable. Everyone would prefer not to have a registry, but I personally found its implementation straightforward with dropdown menus—most data are available from medical records, so we think that should be okay. There is some bumpiness in PET scan reimbursement that should clear up in 90 days. The one PET scan included should not be a barrier. Initially, routine will fluctuate, needing more cognitive tests, PET scans, lumbar punctures, finding the right MRI infusion centers, along with follow-up MRIs. Many offices currently aren’t prescribing LEQEMBI; only select centers that started infusing before traditional approval have been doing so. The practicalities are still being established. There's been considerable disappointment in this field historically, leading to skepticism within the medical community. Now that approvals are secured, physicians are starting to engage. The whole field organization is prepared to help navigate this complex launch. This launch is hardly as simple as prescribing a pill and going to the pharmacy; it necessitates substantial groundwork.

Thanks, Chris. Next question, please.

Thank you for taking my question. Regarding subcutaneous LEQEMBI, how do you envision its positioning? Would it serve more as maintenance treatment after IV LEQEMBI, or as an induction treatment? How critical is Cmax for its approval?

That's a great question, Mohit. Biogen and Eisai are focusing on simplifying and improving the patient journey, which is multi-faceted. One aspect is subcutaneous formulation, addressing infusion capacity, aiming for at-home administration. The second is exploring the correct maintenance duration for LEQEMBI therapy. Currently, we have modeling data indicating the subcutaneous formulation would be 720 milligram doses weekly instead of biweekly IV therapy. Important data indicates subcutaneous formulation may yield better safety outcomes, potentially with lower ARIA rates. We expect to complete regulatory filing by Q1 2024, and Eisai will present more data at the CTAD conference this year. We're looking forward to sharing more information regarding patient journey simplification soon.

Thanks, Priya. Next question, please.

Thanks for taking my question. Chris, investors are curious about your thoughts on two specific recent experiences. First, regarding the proposed changes to the Board, what’s your thought process? Secondly, what was your thought process regarding whether to disclose any details?

Let’s take a step back. Many people focused on the surrounding gossip, but a fundamental change in the Board has occurred. Significant changes happen by consensus of the Board, which is a college of peers with equal power. The board conducted significant investor outreach recognizing the need for governance changes alongside internal transformations. Discussions I participated in centered solely on what was right for Biogen. Notably, our new chair, Caroline, possesses unimpeachable integrity and has a profound passion for the company’s mission. In terms of disclosure, we analyze individuals without regard to personal relationships. Glass Lewis and ISS recommended Susan Langer for the Board, and investors voted her in—there isn’t much more to add about that.

Thank you, Chris. Let’s proceed to the next question.

Thank you, good morning. How is the fit-for-growth initiative and cost alignment affecting your M&A and BD strategy? You've mentioned the three disease areas but can you elaborate on the value proposition in each? Are there limitations regarding deal size or the use of equity?

Fit-for-growth reflects the company’s transition. We've historically focused on multiple sclerosis, witnessing prosperity, but recent declines in some products require organizational changes. We are emphasizing the challenge of balancing short-term and long-term investments, necessitating cost efficiency while also investing in growth. We want to position Biogen strategically for future potential. We didn't focus solely on where we are today, but rather where we wish to be as a company. We want to have enough investment in product launches and strategic R&D targets, working backwards to develop actionable plans. Regarding M&A and external growth, we aim to build on our advancements in neuroscience. Neurological conditions are slow-progressing diseases necessitating lengthy and expensive trials. M&A is an option but the goal should be to focus on meaningful early-stage pipeline developments. We are welcoming diversified investment but will proceed judiciously, prioritizing consensus-based investments that maximize shareholder value.

To add to that, we haven't seen anything pushing us towards the need to use equity. We have around $7.3 billion cash on hand. Therefore, we don't perceive a requirement to utilize equity. Our focus is ensuring a rigorous approach to capital allocation, ensuring investments yield the best returns for the company and its shareholders, representing a cultural shift going forward.

Great. Next question, please.

Hey, guys. Thank you. I'd like to ask about the zuranolone program. You have a PDUFA date coming up, but Chris, you've made bullish comments on this previously. Can you right-size our expectations and elaborate on the opportunities for approval? If MDD approval doesn't happen but PPD approval does, how would Biogen execute on that opportunity?

We're in late-stage review, so it's natural that we want to avoid disturbing the FDA process. My superstitious nature means I prefer to wait for the FDA decision before discussing it heavily. The opportunity in mental health is immensely significant, and it continues to grow as we witness persistent news on the rise of such conditions, particularly mental health disorders exacerbated by the pandemic. While there's still a significant taboo around postpartum depression, it represents a major unmet need and we hope zuranolone can address that effectively. We'll provide updates post-FDA decision.

Thanks, Chris. Let’s take our last question, operator.

Thank you. Biogen and Eisai have emphasized the necessity of chronic dosing for Alzheimer's drugs like LEQEMBI against evidence of finite dosing benefits, specifically with the recent AAIC data for Donanemab exhibiting similar levels of reduction and cognition improvement. How do you reconcile this with the potential risk that clinicians may only administer LEQEMBI until plaque is cleared, affecting revenue? Do the data suggest chronic dosing is actually necessary?

Dr. Singhal, would you address that?

This is a key inquiry regarding the scientific hypothesis surrounding chronic dosing necessity for LEQEMBI. Alzheimer’s is a progressive disease, ultimately leading to fatality with neurodegeneration over time. Evidence with LEQEMBI and previous studies with aducanumab shows that clearance of plaques does not equate to preventing further progression of the disease. The Phase 2 trial indicated that while plaques were cleared, we observed a continued increase in tau levels over time, suggesting ongoing disease progression. This drives the discussion on individualized treatment duration for LEQEMBI because we aim to maximize patient outcomes while understanding that stopping treatment could result in further disease advancement. We're working to develop a systematic approach, evaluating long-term data. The jury is still out on definitive answers, but our data suggests ongoing treatment may be warranted.

Priya and I reviewed the data over the weekend, and the complexities involved are overwhelmingly interesting. It's evident the differences aren’t just in the general population but also in every subgroup. The variance we see in safety is quite significant in these populations treated. We have a responsibility as Biogen to invest further in studying these dynamics because our ambition is to establish ourselves as leaders in Alzheimer’s, paired with Eisai in this space.

Thank you for the insights. Finally, operator, let’s take our last question.

Thanks for the thorough call. Returning to LEQEMBI, what indications do you have regarding the launch ramp's speed based on market feedback? Is it progressing faster or slower than anticipated? What positives or challenges have emerged so far?

It’s challenging to gauge, given the unique circumstances wherein a brand-new therapeutic area is being developed. The dynamics around Alzheimer’s patients necessarily depend on neurologists' familiarity with providing treatment beyond standard cognitive tests or conventional drugs like Donepezil. Sites are key to our launch success. They vary in preparedness; some are already familiar developing treatment strategies while others lag, transitioning from a ‘wait-and-see’ attitude to progressively gearing up. We've focused resources towards advancing centers that are ready and engaging others to follow suit. Initial feedback is positive, with numerous inquiries from physicians. Herein lies the key challenge—how students understand the complex treatment and the necessity for extensive education around unique aspects such as protofibrils, distinguishing patient groups, and evaluating treatment options. We're engaging health practitioners thoroughly as we manage upfront executions in the expected revenue trajectories.

Thank you, Chris, and thank you, everyone, for joining today’s call.