Is There Any Remaining Value in This Industry Leader?

At some point, a company reaches a level of maximum valuation. It doesn't mean the company becomes bad, but rather all upside is priced in and future gains are limited. In the case of Alexion Pharmaceuticals (NASDAQ: ALXN  ) , might this be a reality?

Too many "ifs" in this equation
If you were an executive at a top biotech company, had a once-in-a-lifetime product, and was in the late stages of being bought out, would you sell 8% of your total outstanding shares? Well, this is the logic that some Alexion investors are presenting, as CEO Leonard Bell reportedly sold 140,000 shares last Thursday, amounting to $14.8 million in proceeds. Personally, I don't blame him! 

Alexion markets and sells one drug, Soliris, which is used to treat rare genetic/blood diseases; it also has a hefty price tag of $410,000 per year. This very expensive drug is the driving force behind Alexion's market cap of more than $20 billion.

Alexion bulls point to the company's pipeline, which includes a vast variety of potential indications for Soliris. "If" all goes to plan, Soliris could peak with sales upward of $3.5 billion annually, leaving significant upside potential, as Alexion reported sales of just $1.32 billion in the last 12 months.

However, at 15.5 times sales, Alexion's valuation is tied directly to the potential of Soliris. But strangely, even "if" the drug reaches its full potential, Alexion would still be trading at nearly 6 times sales "if" its valuation stays the same. Thus, with the industry average at 3 times sales, Alexion is very pricey, with limited upside potential.

Given Bell's recent insider sell, I say to follow the smart money. Alexion has slightly underperformed the broader market in 2013, but saw a nice pop back in July following news of interest on behalf of Roche. However, those rumors have since faded, and it now looks as though future performance will be driven by fundamentals, rather than speculation.

Far better options
Monday ended up being a day that could spark controversy for Alexion. News struck that vials of Soliris had to be recalled due to the presence of "visible particles." Alexion states that the recall and replacement of these vials could affect 1%-2% of monthly vial consumption. Hence, with $370 million in quarterly sales, we're talking about a fundamental impact between $2 million and $5 million.

For a company that is valued excessively, and must click on all cylinders to maintain its valuation, I view this news to be operational negligence on behalf of management and yet another sign that Alexion is too dependent on one drug.

Alexion bulls point to the company's orphan indication as a defense for the company's valuation. While orphan indications do allow more years of market exclusivity and often do indicate industry innovation, I think Alexion's market capitalization has more than accounted for its potential upside.

Instead of investing in Alexion, investors interested in the orphan space should look to other companies with more promise an better pipelines, such as Sarepta Therapeutics (NASDAQ: SRPT  ) or Regeneron Pharmaceuticals (NASDAQ: REGN  ) .

There's still upside in this stock
Sarepta is still in the clinical phase, but its Duchenne muscular dystrophy drug eteplirsen has a high likelihood of earning an accelerated FDA approval some time in the next year. DMD is a rare disease, a horrible one that causes a breakdown in muscle, affecting a patient's ability to walk.

After taking eteplirsen, patients in a phase 2 study saw a 62.4 meter improvement in walking distance in the six-minute walk, compared to placebo. While the presentation of this data has led to Sarepta being the best performing biotech stock since January 2012, the stock is currently trading at just 1.4 times peak sales -- analysts project $700 million in peak revenue for eteplirsen.

In an industry that awards companies treating rare diseases, Sarepta is cheap long term, especially compared to Alexion. Not to mention, Sarepta has a pipeline of products using the same technology to treat other diseases.

An industry-leading pipeline
Regeneron is often compared to Alexion, as a $23 billion biotech, trading at 12.8 times sales. While the two may appear similar, the difference lies in pipeline development, as Regeneron has 12 clinical products with several having blockbuster potential.

In particular, Regeneron's phase 3 cholesterol drug, alircumab, and its Phase 2 asthma drug, dupilumab, could create peak worldwide sales of $12 billion combined. Alircumab lowers bad cholesterol and was proven to be significantly better than Lipitor in phase 2 testing. Dupilumab prevents asthma attack and did so in 94% of treated patients compared to just 56% using placebo in a 12-week, 104-patient study.

Therefore, if continued success is realized, and both drugs meet their potential, Regeneron, combined with its blockbuster drug Eylea, could earn sales of $15 billion globally, making it trade at 1.5 times its peak potential. Compared to Alexion, this valuation is much more favorable, and impressively, we only addressed two of the company's 12 products.

Final thoughts
Looking ahead, I see little to no value in shares of Alexion. Sure, Soliris is a great product that commands premium pricing and has no competition, but Alexion's growth is already decelerating and the company's valuation leaves little room for fundamental error.

Regeneron or Sarepta look to be better options in the orphan space. Both have large pipelines in addition to their core products. In biotechnology, the presence of value creates opportunity, and in the case of Alexion, there really isn't any value left.

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