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Biotech Alexion: A Giant In The Tiny Orphan Market

By: Investor's Business Daily
Posted: 9/13/2013 1:21:00 PM
Referenced Stocks: ALXN;AMGN;CELG;GILD;RHHBY

Orphan-drug firmAlexion Pharmaceuticals ( ALXN ) has settled back into busy business as usual since its stock got such a sharp jolt on an otherwise sleepy summer day in July that trading was briefly halted.

Alexion shares soared almost 13% on July 12 after multiple reports surfaced of a potential takeover bid by Swiss drugmakerRoche Holding ( RHHBY ).

Nothing happened.

Alexion spokesman Irving Adler called the reports last week "old news," declining to comment further "on rumors."

If the rumor were true, Roche would presumably have been interested in Alexion's one and only drug and moneymaker, Soliris, which treats two ultra-rare blood and kidney disorders.

Orphan drugs treat diseases with patient populations so tiny that big pharma firms don't usually bother with them, though Roche is hardly a small drug outfit, with $50 billion in revenue and a market cap of $215 billion.

Tiny by comparison, Alexion is richly valued, with a market cap of $22 billion.

Analyst Geoffrey Porges of Sanford C. Bernstein said, "It is one of the most expensive stocks in the entire biopharmaceutical group, in effect trading at a 40% to 50% premium to other large-cap companies with similar profiles."

High Expectations

Such a rich valuation puts a "big burden" on management to over-deliver on earnings and revenue each quarter, he says.

Alexion is the sixth largest company by market capitalization in IBD's Medical-Biomed/Biotech industry group, afterGilead Sciences ( GILD ),Amgen ( AMGN ),Celgene ( CELG ),Biogen Idec (BIIB) andRegeneron (REGN). The group is ranked No. 5 of 197 that IBD tracks.

After the mid-summer stock spike, Alexion went on to report another terrific quarter, with second-quarter earnings soaring 55% from a year earlier to 73 cents a share, or $147.2 million in net income. Revenue rose 35% to $370 million.

The Connecticut-based biotech firm has been posting 30% to more than 60% per-share earnings growth every quarter the last few years as sales kept rising.

How does it keep growing so much when its chief molecule treats ultra-rare conditions with only a handful of patients per every 1 million in population?

First of all, Soliris is very expensive. And Soliris keeps attracting a steady stream of new patients for its two approved indications, though just how many is unclear as Alexion doesn't disclose patient numbers.

It's sold in nearly 50 countries but most of the sales are in the U.S., Western Europe and Japan.

Soliris' lead indication is for the blood disorder called paroxysmal nocturnal hemoglobinuria, or PNH, which helps to reduce the destruction of red blood cells caused by it. The second indication is for the kidney condition known as atypical hemolytic uremic syndrome, or aHUS. Both are life-threatening if left untreated.

"It's a highly effective drug," said Leerink Swann analyst Howard Liang. "Once you capture newly diagnosed patients and convert them into customers, the patients stay on the therapy for the rest of their lives."

With PNH, Soliris keeps gaining new patients in its core markets -- the U.S., Western Europe and Japan. It has also gained traction lately in Turkey, Brazil and Russia.

Alexion's more recent Soliris launch for aHUS patients in the U.S. and Europe has been moving along well, management says. In Europe, progress has been particularly strong in England.

On Friday, Alexion said it received approval in Japan for Soliris' use in patients with aHUS and expects patients to begin using it in the fourth quarter.

"Our opportunity to serve aHUS patients is at least as large as our opportunity to serve patients with PNH, and perhaps larger," said CEO Leonard Bell in a late-July conference call.

In June, the New England Journal of Medicine published positive data from the company's registration trials on Soliris in patients with aHUS, which Bell said helped to broaden understanding of the product's impact on those patients.

More Uses For Soliris

Soliris also has the potential to be used more broadly in other diseases, says Liang.

Alexion is preparing a registration trial for its use in a neurological condition called neuromyelitis optica, or NMO, and another to treat severe refractory myasthenia gravis, or MG.

In July, regulators in the U.S. and Europe granted orphan-drug status for Soliris for treating NMO.

Alexion also hopes over the next several years to receive approvals for using Soliris in kidney transplants, certain grafts as well as "next-generation follow-on products."

And second and third products are in the works. The first is asfotase alfa, an enzyme replacement therapy now in late-stage development. It's meant to treat hypophosphatasia, or HPP, an inherited, ultra-rare metabolic disorder that damages organs and bones.

The other is cPMP for infants with molybdenum cofactor deficiency Type A (MoCD), a severe, rare genetic metabolic disorder.

Alexion has nine lead development programs under way with five therapeutic candidates.

"Upside will come from consistent growth with current and additional indications," Liang said. Like most analysts, he expects revenue to more than double by 2017, when he sees it topping $3 billion, from $1.5 billion this year.

Analyst Porges thinks revenue needs to grow at a faster pace than analysts forecast to justify the stock's high valuation. Shares were last trading near $114, up 22% for the year after pulling back in August and pushing forward again.

"For this stock to have upside they need to achieve revenue at least 25% to 30% above what's in the consensus already," Porges said.

But it's "almost impossible" to forecast demand for Soliris, he says. So investors must rely on management to guide them. He says management "has turned much more bullish" in communicating revenue potential "and part of the reason may be an unwelcome overture from a pharmaceutical acquirer."

Analysts expect earnings to keep growing in the double digits for the foreseeable future, but at a somewhat slower rate than previously. They forecast year-over-year earnings growth of 42% this year, to $3.03 a share. They see it slowing to 10% next year as development programs ramp up.

Earnings are seen growing 25% in 2015 and 33% in 2016, according to the poll by Thomson Reuters.