Weekly Wrap: Market Underestimates Biogen
Poor trial data has created a buying opportunity in the pharmaceutical company. Plus, T. Rowe makes its fundholders whole, and Restoration Hardware misses the trend.
Jeremy Glaser: A wide-moat bargain emerges in a mostly quiet week, and T. Rowe Price remedies an embarrassing mistake. This time on the Morningstar Weekly Wrap.
Disappointing trial results for a new drug sent shares of Biogen lower this week. Even though we trimmed our fair value estimate slightly on the news, Karen Anderson thinks the market is being too pessimistic about the firm’s development pipeline.
Karen Andersen: One of Biogen's novel multiple sclerosis drugs failed in a clinical study this week, and we think shares over-reacted to the news. Right now, Biogen is trading at about a 30% discount to our fair value estimate for the stock. Overall, this is a wide-moat company, a dominant company in multiple sclerosis, a very strong neurology pipeline behind it as well. So in order to get to recent prices, we would have to remove basically everything in the firm's pipeline including two leading drugs in its late stage pipeline--one in Alzheimer's where it is one of the biggest players in the industry right now. Putting this in a little bit of context, biotech right now--the firms we cover are at about a 15% discount to their fair value estimates. There has been kind of a cloud hanging over biotech overall for about the past nine months or so. This is related to fears that the presidential candidates could put some pressure on drug prices. We think the likelihood of meaningful change affecting companies like Biogen is very low, and we also think productivity in the industry is likely to stay at very high levels for the long term.
Glaser: T. Rowe Price has decided to make its fund investors whole after committing a $194 million error due to it accidentally voting for the buyout of Dell in 2013. Our Gregg Warren sees this move as keeping the firm’s reputation of being investor-friendly intact.
Gregg Warren: Wide-moat-rated T Rowe Price announced this week that it was paying out $194 million to fund shareholders for the mistake it made on the Dell proxy vote back in 2013. We feel that this is the right thing for the company to do for its fund shareholders. We feel it is a big way to avoid a reputational hit. We almost look at it as sort of a marketing expense from that perspective. The company is doing right by its own fund shareholders, and I think in the long run that's going to be the right thing for its stock investors as well. The company has had a long tradition of doing right by both parties, and we think that’s going to continue in the long run. It's a hit to earnings this year, there's no doubt about that. But we think it's a one-off event and the company is going to get back to sort of the track record it’s been generating as we move forward.
Glaser: After strong results from many retailers with exposure to the housing market from Home Depot to Williams-Sonoma, Restoration Hardware's poor numbers and outlook really stood out, said Morningstar's Jaime Katz this week. Shares were down around 20% on Thursday.
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Jeremy Glaser does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.