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Alexion Pharmaceuticals (NASDAQ: ALXN ) rallied 20% on Thursday after the company reported quarterly results where revenue for its only FDA-approved drug Soliris increased 37.9%. The company also gave guidance for 2014 that reflects a much higher EPS than what analysts expected. This boost is in part due to the company's move from the U.S. to Ireland, which carries a very low corporate tax rate. Despite these positives, however, at some point valuation must become a concern or at least a question as it relates to Alexion's upside. Is Alexion deserving of this massive post-earnings pop?
What creates the valuation?
After Thursday's 20% pop, Alexion Pharmaceuticals is trading near $159; this translates to a market cap of over $30 billion. In order to find out whether or not Alexion is deserving of its post-earnings performance, we must figure the company's components and what creates the valuation.
Alexion markets one product, Soliris, which treats both rare blood and genetic disorders. Soliris is a very promising product, and is the most expensive drug in the United States. Aside from its two FDA-approved indications, Alexion is also testing the drug to treat five other diseases in late-stage studies. Alexion has a few other products in its pipeline, but all are very early stage or investigational at best. At least 95% of Alexion's valuation is directly tied to the performance and outlook of Soliris.
If a company carries a market capitalization of over $30 billion based on one drug, it better be one promising product. Fortunately, Soliris is a promising product! In fact, analysts estimate a best-case scenario where Soliris could eventually earn peak revenue of $5 billion annually. While $5 billion annually is a great achievement, it also means that Alexion is trading at more than six times its peak sales potential. It's also important to note that Soliris is nowhere near reaching its peak potential.
In Alexion's fourth quarter, the company reported sales of $441.9 million. This was $11.8 million better than the consensus. If we want to get technical, Alexion added nearly $5.5 billion in market capitalization for a $12 million revenue beat. If we incorporate the tax rate news, some of the gains were created from the $0.29 per share profit in Alexion's guidance that was above analyst expectations, or $57 million more in profit than what analysts anticipated for 2014. Simply put, this Alexion story is getting ridiculous!
Approaching bubble-like levels?
Personally, I like Alexion, I think it's a great company and that Soliris is a wonderful product. However, as investors it is our job to consider the valuation of a company before making an investment. At the moment, Alexion is trading higher and it might continue. There are questions as to whether it's approaching bubble-like levels, however.
This is a company trading at 20.4 times its trailing 12 month sales on growth of just 37%. While 37% growth is strong, it's not unprecedented in the land of biotechnology. Jazz Pharmaceuticals (NASDAQ: JAZZ ) is also based in Ireland and produced growth of 49% in 2013. It too has a single product, Xyrem, that has driven the majority of its growth over the last few years. The difference is that Xyrem has slowly but surely become less relevant to Jazz, accounting for 88% of total sales in 2011 and is now responsible for just 60% of total revenue. Jazz has made acquisitions, developed its pipeline, and has become more diversified with better growth relative to Alexion. Despite this, Jazz trades at just 10 times its trailing 12 month revenue; that's a discount of more than 50% to Alexion.
Even if we compare other high-profile orphan drug companies like Regeneron Pharmaceuticals (NASDAQ: REGN ) , Alexion looks expensive. Regeneron has three FDA-approved products, but its drug Eylea is without question its current value driver. For 2013, Eylea was expected to produce sales of $1.9 billion – better than Soliris – and Regeneron was expected to grow total revenue by 50% -- better than Alexion. Regeneron still trades at 14.5 times sales, though, a large discount to Alexion. It also has several blockbuster products in its pipeline. Regeneron has a late-stage cholesterol drug that was very efficient when compared to Lipitor and a drug to treat asthma (not relieve the symptoms, but rather to actually prevent attacks.) These two drugs alone are expected to create many billions in annual sales, and Regeneron has a pipeline full of products with excellent potential. Alexion has no such product in its pipeline other than Soliris.
In my opinion, Alexion was in no way deserving of its 20% rally following its earnings on Thursday.
It's important for investors to realize that most of the upside for Soliris is already priced into its stock, and the stock's valuation leaves little if any room for fundamental mishaps. While much of Thursday's rally is in connection to the lower tax rate created by the company's move to Ireland, a quick look at Jazz Pharmaceuticals shows an Ireland-based biotech with just as much growth, the same tax rate, and half of the cost despite a more diverse pipeline. Even in an overly optimistic orphan drug industry, Alexion has been catapulted to the top of the list despite having the least diversity.
Alexion is a huge risk, and at six times its peak sales you have to ask yourself how much upside could remain. At some point, fundamentals always reflect on a company's stock. For Alexion, it's hard to imagine a scenario where it can continue to soar with complete disregard to fundamentals. Thus, be very cautious in trying to chase these gains.
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