Shareholders of Biogen would probably like to forget the past six months even happened. The stock dropped 31.4% and now trades at $140.49. This was partly driven by its softer quarterly results and might have investors contemplating their next move.

Is now the time to buy Biogen, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Even with the cheaper entry price, we're cautious about Biogen. Here are three reasons why BIIB doesn't excite us and a stock we'd rather own.

Why Do We Think Biogen Will Underperform?

Founded in 1978 in Switzerland as one of the first biotech companies, Biogen today (NASDAQ:BIIB) discovers, develops, and sells therapies for neurological and neurodegenerative diseases like multiple sclerosis (MS) and Alzheimer’s disease.

1. Revenue Spiraling Downwards

A company’s long-term sales performance is one signal of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Biogen struggled to consistently generate demand over the last five years as its sales dropped at a 7.6% annual rate. This was below our standards and is a sign of poor business quality.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Biogen, its EPS declined by more than its revenue over the last five years, dropping 13.3% annually. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Biogen’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Biogen falls short of our quality standards. After the recent drawdown, the stock trades at 8.7× forward price-to-earnings (or $140.49 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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