Alexion: a rare opportunity in biotech

Alexion focuses on diseases that affect only a tiny proportion of the population – a lucrative niche.

939_MW_P32_companies

Victrex invests heavily in research and development

luchschen

There are rare diseases and then there are ultra-rare diseases. The latter are defined as those which affect one person in 50,000, although in some cases the proportion is as low as one per million. Effective treatments for ultra-rare diseases can command very high prices, which health systems readily pay because only a tiny proportion of the population is affected.

For example, if there are only 5,000 patients who need a life-saving drug costing $400,000 per year, that adds up to annual revenue of $2bn for the makerof the drug, well into blockbuster territory.

Enter Alexion (Nasdaq: ALXN), a biotechnology group specialising in ultra-rare ailments. Alexion's blockbuster Soliris treats PNH and aHUS, which are life-threatening blood disorders.

About 35% of patients with PNH die within five years. With Soliris, however, patients can have normal or near-normal lifespans so they typically need the drug for decades, which secures Alexion a recurring revenue stream. The total number of PNH/aHUS patients in North America and Europe combined is only 5,000-10,000, so most GPs will never see a patient with either. As a result the diseases are grossly under-diagnosed.

A promising pipeline

Also on the market are Strensiq for HPP (which causes skeletal abnormalities) and Kanuma for LAL-D (which leads to multiple organ damage). In the advanced pipeline is ALXN1210, a long-lasting treatment for PNH and aHUS, and WTX101 for Wilson's disease (excessive deposition of copper in the brain and liver). In early clinical development are ALXN1810 and SYNT001, for rare diseases WAIHA, a type of anaemia, and PV, a bone-marrow condition. SYNT001 came with the $400m acquisition of Syntimmune in September 2018. There are another four drugs at the pre-clinical stage.

Alexion invests heavily in research and development, which accounted for $730m, or 17.7%, of sales in 2018. In addition it has broadened its pipeline with takeovers. The mix of organic and acquisition growth has built an impressive portfolio.

Resistance to competition

The key risks are the company's dependence on a small number of drugs, with Soliris expected to account for about 85% of revenues in 2019, and the possibility of competing drugs entering the market. However, the most likely competitor to Solaris has only just started Phase-I trials.

Moreover, Alexion's long patent protection, first-mover advantage, experienced sales force and good relationships with patients and doctors all bode well. Its markets are expanding as it develops new treatments, patients survive longer on its drugs, and improved diagnosis expands the patient population.

Robust growth at a reasonable price

Alexion (Nasdaq: ALXN)
Investment measureInvestment ratio
Share price$1352020 p/e ratio13
Market cap$30.4bnCash/debt$1.8bn/$2.8bn
Recent results20172018Change
Turnover$3.55bn$4.13bn+16.3%
Research & development$878m$730m-16.9%*
Earnings per share$5.86$7.92+35.2%
*Decrease owing to completion of Phase-III trials in 2018

Earnings per share (EPS)

In December Alexion had a strong balance sheet, with cash of $1.8bn compared with debt of $2.8bn. But with free cash flow of $213m, the debt can be serviced and paid down.

Alexion appointed biopharma veteran Ludwig Hantson as chief executive in March 2017. He came from rare-disease specialist Baxalta followingstints at top pharma companies Novartisand Johnson & Johnson. The shares cost $135, well down from their mid-2015 high of $206. MarketWatch estimates 2020 EPS as $10.45, giving a forward price/earnings ratio (p/e) of 13. With EPS growth around 15% for 2019 and 2020, that gives an attractive price-to-earnings growth ratio (PEG) of 0.87.

Investment research group Morningstar gives the company a fair value estimate of $172. Alexion is thus an attractive biotech with a strong position in ultra-rare diseases, although its concentrated portfolio and the possibility of pipeline failures makes it a riskier proposition than larger pharma companieswith broader portfolios. But the rewards could also be larger.

Recommended

Why aircraft leasing funds look attractive now
Investment trusts

Why aircraft leasing funds look attractive now

Aircraft-leasing funds crashed during the pandemic, David C. Stevenson explains why the outlook for these funds may be improving.
15 Aug 2022
Share tips of the week - 12 August
Share tips

Share tips of the week - 12 August

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
12 Aug 2022
Britain’s ten most-hated shares – w/e 9 August
Stocks and shares

Britain’s ten most-hated shares – w/e 9 August

Rupert Hargreaves looks at Britain's ten most-hated shares, and what short-sellers are looking at now.
10 Aug 2022
Aviva: One for income investors to tuck away
Share tips

Aviva: One for income investors to tuck away

Insurance giant Aviva is one of the highest yielding stocks in the FTSE 100 – and it’s cheap, too, making it a tempting target for income investors. R…
10 Aug 2022

Most Popular

Are UK house prices set to fall? It’s not so simple
House prices

Are UK house prices set to fall? It’s not so simple

Figures suggest UK house prices are starting to slide, but we shouldn’t take these numbers at face value, explains Rupert Hargreaves.
11 Aug 2022
Is gold cheap relative to equities?
Gold price

Is gold cheap relative to equities?

Dominic Frisby looks at the Dow-gold ratio and explains why gold is starting to appear inexpensive compared to equities.
12 Aug 2022
The energy price cap keeps rising - here is what you can do about it
Personal finance

The energy price cap keeps rising - here is what you can do about it

The energy price cap could hit £5,000 next year, even higher than expected, predicts energy consultancy Auxilione. Saloni Sardana explains what you ca…
12 Aug 2022