Alexion Looks Better After Q2 Earnings

Summary

Alexion reported earnings and revenue that beat estimates and raised the full-year revenue and EPS outlook.

As a result of rising expectations, Alexion’s forward valuation had come down from unsustainable levels.

Given the positive changes I am upgrading Alexion from sell to hold.

Alexion (NASDAQ:ALXN) reported earnings last week that failed to excite investors as the share price went down in the next two days. The results were better than expected and the company raised full-year revenue and EPS guidance. Given the much better expectations and lower trailing and forward valuation, I am upgrading Alexion from sell to hold. I still do not like the reward/risk ratio, but the company is on a steady growth path and a favorable entry point could emerge in the near-term.

Alexion's Q2 revenue and earnings rose 38.5% and 53.4% respectively. The company also guided full-year revenue to a range of $2.18 billion to $2.2 billion, up from the previous range of $2.15 billion to $2.17 billion. Non-GAAP EPS was also revised upward, from the previous range of $4.75 to $4.85 to a new range of $4.95 to $5.05.

There are reasons to be optimistic about Alexion's future growth. CEO Leonard Bell stated in the Q2 conference call: "We continue to see the majority of our growth ahead of us in both PNH and aHUS as our disease education initiatives help physicians to optimize patient care worldwide." He further stated that the strength of the global launch in aHUS reinforces the confidence that the aHUS opportunity is as large as PNH and perhaps larger. The company also continues to make progress with 7 new indications or product approvals through 2018. This leads me to believe that Alexion's high growth phase is far from over.

I had concerns about Alexion's valuation late March and suggested that Alexion should be sold. Although valuation is still high, the improving prospects and favorable growth trends make Alexion less risky at the moment and I am upgrading the stock to hold/neutral. I still do not like the reward/risk ratio at the current price, but there might be room for additional upside in the next couple of months.

A look at Alexion's P/S and EV/EBITDA ratios in the last two years reveals that the company is trading approximately at the middle of its valuation range (if we exclude the January-March 2014 part of the chart). I expect that Alexion should continue to trade in its valuation range in the next six to twelve months as the growth prospects have improved significantly since my March article. This means that I expect Alexion to trade between 35x and 45x 2014 EBITDA. Since the forward EV/EBITDA ratio is 30 at the moment, this translates into 18% upside based on the low end of the valuation range. Based on the current EV/EBITDA ratio of 43, the potential downside is around 20%. The reward/risk ratio here is almost neutral, but could be favorable if we take the high end of the expected valuation range, which means that the potential upside is around 50% in the next six months. But it is better to be conservative here, since the growth is expected to slow down in 2015 and might bring the valuation range lower.

Source: YCharts.com

Conclusion

Alexion's growth phase is far from over and its valuation has become manageable. The reward/risk ratio is not favorable for either the bulls or the bears except in the case of Alexion trading at the top of its valuation range in the last two years. However, given the expectations for a growth slowdown, I do not believe that this will happen. A 10% to 20% correction in the share price could tilt the odds in the bulls' favor.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.