• Biogen’s (BIIB) Aduhelm looks like a market failure
• Approvals on treatments that don’t cure are now under challenge
• There can be no unlimited draw from a limited pool of funds

When Biogen (NASDAQ:BIIB) stock got its Alzheimer’s drug Aduhelm approved last June, the stock spiked to nearly $420/share. It was due to open April 11 at $213. As I wrote recently, the whole biotech sector has gone into a spin.

It’s not a coincidence.

The way I see it, Biogen got greedy. Aduhelm doesn’t cure Alzheimer’s, but Biogen priced it as though it did, at $56,000 per year.  The price threatened to upend the entire Medicare system, where millions of people have Alzheimer’s.

Both sides have since backed off. Biogen cut its price, and access to Aduhelm was limited. But the damage has been done, and it will take years for the sector to recover.

What Went Wrong

Bargain hunters will be tempted to buy BIIB stock today. Its market capitalization of $30.57 billion means it’s selling for less than three times sales. Its trailing price to earnings ratio is 20.6.

But Biogen is not growing. Revenue in 2021 was $10.7 billion and $14.4 billion in 2019. Patents are expiring on its top-selling drug, Tecfidera. Viatris (NASDAQ:VTRS), formerly Mylan, is challenging the patent on Tecfidera, a drug for muscular dystrophy. Spinraza, which treats spinal dystrophy and brought in $1.7 billion last year, faces competition from Novartis (NYSE:NVS).

Tecfidera and Spinraza illustrate a larger problem, Biogen’s aggressive pricing. Spinraza costs $700,000 for the first year of treatment, then $350,000/year thereafter. Tecfidera can cost as much as $62,000/year for life. 

As with Aduhelm, these drugs aren’t cures. They’re treatments. The cost is continuous. While current law states that Medicare can’t bargain over prices, and patients can get any drug regulators approve, you can’t have an unlimited draw from a limited pool of funds. Regardless of who organizes the pool, someone has to say no.

The Precedent

That’s what happened with Aduhelm. Despite a high-profile ad campaign from some Alzheimer’s advocates  and editorials from doctors, even the community seems split by Aduhelm’s limited efficacy and the high price.

Aduhelm was approved under the Food and Drug Administration’s “accelerated approval” process. That process is now under threat. So is the cozy relationship between drug makers and regulators.

A critic who followed the Aduhelm process slammed Biogen’s Phase 3 study, which came out nearly a year after approval. He called it “as true as saying the Earth is flat.”

Scientists disagree over whether the amyloid plaques Aduhelm treats are the cause of Alzheimer’s. Many think the biochemical pathways that result in the plaques should be the priority.

But it’s the bureaucratic and business issues that are most salient. Regulators can no longer approve every drug offered, at any price demanded. Drug companies are now rolling out alternative drugs to profitable franchises. This competition should eventually cut prices. This will limit the value of new drug franchises.

The Bottom Line

When it became obvious that Aduhelm was facing pushback, some analysts wisely sold out. 

Biogen is continuing to defend Aduhelm , and how its approval was handled. Biogen has also announced a $5 billion stock buyback after Medicare cut access to the drug.

My advice is to take it.

The ripple effects of the Aduhelm controversy will last for years. At issue is more than the “accelerated approval pathway.” The entire system for drug approval and pricing needs reform.

Right now, companies like Biogen are fighting reform with everything they have. But in the end, it doesn’t matter. Someone has to say no on costs, or the system goes broke.

The industry is only at the denial stage over the death of its model. Until I see something like acceptance, I can’t see myself investing in BIIB stock.

On the date of publication, Dana Blankenhorn held no positions in companies mentioned in this story. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.