Is Alexion Worth More Than $100 a Share?

Some investors think fishing at the shallow end of the stock pond among penny stocks is where they'll land the biggest returns. While a move of just a few pennies might net you a whopper, it's more likely to have you falling hook, line, and sinker into the weeds of fraud and manipulation.

Instead, try casting your line to the other end of the price spectrum, among stocks that trade north of $100 a share. These three-digit stocks (and sometimes they trade for four-, five-, and six-digits) can oftentimes have you telling a whale of a tale of multibagger returns.

But regardless of how much it costs, it always comes down to whether the business is well-run. We'll check in with the smart set at Motley Fool CAPS to see which high-priced honeys they think are selling something fishy, and ones they believe ought to be mounted over the mantle.

Today we're looking at Alexion Pharmaceuticals (Nasdaq: ALXN  ) , whose shares have almost doubled over the past year, but which has middling respect at CAPS.

Alexion Pharmaceuticals Snapshot

Market Cap $20.6 billion
Revenues (TTM) $951 million
Return on Investment 12.7%
Dividend and Yield N/A
Recent Price $106.74
CAPS Rating (out of 5) ***

Source: TTM = trailing 12 months.

Highfalutin' honeys
Rare diseases are a tragic occurrence because there are typically few or no cures or treatments available, and where one does exist, the costs are likely to be astronomical. Few companies are willing to pursue expensive clinical trials because the payoff will be limited.

Yet some biotechs and pharmaceuticals do pursue such niches because, if successful, they operate with little to no competition, and the prices they charge for their willingness to develop drugs where others fear to tread can sometimes more than offset the risk. The FDA even has a special status assigned to drugs that treat illnesses and diseases afflicting fewer than 200,000 people: orphan drugs.

The pharmas walk a knife's edge, however. Don't charge enough, and the return doesn't justify the risk. Charge too much, and you risk incurring the wrath of those you seek to treat. Just ask K-V Pharmaceuticals, which brought to market a drug to help reduce the risk of premature births and sought to charge $1,500 for it. The firestorm of indignation that it was trying to capitalize on at-risk mothers and babies caused the biotech to cut the price, but it never got over the stigma and earlier this month it filed for bankruptcy protection.

Dendreon (Nasdaq: DNDN  ) walked into a wall of resistance when it sought to maximize returns on its prostate cancer treatment Provenge by charging $90,000 for the treatment. Gilead Sciences (Nasdaq: GILD  ) , Seattle Genetics (Nasdaq: SGEN  ) , and even big-name pharmas like Bristol-Myers Squibb (NYSE: BMY  ) have all dealt with significant pushback when the price tags on their treatments for rare or little-treated illnesses have seemed too high.

So far Alexion Pharmaceuticals has avoided a similar fate. Its drug Soliris -- currently the most expensive drug in the world at $400,000 per year per patient -- treats two illnesses: paroxysmal nocturnal hemoglobinuria, a cause of anemia, which has at most 21,000 sufferers in North America and Europe; and atypical hemolytic uremic syndrome, a potentially fatal genetic disease affecting the immune system that afflicts some 300 people in the U.S. Perhaps because they are so rare, and at-risk babies aren't involved, no one has complained about the high cost.

As the Fool's Keith Speights has noted, Alexion is seeking out new conditions for which Soliris can be used, though that still makes it reliant upon one drug for its revenues, thus it recently acquired Enobia Pharma, which also targets rare diseases. But there are probably other motivations behind the acquisition, such as the expiration of patents in 2015 in Europe, Japan, and other countries. While it has filed for extensions with European regulators and U.S. patents don't expire until 2021, there's no time like the present to plan for the future.

Value is what you get
With second-quarter sales 48% higher than a year ago, there's been no let-up in its ability to add patients, but the market has certainly priced that into the stock. It trades at more than 100 times earnings and 40 times estimates, and its enterprise value goes at a princely 64 times free cash flow. It's a rare stock that warrants those kinds of valuations, and with Alexion's stock doubling over the past year, it may have run ahead of itself.

CAPS member NHWeston102 thinks Soliris makes the pharma a buyout candidate. Tell us in the comments section below whether a price just north of $100 makes Alexion Pharmaceuticals worth more still. It seems a little high-priced to me, so I'm going to mark it to underperform the market indexes on CAPS.

A sky-high opportunity
It's technology that's driving Alexion forward, but a different kind of technology may just set manufacturing on its ear -- and it's made right here in the U.S. The Motley Fool has the ins and outs covered in a special report "3 Stocks To Own For The New Industrial Revolution" that is available free of charge. You can find out which companies will end the "Made in China" era for good by downloading the report today. Get your copy now, as it's available for a limited time only.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Gilead Sciences. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 30, 2012, at 5:43 PM, Clairelikesgreen wrote:

    I agree w your assessment of alexion. The indignation w KV pharmacy drug wasn't taking advantage of pregnant women. It's that we were using a compounded form of the drug for the last 20 yrs that cost about $80 a month and works fine. (still using it) Bristol Meyers stopped making it in1985 I think. There was really no R&D to justify the price. Given the current economic climate in health care, we were all astonished they would try to charge that price. I guess pigs do get slaughtered!

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