Good morning. My name is Marjorie. I will be your conference operator today. At this time, I'd like to welcome everyone to the Biogen Business Update. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star 1 on your telephone keypad. Please limit yourself to 1 question to allow other participants time for questions. If you require any further follow-up, you may press star 1 again to rejoin the queue. Today's conference is being recorded. I would now like to turn the conference over to Mr. Chuck Triano, Head of Investor Relations. Mr. Triano, you may begin your conference.
Thanks, Marjorie. Good morning, everyone, and thank you for joining us on short notice this morning. We know we're still busy in earnings season. We will keep this call to about 30 minutes. During this call, we will be making forward-looking statements which are based on our expectations. These statements are subject to certain risks and uncertainties. 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 am joined by our President and Chief Executive Officer, Christopher Viehbacher, and CFO, Michael McDonnell. Chris and Mike will each make some overview comments. Then we'll move to the Q&A session, where we will also be joined by Adam Keeney, our Head of Corporate Development.
You can access the press release and supporting materials regarding today's announcement, as well as a replay of this call at www.Biogen.com. I'll now turn the call over to Chris. Chris?
Thank you, Chuck. Good morning, everyone. As you saw this morning, we announced that Biogen has reached an agreement to acquire Reata for $172.50 per share in cash. That represents an enterprise value of about $7.3 billion. We do believe this is a highly attractive opportunity on our path to returning Biogen to sustainable growth, and it's expected to drive return to revenue and non-GAAP EPS growth. This fits perfectly with Biogen. You know, we're used to being first in class and, and really addressing unmet needs. Skyclarys is the first and only FDA-approved treatment for Friedreich's ataxia. This is a devastating, rare genetic neuromuscular disorder. The U.S. launch has just started. A regulatory filing is currently under review in the EU, and we see the potential for further geographic expansion.
The expected exclusivity period is through 2037. We believe it is poised to become the standard of care for Friedreich's ataxia for the long term, with the potential to meaningfully contribute to Biogen's sustainable long-term revenue growth. As we evaluated this opportunity, it became increasingly clear that Biogen would be the natural owner for Skyclarys. Now, commercial execution in the rare disease space is a very distinct skill set built up over time. You've heard me say that before. We see a significant complementarity with our existing global commercial infrastructure with Spinraza, and of course, more recently, Qalsody. That creates the opportunity for meaningful synergies. Overall, we believe the transaction creates a win for both patients and for our investors. We believe that Reata's limited U.S.-based operational footprint is going to allow for a relatively seamless integration.
Now, if I just turn to Friedreich's ataxia for a moment, this is a really significant unmet need. We believe we can address this with this acquisition. Friedreich's ataxia is a rare but often fatal genetic neuromuscular disease. It impacts approximately 5,000 people in the United States and about 22,000 patients worldwide, with a prevalence concentrated in people of European descent. Friedreich's ataxia is almost exclusively caused by a mutation in the frataxin gene, with most people starting to experience symptoms early in life. The condition damages the cerebellum, spinal cord, and peripheral nerves, resulting in an array, an array of different symptoms, which may include problems with speech and swallowing, trouble walking, hearing and vision problems, as well as heart issues. These symptoms can be quite serious. The average life expectancy for an individual with Friedreich's ataxia is only 37 years.
As I said earlier, Skyclarys is the first FDA-approved therapy for FA, and it has demonstrated a clear ability to improve functional abilities and improve the overall quality of life for patients. We believe that the oral, daily oral treatment with Skyclarys has the potential to become the standard of care for FA over the long term globally. With that, I welcome Mike to run through the financial highlights.
Chris, thank you. Let me take you through some of the financial highlights of this important transaction. Our acquisition of Reata for $172.50 per share in cash represents an enterprise value of roughly $7.3 billion, and we expect to finance the acquisition with cash on hand, which will be supplemented by the issuance of term debt. The transaction is subject to customary closing conditions, and this includes approval by Reata shareholders and also regulatory approvals. We anticipate closing the acquisition in the fourth quarter of this year, and we have received support agreements from Reata shareholders, which hold approximately 36% of its voting power. We believe that the agreement with Reata is consistent with our overarching sustainable growth strategy and prudent capital allocation, and we believe it will create significant long-term value for our shareholders.
