Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Barron’s was out this past weekend with a negative article on Alexion Pharmaceuticals (ALXN), stating a lot of things that are already known – namely that the current situation is this is a “one drug” story. [Feb 12, 2012: Alexion Pharmaceuticals – One Drug is Enough When it Costs this Much] But of course they have a very large megaphone. Alexion was one of the few stocks in my watch list to actually open down today.
As with any high growth, high beta stock – eventually the super growth era ends, and “valuation once more matters”. When it does, it’s usually a dark and ugly point for the stock as you lose the momentum growth investors and the “value” investors won’t be touching said stock until a much lower point. Barron’s seems to be making a pre-emptive strike on ALXN in this regard.
- So it goes lately for Alexion’s doubters. But there’s good reason to be cautious about the stock, mainly because of Alexion’s dependence on just one drug—Soliris, which treats a rare, life-threatening blood disorder called paroxysmal nocturnal hemoglobinuria. PNH, as it’s also known, damages red blood cells and leads to anemia and death. There may be no more than 10,000 PNH patients worldwide, but the estimated annual cost for one patient can be more than $400,000. The drug lets sufferers live as long as they would if they didn’t have the disease.
- In September, the Food and Drug Administration approved the use of Soliris for a second, even rarer ailment called atypical hemolytic uremic syndrome, or aHUS, which causes kidney disease and high blood pressure, mainly in children. But that market is tiny. In the U.S., there are no more than 700 patients.
- Over the past three years, Alexion’s sales have grown at an average annual clip of 45%, while profit has climbed 50% annually. The Cheshire, Conn., biotech outfit’s stock has been blazing, too, rising 65% in 2010, 77% in 2011 and 31% since January.
- For 2012, the company has said it expects worldwide revenue—it does more than half its business abroad—of $1.04 billion to $1.07 billion, versus $783 million last year, and non-GAAP (generally accepted accounting principles) earnings of $1.60 to $1.70 a share, up from $1.38 last year At its recent stock price, that would give it a current-year P/E ratio around 55 to 59.
- But, while still robust, profit growth is slowing. In the current quarter, it’s expected to be 30% above the year-earlier level—the weakest quarterly gain in at least three years and far below the 82% rise in 2011’s final three months. For the year, it’s likely to come in at 14% to 28%. Revenue growth is also decelerating, mainly because most PNH victims have been identified and expanding the user base is thus becoming more difficult. Based on the company’s numbers, revenue will rise 36% this year, versus 45% in 2011. Most analysts see the yearly sales-growth rate slipping to 24% in 2014. The figures are impressive, but might not be impressive enough to sustain Alexion’s lofty P/E.
- PiperJaffray estimates that sales of Soliris could exceed $5 billion in the latter half of this decade. But Morningstar biotech analyst Lauren Migliore is skeptical. “There are only a handful of drugs in the world that can claim $5 billion in sales, let alone for a drug [like Soliris] with only 8,000 to 10,000 patients in its primary indication [PNH] to achieve that level,” says Migliore, who asserts that the “intrinsic value” of Alexion’s common is only $52, based on maximum sales of $3.5 billion in the period.
- In conversations with the company, investors and analysts say, Alexion officials have acknowledged the slowing growth and stressed the need to develop new uses, or “indications,” for Soliris, as well as the necessity of developing or acquiring new drugs. (Alexion’s CEO, Leonard Bell, declined to be interviewed for this article.)
- Alexion recently announced the acquisition of privately held Enobia Pharma, a biotech outfit whose therapy for hypophosphatasia, a rare and potentially life-threatening genetic bone disorder, is in clinical trials. Alexion is paying $610 million in cash and possibly $470 million more if certain sales milestones are reached. Analysts say the deal could add $600 million to Alexion’s global sales.
- Company researchers are aggressively exploring additional nephrological and neurological indications for Soliris. Although it has five compounds in its pipeline targeting severe and ultra-rare disorders, these are in very early-stage development, and some have established competitors.
- One question mark is how much insurers and other payers will continue to ante for treatment of “orphan” diseases like PHN and aHUS. Coverage already has been limited for such drugs in the U.K. and some other parts of Europe. “There’s increased scrutiny by physicians, insurers and other payers about reimbursement issues because of recent changes in the Affordable Care Act in the U.S.,” says Charles A. Stevens, vice president of Parexel Consulting, a biopharmaceutical trade organization. He says there are 3,000-plus orphan drugs, compared with just a few hundred several years ago. “Payers may take a more serious look at these drugs in the future and could restrict coverage based on prices of the drugs.”
Disclosure Notice
Any securities mentioned on this page are not held by the author in his personal portfolio. Securities mentioned may or may not be held by the author in the mutual fund he manages, the Paladin Long Short Fund (PALFX). For a list of the aforementioned fund’s holdings at the end of the prior quarter, visit the Paladin Funds website at http://www.paladinfunds.com/holdings/blog
