Alexion Pharmaceuticals: Patent Resolution Is Too Little Too Late
Summary
- The patent disputes over the leading drug forced Alexion to seek the revenue diversification.
- The recent acquisitions are unlikely to accelerate the current growth momentum any time soon.
- With the majority of patients already converted to the replacement drug, the resolution to the U.S. patent dispute looks too late.
- Despite more optimistic revenue forecasts, our relative valuation, using the current trading multiple to reflect the unchanged prospects, indicates an overvalued stock.
- With the disgruntled activist investors pushing for a sale of the company, we believe, Alexion is a ‘Hold’.
Investment Thesis
The patent disputes over its leading revenue generator have taken its toll on Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), with its share price lagging the peers as the company attempts to diversify the top-line. The recent acquisitions, driven by the rising cash flows and low gearing, are, however, unlikely to further benefit the record-breaking revenue growth any time soon. Having already converted a majority of patients to the replacement therapy, the eventual resolution to U.S. revenue dispute looks too late. Meanwhile, with patient-friendly and more affordable candidates, the rivals are targeting the less rare indications, currently the domain of Alexion.
In contrast to the past, this year's management guidance indicates a sharp slowdown to reflect the pandemic impact. With the economy opening up faster than expected, our NTM revenue forecast in line with the historicals looks promising, though it suggests an undervalued stock with the current trading multiple, which, in our view, doesn't deserve a premium given Alexion's dreary prospects. However, with the activist hedge fund, Elliot Management, pushing for change in the company, including a sale, we believe, Alexion is a 'Hold'.
Source: The Company Website
Patent Issues Lead to Diversification
When Alexion bid for Portola Pharmaceuticals, Inc. (PTLA) in early May, adding a premium of more than ~131% to the stock's last traded price, the long-standing investor concerns over the company's acquisition spree reached a boiling point. The stock tanked ~5% on the day of the announcement, and a few days later, the Hedge fund, Elliott Management, questioning the management's strategic direction, called for a sale of the company. Elliot's worries were understandable. Since it built an activist stake in December 2017, Alexion had dropped ~9%, underperforming the ~17% rise in the NBI (NASDAQ Biotechnology Index) as the patent woes exposed the company's heavy reliance on Soliris (eculizumab), its main revenue generator.
A few days after Amgen Inc. (AMGN) challenged the drug's U.S. patents that could extend its market exclusivity from 2022 to 2027, the European Patent Office rejected two of its patent applications, allowing for Soliris biosimilars to enter the market in as early as 2022. With Soliris generating ~71% of Alexion's net product sales and ~54% of it sourced from the U.S., the company, based in Boston, Massachusetts, hurriedly looked for revenue diversification. The efforts were not convincing enough for investors with the stock's modest ~7% gain trailing the ~30% gain in the NBI by the end of last month when the latest twist to the tale emerged. According to a regulatory filing, Alexion struck a deal with Amgen to settle its U.S. patent dispute, thereby effectively delaying the launch of Soliris biosimilars there until 2025. With a gain of only ~7% so far this year, the company's poor run continues regardless, under-performing the ~10% rise in the NBI.
Source: Koyfin
The patent dispute with Amgen sought to invalidate Soliris' patents used to treat PNH, (Paroxysmal Nocturnal Hemoglobinuria), prompting the company to convert existing Soliris patients to Ultomiris (ALXN1210/ravulizumab-cwvz), a long-acting C5 inhibitor that won the FDA approval in December 2018. Having switched ~67% of PNH patients in its key markets by Q1 2020, Alexion is well on track to meet the ~70% conversion target it expects to achieve within two years of the launch. Meanwhile. Soliris' orphan drug exclusivity for gMG (Generalized Myasthenia Gravis) and NMOSD (Neuromyelitis Optica Spectrum Disorder) runs until 2024 and 2026, respectively. Therefore, with patents for less rare indications intact well-beyond 2022, and the company already being proactive to retain its PNH market share, we believe, the patent resolution is unlikely to meaningfully change Alexion's long-term prospects.
Rivals Challenge the Pricing Power
However, at $500K per year for a treatment regimen, Soliris is one of the most expensive drugs in the world. With Ultomiris being slightly less expensive at $458K, we believe it's a matter of time before more affordable rivals start to challenge Alexion's pricing power. Apellis Pharmaceuticals, Inc. (APLS) is preparing to file an NDA in H2 2020 for its PNH candidate Pegcetacoplan with discussions for an European launch scheduled to start in the current quarter. Meanwhile, expecting data in Q2 2020, BioCryst Pharmaceuticals, Inc. (BCRX) has initiated the proof-of-concept study for BCX9930, an oral Factor D inhibitor currently in Phase 1 development for PNH. With less-costly and more patient-friendly formulations advancing in late stage trials, the rivals could challenge Alexion's fast-growing neurology vertical too. Aiming for subcutaneous self-administration, Zilucoplan from Ra Pharmaceuticals, Inc. (RARX) is currently undergoing a pivotal Phase 3 study expecting top-line data in early 2021.
Meanwhile, Alexion's acquisition-led portfolio expansion has yet to yield meaningful results. The Factor D inhibitor, ALXN2040 (Danicopan/ACH-4471), added with the acquisition of Achillion Pharmaceuticals, Inc. (OTC:ACHN) last January is scheduled to undergo a Phase 3 study in late 2020 for PNH with extravascular hemolysis. The Phase 2 trial of ALXN1830 (SYNT001) in WAIHA (warm autoimmune hemolytic anemia) in currently on hold due to pandemic concerns, while the top-line data from ALXN1840 (WTX101) in Wilson disease could be available only in H1 2021. Before their acquisitions by Alexion in 2018, SYNT001 and WTX101 were part of Syntimmune and Wilson Therapeutics AB, respectively. Noting that the patient starts for Andexxa of Portola occurs in a hospital set up similar to Soliris/Ultomiris in aHUS (Atypical Hemolytic Uremic Syndrome) and NMOSD, the company is seeking what it calls the 'site-of-care' diversification through its latest acquisition. However, with aHUS and NMOSD being much rarer, the extent of synergistic benefits could be less than expected.