We expect that the acquisition will be accounted for as a business combination, assuming that we close in Q4, we expect that this will be slightly dilutive to non-GAAP diluted EPS in 2023, roughly neutral in 2024, and significantly accretive beginning in 2025. All of this being inclusive of associated transaction costs. The majority of this slight near-term dilution is expected to come from lower interest income due to lower cash balances and higher interest expense due to the incremental debt. Importantly, we expect to see a positive contribution to our non-GAAP operating income beginning in 2024. I would add that we plan to update our full year 2023 financial guidance in conjunction with our third quarter earnings call.
Importantly, as Chris mentioned, we believe that Biogen is the natural owner of Skyclarys, and we do expect significant synergies with Spinraza and Qalsody. Biogen continues to generate significant free cash flow, which provides the capacity and flexibility to support our internal R&D efforts, investments in new product launches and other strategic initiatives, both organic and inorganic. With that, I'll turn it back over to Chuck to open up the Q&A.
Great. Thanks, Mike. Marjorie, can we please poll for questions?
Of course, we'll take our first question from Jay Olson from Oppenheimer. Please go ahead.
Oh, hey, congrats on the deal. Thanks for taking the question. Can you just talk about the physician overlap between Spinraza and Qalsody? Are they the same doctors that would treat Friedreich's ataxia? How easy is it to diagnose Friedreich's ataxia, and is there a patient registry? Thank you.
All right. Thanks for the question, Jay. Yeah, there is a huge overlap with Spinraza. It's largely the same physicians, same centers. There may be some origin at the PCP level, which is not the case for Spinraza. So we may at some point think about a, you know, not necessarily a field force, but some omni-channel outreach to PCPs. Largely, we anticipate just being able to use our existing commercial field force. We may be looking in an initial period at adding some of the field force that Reata has now and some of the MSLs. Largely, there's an awful lot of synergy with that.
What was the second part of the question, Jay? Oh, diagnosis. Diagnosis is largely genetic. The genetic tests are actually readily available and reimbursed. Reata hasn't been providing those genetic tests. We do that actually in the case of Spinraza and with Qalsody, and we would anticipate doing that also for Skyclarys.
Thanks, Chris. Can we move to our next question, please?
We'll next go to Carter Gould from Barclays. Please go ahead.
Good morning, and let me offer my congratulations, too. One of the outstanding questions for Reata has been sort of the steps to address that pediatric population. Do you have any further clarity or color on exactly what the FDA ask might be here and sort of the timelines?
We do think an additional study will be needed, and we've built that into our financial model.
Thanks, Chris. Can we take our next question, please, operator?
Our next question comes from Terence Flynn from Morgan Stanley.
Hi. Thanks so much for taking the questions. Was just wondering, if you can comment at all about the market opportunity. It looks like consensus estimates in 2030 are around $1.7 billion. Just wondering how you think that shapes out, both in the U.S., ex-U.S., and, then maybe, current label versus, pediatric label. Thank you.
I mean, one of the interesting things about all the rare diseases I've had any experience with is that, there always end up being more patients than you think. You know, as long as there's not a treatment, there isn't the same always pursuit of really trying to get at the diagnosis. Now there's. This is at different stages, obviously. Most people are diagnosed somewhere in their mid-teens. It can be younger, and it can be older. There are people that do live longer. So I actually think some of those older ones who may have slightly less symptoms might actually now emerge and be seeking therapy.
I, I, I definitely think, you know, the, the, the analyst forecasts are doable. I did go back and, and ask, "How did, how did analyst forecasts compare to Spinraza actual sales?" Actually, Spinraza also demonstrated that, that we exceeded those forecasts. I think it's, it's just this, this function of, The more you look, the more patients you find. I, I used to say when, you know, when Genzyme launched, product for Gaucher disease, it was thought that there was less than 1,000 patients worldwide, and today, I think they're treating over 7,000. Wouldn't suggest that there's going to be that kind of, number of patients emerge for, for FA, but it, it just says that once you start treating, you usually find more.
