Alexion Pharmaceuticals: Expanding Markets Point to Bigger Profits

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Biotechs are increasingly trying to boost drug pipelines by targeting rare diseases. Why? Because treatments command higher prices and generate bigger profits. One company buidling a billion dollar business in rare diseases is Alexion Pharmaceutical (NASDAQ:ALXN).

Soliris, which accounts for all of Alexion's revenue, treats PNH, an ultra-rare blood disease which damages red blood cells and vital organs. The market is small -- affecting one to five of every million people -- but lucrative, with Q1 net sales rising 41% to $166.1 million. Despite being approved in the U.S. and EU in 2007, Soliris' momentum remains strong, with the company posting greater than 30% revenue and 25% earnings growth in every quarter since at least June 2009.

And this revenue is translating into robust cash flow, given that PNH is a chronic disease with the average person living 10-15 years following diagnosis. For 2011, Alexion is guiding for $2.28 per share in earnings, 28% higher than 2009. In 2012, the street expects earnings to expand an additional 33% to $3.04.

Expanding Soliris into new countries provides upside, but even greater opportunity exists in gaining approval to treat other diseases. In April, Alexion filed U.S. and EU Marketing applications for Soliris in the treatment of aHUS, an ultra-rare blood disease damaging kidneys, the heart and other vital organs.

Why is aHUS an important market for Alexion? Because 60% of aHUS patients require dialysis and/or a kidney transplant, or die within a year of diagnosis. Of those receiving donor kidneys, 90% experience failure. Like PNH, aHUS isn't common, affecting about one in 500,000 in the U.S. But, given the nature of the disease and its prognosis, ALXN is modeling for priority review, which means a potential launch by year-end and significant sales upside in 2012 and 2013.

Additionally, Alexion is planning a study on the use of Soliris in treating Acute Humoral Kidney Rejection (AHR) in patients at elevated risk of antibody mediated rejection - another rare and potentially lucrative market. AHR occurs in about 20-30% of acute kidney rejections, with acute rejections occurring in 10-30% of all kidney transplants. It's a small market, but another avenue of sales and profit growth, given there were 16,000 kidney transplants in the U.S. alone in 2008.

Alexion is also deploying its cash flow to expand its pipeline. In Q1, it acquired two developmental biotech companies: Taligen Therapeutics and Orphatec Pharmaceuticals. Taligen is a pre-clinical company seeking to treat ophthalmic diseases including age-related macular degeneration, which affects about 30% of those 75 or older, according to NIH. Orphatec has potential in treating an ultra-rare genetic disorder, MoCD Type-A, a fatal genetic deficiency fatal to newborns and currently untreatable.

The company boosted its guidance to $720-740 million for 2011 from $715-735 million, and has beaten the street in each of the past four quarters. Given Alexion's balance sheet, with $348 million in cash exiting Q1, its strengthening cash flow and possibility of label expansion, Alexion offers investors a significant amount of future growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ALXN over the next 72 hours.