Alexion: Another Deal, Now Portola

Summary

• Alexion Pharmaceuticals has continued to deliver on solid growth while an aggressive acquisition strategy might scare off investors.
• Shares now trade at just 4 times forward sales, diversification is slowly arriving, and the company has a few deals in the works to bolster the pipeline.
• Very modest variations mean that I am slowly buying the low valuation, although more selective M&A strategy would likely be welcomed by investors.
• Looking for more stock ideas like this one? Get them exclusively at Value In Corporate Events. Get started today »

Alexion Pharmaceuticals (NASDAQ:ALXN) surprised the market by announcing an acquisition in the middle of the COVID-19 crisis as it is looking to acquire Portola Pharmaceuticals (PTLA).

Thanks to generous cash flows, Alexion has the means and willingness to be aggressive in deal-making, having announced multiple deals in recent years and recent times. The main business continues to do well with continued impressive growth in sales and very strong earnings, all while multiples have become quite compelling.

Deal Terms

Alexion has reached a deal to acquire Portola in a transaction which values the target at $18 per share in cash as the company will furthermore assume $215 million in net cash held by Portola.

Given that Portola reported a diluted share count of nearly 78 million shares by the end of 2019, this values equity at around $1.40 billion and the entire business at around $1.2 billion.

The offer looks generous on a percentage basis, representing a more than 130% premium, with shares trading in the mid-single digits recently. One has to recognize that shares actually traded in the low twenties at the start of the year and are far removed from levels in the $60s back in 2017.

What Is It All About?

Alexion defends the deal by pointing toward the fact that it will acquire Andexxa, a commercialized medicine as the entire company (Portola) focuses on life-threatening blood-related disorders. The drug has furthermore been approved in Europe, marketed there under the name Ondexxya, being the first and only Xa inhibitor reversal agent, reversing the so-called anticoagulant effect of Xa inhibitors in uncontrolled bleeding.

While FDA approval arrived in mid-2018, a real commercial launch started only in January 2019 as the first phase of commercialization in Europe started last summer.

Alexion cites that the company will see diversification in the portfolio, as that alone is never an argument for pursuing a deal, although CEO Ludwig Hantson points towards the strategic fit in the focus and expertise in hematology, neurology, and critical care.

The $1.2 billion price tag (on an enterprise basis) does come at an expense as product revenues reported by Portola only came in at $112 million in 2019, marking a more than 10 times sales multiple. Despite the fact that the product has only been launched quite recently, fourth quarter product revenues of $28 million are basically flat compared to the annual results if we annualise these quarterly results. A real concern for investors in Portola and now, thus, Alexion as well is the burn rate, with SG&A at roughly twice the revenues, with 2019 operating losses reported at $270 million.

Investors in Alexion are voting with their feet as shares lost about 6% and thus $6 in response to the deal announcement, and with 222 million shares outstanding, that value destruction of $1.3 billion actually exceeds the enterprise value of Portola as investors do not appear to be really confident in the deal-making strategy, as the assumed losses will impact earnings.

The Thesis

Early 2019, I looked at Alexion as I concluded that progress was being made, yet challenges remained. Shares traded around $125 at the time, as I continued to display caution. I noted that Alexion has turned into a real winner since it obtained approval for Soliris in 2007 to treat PNH, another blood disorder. This rare disease nonetheless generated significant revenues, with prices around $400,000 per year per patient.

To get a clue about the ramp-up, let's first go back a few years into time. The company generated $3.55 billion in sales in 2017, of which $3.14 billion was from its own blockbuster. The company furthermore markets Strensiq, a hypophosphatasia drug for which approval came in back in 2015, generating $340 million in sales. The company furthermore spent $8 billion on Synageva to acquire the drug Kanuma, yet that price was high as it contributed just $65 million in sales that year.

Besides that mega purchase, Alexion acquired Wilson Therapeutics in a $855 million deal in 2018 to get its hands on a phase III potential drug WTX101, for treatment of Wilson's disease. The company furthermore spent $400 million to acquire Syntimmune that year, and in December, FDA approval for Ultomiris rolled in. The company did see solid momentum in 2018, with Soliris growing 13% to $3.56 billion, Strensiq increasing sales 40% to $475 million, and Kanuma sales growing at similar percentages to $92 million.

Early 2019, the enterprise value totaled $29 billion, given a modest net debt load and the fact that shares traded at $125 per share. This valued the company at around 7 times sales, which was starting to look more reasonable as the earnings picture is highly distorted and complicated.

This led me to conclude that, at a 6.4 times forward sales multiple, I was getting more upbeat with modest earnings multiples, but these are very distorted measures. During 2019, the company saw continued sales growth and was making some deals as it acquired Achillion in a near-billion transaction, while the full year results were released in January. The company has seen a good year with product revenues coming at $5.0 billion, with Soliris growing to $3.95 billion, Ultomiris generating $339 million in sales in their debut year, Strensiq growing to $593 million, and Kanuma growing, yet at the same time, a $112 million revenue contribution cannot justify the $8 billion price tag.