I, I, I think actually there's an upside to the analyst, sales forecast at peak.
Thanks, Chris.
Thank you.
Next question, please.
Our next question comes from Brian Skorney from Baird. Please go ahead.
Hey, good morning, everyone. I just wanted to dig in on, on your thoughts on the EMA review. I know you submitted tofersen in fourth quarter, which is when Reata also submitted omaveloxolone, so under similar CHMP review periods.
I just wanted to also address AMX AMX0035 from Amylyx recently received a negative CHMP opinion, and although in a different indication than OMAB, there's a lot of parallels in the clinical trial results as the street sort of sees it. I guess, you know, I kind of assume in your process, maybe you looked at Amylyx as well. In that context, I just wanted to get a feel for what your confidence level is in a positive CHMP opinion for OMAB and, and why you think the CHMP may fall on, on a different side here than with the AMX0035 decision?
Thanks, Brian. I mean, clearly, we have to respect the confidentiality of our diligence process since, you know, Reata is still a separate company, but we clearly did a lot of diligence in this. I, I think, it's safe to say that the 120 day questions are pretty much consistent with the same questions that the FDA asked. You know, with regulatory, you never know, but I, I would say we're highly confident in the approvability of Skyclarys in the EU.
Thank you. Next question, please.
Our next question comes from Michael Yee from Jefferies. Please go ahead.
Thank you. A question, maybe, thinking about this deal, assuming it gets completed, your balance sheet. I think that you will look around 3 times lever. Maybe Mike could walk through your thinking around where you will be here and after the deal, then the thoughts around having to work down the debt or generating free cash flow to get back to where you'd like to be and where you're comfortably to be doing more deals. Thank you.
Sure. Sure, Mike. Thanks for the question. You know, we'll be in a good spot. I would say that the gross leverage will be something probably just a bit less than three turns. The net debt will be something even below that. You know, we'll probably keep some buffer cash on hand. You know, maybe that's $1 billion or so. In terms of, you know, term debt, I would sort of estimate that that might be something on the order of about $1.5 billion. We'll structure that very flexibly. We'll prioritize paying that down. I would estimate that we should be able to very comfortably pay that down over the course of two years at the very outside.
You know, we're generating about $1.8 billion of free cash flow per year. We have over $400 million due from Samsung, come April. We've got plenty of sources for very quick repayment and putting our balance sheet back to a similar place that it's in today.
Thanks, Mike.
[crosstalk]
Next question.
Our next question comes from Tyler Van Buren from TD Cowen.
Hey, good morning, guys. Congratulations to both Reata and Biogen on the transaction. A couple of quick ones. Can you please give us a sense of what the latest number of cumulative patient start forms for Skyclarys looks like? The second one is related to the Day 120 questions. Have the responses to those questions been submitted yet?
I think on the patient numbers, it, you know, it, I'll have to check, but I think, you know, we're in possession of quite a bit of confidential information. We haven't closed this deal yet, so I think I would, I would still have to defer to Reata management about what they intend to disclose. On the, Adam, on the, responses to the Day 120 questions, perhaps you can help?
Yeah, this is Adam Keeney here, Head of Corporate Development. That's a very ongoing engaged process currently. The Reata team are drafting their responses. During due diligence, of course, we had an understanding of where they are in that process, that seems to be progressing well.
Thanks, Adam. Next question.
Our next question comes Umer Raffat with ISI. Please go ahead.
Hi, guys. Thanks for taking my question. Maybe a couple here, if I may. First, do you think the deal is a break even at the valuation you're paying if EU is not approved? Sorry, can you hear me?
Yeah, we can hear you.
Okay, let me, let me do it again. Do you think the deal is a break even if, on the NPV you're paying, if EU is not approved? Secondly, on the Day 120 questions that, you have from EMA, are they looking at the open-label extension natural history comparison as a confirmatory evidence the way FDA did? Or at least are they heading in that direction? Finally, Orange Book has 2033 as the patents listed. I know Reata had expressed, they could get extensions through 2037. Is that your base case as well in modeling? Thank you.
