- Alexion is trading near the high end of its historical valuation, and it would be hard to justify further expansion.
- Government inquiry about Gilead’s Sovaldi price affected Alexion’s share price since it has the most expensive drug in the world.
- NPS Pharma might be a better stock to own, since it has a similar valuation to Alexion and stronger growth prospects.
Shares of Alexion (NASDAQ:ALXN) have risen more than 80% from its late October 2013 lows, and although the stock is down 20% from its February high, I would not buy this dip. Although the company's growth prospects are still quite promising, I do not believe that they can justify the current valuation, which is near the high of its 5-year range. Recent government inquiry about the high price of Gilead's Hepatitis C drug Sovaldi has brought Alexion's share price down 8% in just one day, as Alexion has one of the most expensive drugs on the market. While the government inquiry may amount to nothing, I think that it is a risky proposition to own shares of Alexion at the moment. NPS Pharma (NASDAQ:NPSP) presents a much more comfortable investment, since it has a lower forward valuation than Alexion and stronger growth prospects.
Alexion has been benefiting from strong growth of its sole drug Soliris, and its share price has risen significantly in the last six months. The most recent strength of the stock price (until last week) is attributed to a strong Q4 report, analyst upgrades and thanks to the raised revenue and EPS guidance. Everything was great until the end of February. That was the time when the biotech sector (NASDAQ:IBB) began to break down, and the correction worsened last week, when members of congress asked Gilead to explain Sovaldi's hefty price.
Valuation and price risks outweigh potential reward
A look at Alexion's TTM P/S ratio and EV/EBITDA ratio reveals that Alexion is trading close to the high end of its valuation range in the previous five years. Although the growth prospects are still compelling, I do not think that they can justify a breakout from its previously established long-term valuation range. If analysts are correct with their long-term growth projections, Alexion could be trading at a more modest valuation going forward. The company has been growing revenue between 40% and 50% since 2009, and the growth is expected to stay in that range in 2014, but expectations are lower for 2015, with a projected 20% increase in revenue for that year. If the revenue growth slows down as projected, it might drive down Alexion's valuation to a more acceptable level.
The previously mentioned inquiry about Gilead's Sovaldi pricing strategy could also weigh on Alexion's share price, as it did last week, when the stock fell 8%. Alexion's Soliris is the most expensive drug in the world, with a $569,000 price tag.
NPS Pharma is a better choice
When we compare the estimated growth levels of Alexion and NPS Pharma and their respective forward valuations, NPS Pharma comes out as a clear winner. NPS Pharma has successfully launched Gattex last year, and the company expects Natpara to be approved by the end of 2014. In addition to Gattex and Natpara, NPS has two more products in the pipeline, NPSP790 and NPSP795. You can read more about my thoughts on NPS here.
In the table below, you can see the revenue growth expectations for Alexion and NPS Pharma and their expected forward P/S and EV/EBITDA ratios. The growth and valuation leaves NPS significantly undervalued when compared to Alexion, and NPS should be trading at a forward premium over Alexion, not the other way around. Based on a forward 2015 P/S ratio, NPS should rise at least 50% to catch up to Alexion's valuation. I would not use the 2014 EV/EBITDA ratio to judge their growth potential, since NPS Pharma is at the beginning of its earnings expansion, while Alexion has been profitable for more than five years. The 2015 EV/EBITDA estimates show what kind of EBITDA growth NPS is expected to deliver.
Source: Yahoo! Finance, Thomson Reuters
However, both stocks are facing downside risks if the selloff in the biotech sector worsens. It might drive their respective share prices and valuations further down to a more favorable entry.
Alexion is trading near the high of its valuation range in the last five years, and I believe it offers limited upside from the current price. I would wait for the biotech sector to stabilize before initializing positions. NPS has much better growth prospects and a more favorable forward valuation. Recent pricing issues might drive Alexion's and NPS's share price further down, and we might get a more favorable entry point in the next couple of weeks.