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William Meyers, OpenIcon (18 clicks)
Long only, tech, biotech, research analyst
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Alexion Pharmaceuticals (ALXN) has a single therapy on the market, Soliris, which treats two rare diseases. Yet it has become highly profitable.

I am looking for new biotechnology stocks to invest in because Amgen (AMGN) is acquiring Onyx Pharmaceuticals (ONXX), which I have been long in. I will have cash to re-invest. I accumulated the stock back in 2008-2010 at between $26.20 and $34.87 per share. I sold some for $80.35, then for $133.40, and should get near $125 for the rest.

I am looking for an Onyx-like (in 2008) situation: where I believe the likely long-term (2 to 5 year outlook) is not truly reflected in the current price. I will likely take three new long positions with the cash, because I know I can't really see the future. I like to be diverse even within the narrow field of biotechnology.

There are a lot of biotechnology stocks out there to choose from. Alexia is part of the Nasdaq 100; I am looking at the Nasdaq 100 healthcare and biotech stocks first because I have done well with the ones I already own: Gilead (GILD), Biogen Idec (BIIB), and Celgene (CELG). Then I will look at some of the many smaller biotech companies that might offer better returns that Alexion.

Alexion Pharmaceuticals is controversial because of the high cost of treatment with Soliris (eculizumab), rumored to be roughly $400,000 per year. However, the science behind Soliris is great. Because the number of treatable patients is relatively small, and because the diseases are life-threatening, the high cost could be justified by the risks taken to fund the high development costs. Soliris was first approved for the treatment of PNH (paroxysmal nocturnal hemoglobinuria), a rare but deadly blood disorder which results in severe anemia, blood clots, and eventually death. It is caused by a defect in the membranes of the red blood cells. Soliris is a monoclonal antibody that selectively inhibits the cascade of immune-response events caused by the defective cell membranes. Soliris received FDA approval for PNH in 2007.

More recently Soliris was approved for the treatment of aHUS (atypical hemolytic uremic syndrome), which in the atypical case is congenital, where similar defects and immune cascades affects both red blood cells and platelets, often causing kidney failure. Approval for this indication came in September 2011. Both indications have also been approved in Europe and are being rolled out in other nations.

There have been concerns about insurance company and national health care plans' willingness to pay $400,000 per year for a therapy. It is understandable: if patients start as children and live otherwise normal lives (there is no known upper end yet on the effectiveness of Soliris), the bill could run on the order of $28 million per life. There was some push-back in England around aHUS, but apparently the idea of denying children life-saving therapy there put pressure on regulators. Recently an English regulatory committee recommended reimbursement, but final reimbursement approval is not in yet. France and Belgium are also in negotiations about reimbursement.

It is notable that if you take the current cost of goods sold as a percent of revenue, which was 11.6%, there is a lot of room for negotiation. Expanding numbers of patients should swamp any discounting that may be necessary to get new patients in Europe.

Of the $370 million in sales in Q2 2013, the bulk is presumably for PNH. Alexion management estimates the aHUS opportunity may be as large as the PNH. PNH is still ramping sales because new nations are being added for commercialization, identification of patients by doctors is improving, and patients are living longer instead of dying.

The $370.1 in Q2 revenue was up 9% sequentially from $338.9 million and up 35% from $274.7 million in the year-earlier quarter. GAAP net income was $95.9 million, up 17% sequentially from $82.2, and up164% from $36.3 million year-earlier. EPS (earnings per share) was $0.48, up 17% sequentially from $0.41, and up 167% from $0.18 year-earlier.

Those strong revenue and profit growth rates would seem to be reflected in the current stock price, though it closed on August 27, 2013 at $105.70, 16% off the 52-week high of $125.65, but up 29% from the 52-week low of $81.82. The trailing GAAP P/E is a sky-high 60. But if you use this quarters' non-GAAP EPS of $0.73 annualized, the non-GAAP P/E is a more-reasonable 36.

Clearly some further EPS growth is built into the price. What I don't see in it yet is the future value of the pipeline. Not all pipeline candidates get FDA approval and successful commercialization, but Alexion management seems to be one of those teams that is careful about picking its candidates and spending R&D dollars on them. Soliris is slated for four more kinds of therapy: neuromyelitis optica; severe, refractory myasthenia gravis; kidney transplant rejection issues; and STEC-HUS (caused by E. coli toxin). While each of these diseases has low numbers of patients, again the prices charged and gross margins will be high. In addition variations on the Solaris molecule are pre-clinical but may begin clinical trials as early as 2014.

Asfotase Alfa for hypophosphatasia (HPP) received Breakthrough Therapy designation status from the FDA and is in Phase II. Management thinks commercialization could begin before the end of 2014. A Phase I dosing study of cPMP replacement therapy for Molybdenum Cofactor Deficiency Type A has started. A Phase 1 study of ALXN1007 in healthy volunteers was completed; it is slated for treating inflammatory disorders. The Phase 1 safety study of ALXN1102/1103, also for inflammatory disorders, continued in the quarter.

If I had picked ALXN at the end of 2008 instead of ONXX, how would they compare? ALXN ended 2008 at $17.23, so it is up 513% from there as of today. ONXX ended 2008 at $33.49, so it is up "just" 268%. Some biotechs have done even better over that period. The point is that you can beat the market if you can discover undervalued pipelines. Another point I would like to make is that both stocks had long periods when they did not appreciate in value (stock price); it took years for the pipeline value to materialize. To do this type of investing, you need to do careful research, you need to be able to wait long periods of time sometimes to find out if you are right, and you need to recognize that you will be proven wrong at least once in a while.

My overall take on ALXN is that I could buy it at present and, while there is no short-term guarantee, it is highly likely to be ramping pretty quickly in 2015 and beyond. I would rather buy it at a lower P/E ratio, but by waiting I also might have to pay even more. Short term, I make no prediction about the price of ALXN. In any case I am going to look at more biotech companies before making any decisions, unless there is a market panic and I can pick up ALXN shares for substantially less than $100.

Source: Alexion Pharmaceuticals Offers Long-Term Value