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At Helix Investment Management, we look for companies that can not only transcend macroeconomic business cycles, but can also withstand the competitive pressures of the marketplace. And in Alexion Pharmaceuticals (ALXN), we have found both.

Overview

Alexion is a biotechnology company based in Chesire, Connecticut that manufactures drugs to treat extraordinarily rare diseases, such as PNH (paroxysmal nocturnal hemogloburinga), in which a body destroys its own red blood cells, and aHUS (atypical hemolytic-uremic syndrome), a disease where the body progressively destroys its own vital organs. Alexion currently has one drug on the market, Soliris (eculizumab), which treats both of these diseases, and is working to expand the uses of Soliris. In addition, Alexion has some promising products in its pipeline (more detail to follow). Over the past year, Alexion's stock has soared, advancing over 85%, compared to a 2.6% rise in the S&P 500.


(Click to enlarge)

So why recommend Alexion at all when the stock is trading near all time highs? Simply put, we think that Alexion's best days are ahead of it. So does Goldman Sachs, which added Alexion to its conviction buy list on Friday, with a price target of $91. In its upgrade, Goldman noted that, "sustainable high growth potential when growth is hard to find, and a 30%+ top-line and bottom-line CAGR in 2011-2015E; a diversifying ultra-rare drug franchise (Enobia brings in another late-stage growth driver), which we see as most shielded from political and pricing risks which the industry faces; and an attractive M&A candidate; ALXN's key asset Soliris is wholly owned and has a long terminal value."

We agree with Goldman Sachs on the strengths of Alexion. Below we review the fundamental strengths of this company, and why we believe that it will continue to outperform the broader markets.

Competition

All public companies like to tout their ability to beat the competition, and the biotechnology sector is no stranger to that. Competition in this sector is fierce, with multiple companies often developing multiple treatments for the same disease. Alexion, however, does not have to worry about competition. Simply put, there is none. Alexion has no competitors. No other drug company in the world has a treatment for PNH or aHUS, and the vast majority of diseases targeted for treatment by Alexion are also ones that only it focuses on. PNH occurs at a rate of 1-2 cases per million, and only about 500 new cases are reported each year in the United States.

Alexion's focus on orphan drugs, which target extremely rare diseases, allows it to carve a niche for itself that is free of competition. Orphan drugs are granted special status by the FDA, including research tax incentives, longer exclusivity, and priority review status. In Alexion's pipeline, the only disease to have meaningful competition is AMD (age-related macular degeneration), a disease targeted by Regeneron (REGN) and its Eyela drug. Other than that, Alexion targets diseases that no one else does. A prime example of this is its cPMP replacement therapy (currently in preclinical testing), which is a treatment for molybdenum cofactor deficiency type A, a disease that is usually fatal within months of birth. There have only been about 132 documented cases of the disease. Alexion's focus on such rare diseases means that it does not have to worry about pricing. Soliris holds the record for the world's most expensive drug; it is priced at $409,500 per year. Such a laser-like focus on extremely rare diseases allows Alexion to operate in an environment that is truly free of competition, and allows it to be ranked as the 6th fastest growing company by Fortune.

Pipeline & Acquisitions

Alexion's pipeline, which currently contains 16 different trials, can be split into 2 categories: Trials to expand the use of Soliris, and trials of new compounds. 9 of the trials are to expand the use of Soliris, and 7 trials are for new therapies.

Alexion has entered into 2 deals recently. Alexion bought Taligen Therapeutics at the start of 2011 for $111 million in cash to gain rights to TT-30, Taligens experimental ophthalmology drug for the treatment of AMD. There are reports that TT-30 could also be used to treat PNH, but there has been no confirmation from Alexion that TT-30 could be applied that way. The press release announcing the Taligen deal made no mention of PNH, and spoke of Taligen's portfolio of inflammatory compounds. The most recent 10-Q also made no mention of Taligen's attempts to develop a treatment for PNH. If TT-30 could indeed be used to treat PNH, this deal was a worthwhile investment, since it removed a potential competitor. And if not, then Alexion still gains a portfolio of promising clinical compounds.

Alexion entered into a major deal at the end of 2011, when it announced the acquisition of Enobia Pharmaceuticals for $610 million in cash, as well as up to $470 million in milestone payments. The primary motivator of the deal was Enobia's investigative treatment for HPP (hypophosphatasia), an extremely rare metabolic bone disease that progressively destroys the skeletal and muscle systems, as well as the body's vital organs. ENB-0040 is the first potential treatment for HPP, and it has been awarded orphan drug status. The compound is in Phase II trials.

Financials & Valuation

Alexion's focus on ultra-rare diseases has been very profitable for the company. Below, we give a quick financial overview of Alexion.


2007

2008

2009

2010

2011E

2012E

Revenue

$72.041 Million

$259.099 Million

$386.8 Million

$540.957 Million

$775.3 Million

$1 Billion

Net Income

-$92.29 Million

$33.149 Million

$295.166 Million*

$97.030 Million

N/A

N/A

EPS

-$2.54

$0.39

$3.26*

$1.04

$1.30

$1.67

Revenue Growth

N/A

259.65%

49.29%

39.85%

43.32%

28.98%

EPS Growth

N/A

N/A

735.90%

-68.1%

25%

28.46%

Net Cash

-$87.288 Million

-$1.511 Million

$166.302 Million

$357.887 Million

$444.47 Million (Q3 2011)

N/A


In the last quarter, Alexion's profit margin was 32.13%. For the first 3 quarters of 2011, it was 22.87%, and the company had just $718,000 of debt.

Alexion will be financing the deal for Enobia with cash on hand and $300 million of debt. While this will deplete Alexion's cash reserves, we think they are worthwhile investments. By our estimates, these deals will leave Alexion with $134.47 million in cash and $300 million in debt. While that may seem to be a warning sign on the surface, in reality it is not as big an issue as it sounds. Alexion has good cash flows, generating over $171 million in cash in the first 3 quarters of 2011. We see no issues surrounding the debt used for the Enobia acquisition.

The sticking point for some investors may be Alexion's valuation. The stock trades at over 98x trailing earnings, and 61x forward earnings. While this is a premium to the pharmaceutical sector, we think the premium is warranted. Few companies are growing as fast as Alexion is, and as Soliris is approved for new treatments, and new therapies are released, growth will accelerate from here.

Conclusions

Alexion Pharmaceuticals is poised for great success. The company has no competition, is in great financial shape, and could even be a takeover target. Goldman Sachs lists Alexion as one of its top takeover targets for 2012 due to its focus on orphan drugs and diseases and the appeal that will have to large pharmaceutical companies. Alexion reports earnings for the fourth quarter and 2011 on February 9, and we expect to hear good things. The company is poised for great success, and its best days are yet to come. We think that investors who buy into the stock will be rewarded greatly for their belief in the novel treatments and potential that this company has to offer.

Source: Alexion Pharmaceuticals: No Competition, A Solid Pipeline And Takeover Fever