We haven't actually specifically looked at whether this is break even without the EU. That said, you know, this is very similar to a lot of rare diseases and in fact, Spinraza. There's no question that significant value comes from ex-US. It could potentially be a break even just from the US. I haven't really modeled that, but again, I think we got pretty comfortable with the approvability in the EU. On the patent diligence suggested that, you know, we put in our comments earlier, we think that there is exclusivity out to 2037. And I don't know whether you want to comment on the Day 120 question. That might be a better thing to defer to Reata management.
Yeah. No, exactly. I would just say that that's a, a conversation that's going on currently, and I don't think we can comment any further.
Great. Next question, please.
Our next question comes from Geoff Meacham from Bank of America. Please go ahead.
Thanks, guys. Congrats on the deal. You know, I noticed like Skyclarys is by far the big value driver, but what consideration did Biogen give to the Nrf2 or Hsp90 programs in the deal? Is there some synergy with any internal programs there at Biogen? Thank you.
We, you know, their programs are early, but I, we can't really say that a lot of value was ascribed to that, although, I, I would certainly say we, we took that into consideration. I, I am actually quite interested. I think we as a company are. I think the Nrf2 technology in particular, fits very well with a number of diseases that we already look at, such as ALS and Alzheimer's. I think one of the things that we will be doing is getting our R&D teams together and thinking about what other things could we do. diabetic neuropathy is a, a, a huge potential market.
We did not spend as much time yet on, on really diligencing, diligencing that, but I, I, I do think that the Reata is potentially much more than just a, a company on Skyclarys. I don't know, Adam, if you'd want to add anything.
I think actually I'll just add that the, the body of literature and scientific support for this particular mechanism, Nrf2, and, and the role of mitochondrial processes in, in a range of neurodegenerative diseases makes a lot of sense, and, and Reata have proven the ability to deliver quality molecules. We'll go through a thorough assessment and understand what the future opportunity could be for their earlier portfolio.
Great. Thank you. Next question, please.
Our next question comes from Sumant Kulkarni from Canaccord.
Good morning. Thanks for taking our question. I know you said, you consider Skyclarys as becoming the standard of care for Friedreich's ataxia, but how did you think of the competitive landscape over time, and how many competitors were you factoring in, let's say, over 5 years?
Well, you know, the near, near-term competitor was, was PTC. They obviously had a, had a setback, and, and it's not really clear what PTC is, is going to do. You've got some enzyme replacement out there. You've got some gene therapy. That all seems to be somewhere in, in, in the distance. You know, I think in diseases like this, y-y-you could well end up with addressing them through a combination. Our, our, our thinking is that we certainly have a, a period of exclusivity here in the marketplace. Even if at some point competitors do come in, we, we do think that this could be the backbone of therapy.
Thanks, Chris. Can we move to the next question, please?
Our next question is Myles Minter from William Blair. Please go ahead.
Thanks for the question. Just a quick one. You mentioned that you'd pay down the debt comfortably over two years. Does that imply that Biogen's not going to do another deal on this scale or, or somewhere underneath it, for another two years? Thanks.
Sure. I'm happy to take that one, Myles. You know, it doesn't necessarily imply that. This is obviously a sizable deal. You know, it, it'll use a meaningful amount of cash. At the same time, you know, we've got $7.3 billion of cash at the end of the second quarter in building. Our balance sheet's in, in a good spot. I have a high degree of confidence that we'll be able to maintain very solid investment grade ratings that we have. You know, we'll continue to look at, at, at business development opportunities as they come. Obviously, this one is, is a pretty sizable one, which we were thrilled to be able to get done. We'll continue to look at a, at a variety of different things.
You know, we're not stretching the balance sheet to a point where we, we have to go, you know, completely dark on business development activities for a period of time.
Yeah, we're not going to let Adam retire here. The, you know, to, to Mike's point, I mean, this is a, a, you know, a sizable deal. It, it doesn't use all of our firepower, but it, it's, it's not a small deal either. You know, basically back in the, the early part of the year, we engaged a, a team internally to, to, to really look at the landscape of, of what's out there that could fit with, with Biogen. Because, you know, you do want to make sure that you, you do the, the right thing and not just the first thing that, you know, somebody comes along with.