A Soft Guidance Following an Exceptional Quarter
However, despite the pandemic headwinds, Alexion has witnessed an exceptional performance in Q1 2020. Having posted the highest revenue growth in five years in 2019 with ~21% YoY growth, the top-line for Q1 2020 has reached ~$1.4B with ~27% YoY growth, topping the previous record in Q2 2015. However, the management seems less sanguine over the 2020 outlook. Assuming a gradual reopening of the healthcare systems in July, the guidance at the midpoint, suggests only ~6% YoY growth for 2020, excluding any revenue benefit from Portola. The slowdown is attributed to the pandemic-driven slump in new patient starts and the shift in patient mix to Medicaid due to rising unemployment.
Source: Koyfin
Meanwhile, the consensus forecasts indicate ~$5.4B in NTM revenue suggesting only ~1% YoY growth. However, with the company recording ~21% YoY growth on average in the past four quarters on an LTM basis, the management guidance as well as the consensus forecasts seem to be underestimating the company's revenue potential even as restrictions begin to ease in many states while the unemployment slowly recovers. We, therefore, estimate ~19 - 23% YoY revenue growth for Alexion for the NTM period projecting ~$6.3 - 6.5B in revenue.
Source: Koyfin
Highest Margins Ever
Meantime, the company's EBITDA margin for Q1 2020 has reached ~57%, its highest on record. With many of the clinical trials getting delayed while some have been put on hold, we project NTM EBITDA margins to remain stable at ~51 - 53%, raising NTM EBITDA by ~18 - 26% YoY to ~$3.2 - 3.4B.
Source: Koyfin
Unlike its peers resorting to a softer revenue guidance and at the same time cease investor returns citing the pandemic concerns, Alexion hasn't paused the share repurchases. Thanks to a strong balance sheet with robust liquidity and low gearing, it keeps snapping up rivals. The clean balance sheet and the lucrative pipeline driving cash flows had earlier fueled acquisition rumors, which will resurface as Elliot has indicated that the company is undervalued by as much as 50%.
Source: Koyfin
Activist Calls to Fuel Speculation Trades
However, in terms of NTM EV/EBITDA, the company currently trades at ~7.4x in line with its past year average. Before the patent issues emerged last year, the 1-year NTM average stood at ~10.0x. The two acquisitions that followed are unlikely to add a significant benefit in the near-term, and with ~70% of PNH patients already converted to Ultomiris, the patent resolution is, in our view, too little too late. Therefore, assuming the current trading multiple to reflect the company's unchanged prospects, our relative valuation, even with more optimistic revenue forecasts above, indicate an overvaluation of ~9.2 - 2.3% for the stock. However, with activist shareholders pushing for change, Alexion could be a stock to 'Hold' as investors wait for a sale of the company with bated breath.
Sources: The Author; Data from Seeking Alpha, Koyfin and Author Estimates
Conclusion
Alexion's revenue diversification started in earnest as patent disputes challenged Soliris, its leading revenue generator. Even though the rival candidates are challenging Alexion's sales dominance, the most recent acquisitions are unlikely to benefit the top-line any time soon. Having converted the majority of Soliris patients to the replacement therapy, the patent resolution was long overdue. Unable to justify a premium given the bleak prospects, the current multiple, even with our more optimistic revenue forecasts, indicate an overvalued stock. However, with activist investors pushing for change, including a sale of the company, we believe Alexion is a 'Hold'.
If this article was insightful to you, please click "Follow" next to my name at the top to receive updates on our latest research.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
Recommended For You
Comments (7)
"In contrast to the past, this year's management guidance indicates a sharp slowdown to reflect the pandemic impact."So, that statement, with respect to COVID-19, is completely in accurate. They barely changed their guidance and the slower momentum that you may be conflating with initial full year guidance was, by most accounts, conservative. In part because the new CFO is, in my opinion, terrible. If you article made an argument around that I would absolutely agree - she doesn't not belong in the C-Suite. Finally, the companies you claim that are challenging the pricing supremacy and market share that ALXN has benefited from for 10 plus years, even under the worse case scenarios, will likely have little impact. APLS has a massive uphill battle on the clinical and payer front in store for it. Partly, because, despite the headline grabbers APLS marketing team has created their candidate has it's own set issues like the fact that the completely missed their secondary endpoints. PnH is primarily a disease of break through hemolysis and the should no improvement over Solaris let alone the better improved Ultomiris. Even still, PnH is a small part of their revenue at this point so even if they managed to pressure on that front they would have zero influence in the much more lucrative neurology franchises.By most models including mine ALXN and assuming some worse cases including biosimilar entrants byt 2023 (which is now pushed out to 2025) should generating close to $10 billion in top line revenue by 2025 and that includes 0 contribution from the existing pipeline which likely will grow both organically and through M&A. All that considered I am not sure how you can assign a hold to a company generating enormous cash flows on very reasonable margins and double digit y/y growth. All of which should continue unabated for the next 5 plus years while the pipeline takes shape. This seems like analysis that started from the predisposition of being bearish ALXN - possibly because of previous article that you had to eat crow on.
seekingalpha.com/...