The Numbers

Following strong results, with product sales advancing to $5 billion, Alexis is very profitable as it reported GAAP operating profits of $2.1 billion, even after accounting for more than $300 million in amortization charges. Thanks to a modest tax refund, the company reported net earnings of $2.4 billion, or $10.70 per share, which actually coincided with adjusted earnings of $10.53 per share, although I would not feel comfortable to not adjust for $175 million in stock-based compensation. With these expenses at less than a dollar per share, realistic earnings still approach $10 per share, creating very modest multiples, with shares trading at $95 now.

With 225 million shares trading just below the $100 mark, equity is valued around $22 billion as the company has a net cash position of about flat based on the 2019 numbers. That flat cash position was before the purchase of Achillion and Portola which should translate into a pro forma net debt load around $2 billion, yet that is before incorporating the retained earnings generated in the first quarter.

In fact, just a day following the purchase of Portola, the company announced its first quarter results, with first quarter sales up 27% to $1.44 billion. Despite the strong start to the year, the company cut the full year sales guidance by about a quarter of a billion to levels around $5.3 billion due to the COVID-19 impact, which is mostly a short-term nature.

Final Remark

Trading at around a $23 billion enterprise value, appeal is rapidly increasing at about 4 times forwards sales as earnings multiples are low. The worry of investors is that of aggressive acquisition strategy, and while a few hundred million deals or low-billion deals might not alter the investment case, as investors are concerned about the losses assumed with some of these companies, as of course, $8 billion bet on Kanuma has not been playing out, perhaps worrying that management should be a bit more cautious in its deal-making practices.

The other big worry is that of patent concerns as challenges rolled in from prominent names such as Amgen (AMGN), prompting the company to convert many users of Soliris into replacement Ultomiris. Ultomiris now makes up 18% of combined Soliris and Ultomiris sales. Another concern is that, despite the relatively faster growth of Strensiq and Kanuma, these two products combined make up just 14% of first quarter product sales.

Despite all the concerns, these levels start to look compelling enough for me here with GAAP earnings seen a bit above the $8 mark this year and adjusted earnings seen comfortably above $10, although the nature of the business model (large reliance on pricey drugs) and aggressive deal-making show that the adjusted metric is not necessarily the most indicative. At these levels, I thus feel comfortable to start initiating a position in an interesting and aggressive player.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ALXN over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[raising rusty]

apparently Elliot Advisers agrees with your thesis and started an activist campaign. nice synopsis

[The Value Investor]

Quite a coincidence indeed. We will see what happens!

[Stéphane Renaud]

yes very different proflie indeed fro the typical pharma that gives all its cash via dividend or shares buyback. Now making so mnay aquisitions might be a risk also.
But common at this price, they can even afford making few mistakes. I m in for the next years

[Xonda]

Dear author. Could you explain me how alxn cost less then 100 with p/e 9 or less after recent report?
with q1 2020 +22.1% Y/Y rev and +22.3% Y/Y q4 2019.
with really small debt
increasing equity y/y
very high margins
Overall, with really good fundamentals.

I just don't understand. And what's the problem with takeovers? I heard from over investors that alxn had small pipeline. But not now. And they expanding it sharply. Including Portola.

[The Value Investor]

Concern with ALXN in my eyes is two-fold
1) concern about patent (still > 80%? of sales from 1 (group) of drugs
2) company has spent well over $10bn on deals in recent years, and real diversification still not seen

[brokeagain73]

@Xonda The simple answer is that management has done two things to thwart interest in the stock. 1 they told the market and Elliot that they are not for sale thus crushing any hopes of them being acquired which helped prop up the stock price. 2 as the author pointed out, they spend like drunken sailors on assets and companies that have yet to show any promise or yield any fruit - $13.5 billion in five years in lieu of returning a that money to shareholders where it would've done more good.

Solaris patent issues aside there is enough there to dissuade most investors - add in the patent worries and you have a stock that is declining on multiple fronts:

1.A gross decline relative to their highs of years past.

2.A real decline when marked against inflation (Alexion's assets are being valued less compared to inflation)

3.A relative decline to the market. As the market jumped in value Alexion stayed flat or declined.

[raising rusty]

reminds me of Guy Adami on Fast Money referring to Mylan Labs as serial wealth destoyers.

[low frequency]

Lackluster stock

[happy2camp]

Anyone in ALXN took responsibility for the mistake of buying Kanuma for 8 billion? Did anyone resign or get fired?

[208Pb]

Kanuma was acquired in 2015
Current CEO came in 2017

[biodatadude]

CEO, CFO, and founder all booted by BOD.