We have scoured the landscape, and we do believe that this is an opportunity that will drive both an awful lot of strategic synergy within our portfolio. You know, I've said that I'd like to get Biogen a little stronger in rare diseases, and I see that this acquisition as a move in that direction. Equally, we believe that this is an opportunity to drive shareholder value with this transaction. BD isn't all about M&A. We're pretty close to naming a head of research, and we'd like to have an external growth oriented research organization.
I, I think there are an awful lot of capabilities with, in Biogen that make it unique as, as a partner in, in, in a number of fields. That's certainly anything in neuroscience, certainly now in, in rare diseases and, and also in, in, in aspects of immunology. BD is, is really covering the, the gamut. It's not all, it's not all going to be M&A. I, I would suspect we're going to focus more on the BD-type deals, licensing and, and collaborations for a while. You know, to, to Mike's point, we always keep our eye open. If there, if there's something that we think would drive shareholder value, then, then we would at least look at it.
Great. Thanks for the perspective, Chris. Next question, please.
Our next question comes from Robyn Karnauskas from Truist Securities.
Hi, this is Alex on for Robyn. You mentioned that there could be more FA patients that come into the forefront after the approval. Could you say if there are active efforts from Reata or Biogen that are supporting patient identification for FA? Also, could you remind us, do you now have access to a priority review voucher, and do you plan to monetize that, or how do you plan to use that if you have one? Thanks.
There is indeed a priority review voucher in there. We haven't made a decision about what we're going to do with it. As you know, those are definitely transactable. We'll be reviewing that and looking at that. You know, in terms of outreach, you know, it's early days. People have known the product is coming. I think it's reasonable to say that Reata is experiencing even a better response than they had actually forecast for this. I think FA patients have been anxiously awaiting this therapy. I think it's very good news for them. I think over time, you know, Biogen has a real opportunity to accelerate, particularly the expansion internationally.
we have, we have Spinraza around the world, so we can not only get probably to Europe if it's approved, earlier. You know, there are actually quite a number of patients in potentially in Latin America. Just given the European heritage, that is typically associated with this, we don't particularly see this as a big opportunity in Asia. I, again, I, I, I think Biogen, and I wasn't here, so, but as I, as I observed, I think Biogen did an excellent job of commercializing and continues to do an excellent job. You saw that we returned to growth, actually, in the second quarter with Spinraza.
I do, I do think Biogen brings an awful lot that can really make sure that a maximum number of patients benefit from Skyclarys.
Thanks, Chris. Let's take our next question, please.
Our next question comes from Brian Abrahams from RBC Capital Markets. Please go ahead.
Hi, thanks for taking my question, and congratulations on the deal. Can you talk about how this acquisition will impact your recently announced, Fit for Growth, initiative? How, if at all, this might change expectations for, the cost and personnel reductions measures that you've, recently talked about? Thanks.
Thanks, Brian. No, actually, well, Fit for Growth was always around, what do we, how do we best position Biogen for, for future growth? You know, we've, we've had a long heritage and successful heritage in, in multiple sclerosis. We are still the market leader in there, there is a need for, for reengineering, as I said. It wasn't just a cost reduction exercise. It's, it's around, removing layers in the organization and, and also building the capabilities for the new therapeutic areas that we're going to enter. That's ongoing. That will be done, and, I think, you know, one of the things I had also said is I didn't really want to, do, an acquisition too early until we actually had a plan for the, internal organization.
By the time we close this, I think certainly in the U.S., we'll have been able to implement most of what we need to for Fit for Growth, at least in the U.S. Around the world, that will take more time. I think this, this is actually gonna be pretty synergistic. If I may, I think as I look now at Biogen, you know, we have we have Leqembi that is already approved. We have Skyclarys, which is already approved. We have a PDUFA date for zuranolone next week, and we have an opportunity to really reengineer our cost base and get our capabilities. I think this places Biogen in an outstanding position for growth going forward.
Thanks, Chris. Next question, please.
Our next question comes from Ami Fadia from Needham.
Hi, good morning. Thanks for taking my question. Can you put some specifics around cost synergies from the deal? It sounds like you're not gonna take on much of the organization, but, but perhaps a little bit. Maybe if you could sort of quantify how that contributes to accretion in 2025. Also, if you could comment if this process was a competitive bid process? Thank you.
Mike, do you want to take the numbers questions?
Yeah, sure. Thanks for the question, Ami. And it's, you know, it's a, it's a very attractive financial profile. This is, you know, this is an oral, and royalty obligations are, are modest, so you're, you're looking at a, at a very high gross margin product. Then, you know, from a cost perspective, there is some ongoing R&D related to the pediatric study, that'll go for, for a few years. Obviously, you need to add some selling, you know, sales and marketing cost in order to market the product. As we've said, this will bolt on very nicely to our rare disease platform, along with Spinraza.
You know, in terms of incremental cost below the gross margin line, you're not looking at, at a huge amount of money, probably, you know, maybe $150 million, and then winding down to closer to $100 or less over time. A very high operating margin that we would expect as this goes, which is why we made the comment about significant accretion expected by 2025.
We'll wait for the S-4 to see whether it was indeed a, it felt like a competitive process, but, you know, until you see the S-4, you don't know, for sure.
Right. Can we move to the next question, please?
Our next question comes from Marc Goodman, Goodman from Leerink Partners. Please go ahead.
Thanks for taking our question. This is, Rudy on the line for Marc. I was curious about how should we think about the product ramps? Do you think we're gonna have a bolus of patients following the initial launch, given the high awareness? Thanks.
You know, again, I'll, I'll, I'll defer to to to Reata because, again, they're an independent company and, and, you know, it would be inappropriate for us to share confidential information gained through diligence. I, I, I would say, I think I'm on safe ground to say that, that Reata management are seeing better than, and faster uptake than, than they themselves had, had forecast.
Thanks, Chris. Operator, can we move to our last question, please?
Of course. Our last question comes from Paul Matteis from Stifel. Please go ahead.
I guess it's fate for me to re-ask a little bit of my question from earnings, one of the questions I've gotten from investors is just whether the timing of this deal has any read-through onto your confidence or not in zuranolone and the breadth of potential there. Maybe you can't comment, I thought I should try to ask. Thanks so much.
No, I mean, you know, as I said, Paul, we, we've started early this year and have been working our way through the landscape of companies. We will, you know, I think we will always continue to do that. I mean, I, I think personally as a, the CEO, you have opportunities inside the company, but you should always be mindful of things that are outside the company. If, if for no other reason, you see what your competitors are doing and, and, and where there's value creation. I, I think increasingly our industry has, has relied more on, on external growth, certainly to complement internal growth. You know, this has gone over some period of time, and, and, I, I, I will say that we were able to move quite quickly.
I, I, I do have to compliment the Biogen team. You, you know, this happened very quickly. We put able to put together a strong team to due diligence. I'll take the opportunity to congratulate Adam Keeney. He's been here for 3 months, and he's already got us a substantial deal. I don't know what he's gonna do next quarter for an encore. No, I, I, I... Look, this is this, this is this gives us another driver of growth. As I said, you know, I think Fit for Growth is extremely important. I mean, you know, I really can't tell you how important that is in terms internally.
I mean, you're, you, you, you guys are all gonna be interested in what's the impact on the numbers, but this is a, this is a substantial cultural shift inside the company. It really is really trying to make us really agile and focused and accountable to really be able to take advantage of the growth drivers that are in front of us. With, with, you know, with Leqembi already launched, with a PDUFA for zuranolone next week, and now with this product, you know, I think we've, we've got, you know, we've got a pretty outstanding growth outlook for the company over the coming years.
Great. Thank you, Chris and Mike and Adam. Thanks to everyone for joining us on short notice this morning. This will end our call.
Thank you. Ladies and gentlemen, that does conclude today's conference. We appreciate your participation. Have a wonderful day.