Can Alexion Pharmaceuticals Continue to Deliver?

Successful biotechs are generally expected to reinvest their profits into the development of broad pipelines, but Alexion (ALXN) is following a somewhat different path. While I do not mean to give short shrift to this company's pipeline development efforts, the fact is that Alexion has been more interested in maximizing the value of its blockbuster orphan drug Soliris than relying on new development projects. That strategy has served the company well so far, and while there may some reasons to question whether health care systems will continue to support such generous reimbursement for orphan drugs, Soliris could yet offer significant growth potential.

Soliris, as it is today
Soliris is Alexion's complement inhibitor (a humanized monoclonal antibody) and its only approved drug. But what a drug it has been; with a price tag of over $400,000 in the U.S., Soliris is effectively the only pharmaceutical option for patients with paroxysmal noctural hemoglobinura (PNH) and atypical hemolytic uremic syndrome (aHUS). Untreated, PNH often leads to thrombosis (blood clots), which can cause severe complications with the heart, lungs, brain, or liver and/or death. Untreated aHUS is likewise quite serious, with nearly three-quarters of patients eventually progressing to end-stage renal disease.

PNH and aHUS are quite rare, but Alexion has turned Soliris into a blockbuster drug due in no small part to that high price. Thus far, payers have been willing to go along with the price as there are few other options (bone marrow transplant is an option for PNH, but the cost is high and the risk of severe complications/death is also troubling), the drug works quite well, and the cost of maintenance therapy is high. In the case of aHUS, for instance, providing dialysis for patients with end-stage renal disease costs upwards of $70,000 a year and carries a significant quality-of-life burden as well. What's more, the rarity of the conditions makes coverage a less onerous decision for insurers; PNH and aHUS patients on Soliris are expensive, but there are not many of them and the overall costs of not covering the drug (bad publicity in particular) factor into the decision.

Soliris, as it could be
One of the strongest bull arguments for Alexion is the skill with which management has handled the drug, including maximizing its profit potential by exploring follow-on indications. Shiga toxin e coli-related hemolytic uremic syndrome (STEC-HUS) was a natural follow-on considering its efficacy in aHUS. The company is also at pivotal development stages for post-kidney transplant patients, neuomyelitis optica (NMO), and myasthenia gravis (MG).

All told, these indications could significant expand the addressable market. Kidney transplant is likely to be a smaller opportunity unless Alexion can show that a meaningful percentage of transplant patients would benefit, but NMO and MG could prove to be just as large or larger than PNH and aHUS if the data are strong and incidence estimates (30,000 or more, each) are accurate.

It's not just Soliris that adds value
Beyond Soliris, Alexion has asfotase alfa, an enzyme replacement for hypophosphatasia (or HPP), a rare disease in which patients lack a protein needed for bone growth. This drug could launch late this year and address a global market of 3,000 or so children. Pricing in line with Soliris would make it a $1 billion or more opportunity, and there is a possibility that better patient identification could expand the market, as well as a chance that severe adult-onset patients (likely fewer than 1,000 worldwide) could benefit.

Alexion also has other drugs in its pipeline. In addition to a "next-gen Soliris", there is ALXN1007, an anti-inflammatory antibody that should see further clinical testing this year, ALXN1102/1103 (complement inhibitors), and cPMP for molybdenum cofactor deficiency type A.

Alexion management has also been aggressive in tending to its profitability. Management has bargained hard with national health care systems in Europe to justify the price of Soliris (though the UK's NICE has raised some recent objections), and recently won a positive decision in France. Company management also restructured and reorganized itself with an Irish affiliate that will allow it to substantially reduce its corporate taxes.

There are threats, but they're in the distance
Could outside events come in and spoil Alexion's party? In the near term, the biggest threats would be clinical failures that would shrink the Soliris sales expansion opportunity. Closely behind that would be the threat of a coordinated effort on the part of payers to push back on orphan drug pricing -- a move that would threaten not only Alexion, but Sanofi, Shire (NASDAQ: SHPG), BioMarin, and Vertex as well. I also believe the company's tax inversion strategy could come under threat down the road – with so many drug companies using this strategy to reduce their tax bill, it may well attract the notice of Congress and result in legislation aimed at closing the loopholes. 

Competition is another threat, but one that Alexion does not seem particularly worried about, as management took some time during a December analyst meeting to talk down its potential rivals. Swedish Orphan Biovitrum (or SOBI) (SWTUY) has its SOBI002 antibody mimetic (or Affibody, developed with Affibody AB) going into human studies, targeting the same C5 complement protein as Alexion's Soliris. As this is a bacteria-based protein, though, there could be long-term immunogencity concerns. Shire has a C1-INH inhibitor program acquired from ViroPharma, including the approved drug Cinryze, and ViroPharma was exploring the use of Cinryze in other indications like PNH. While Alexion management maintains that safety and pricing would be an issue, further human trials (or development of a C1-INH inhibitor better suited for this indication) could challenge that view.

Last and not least is Alnylam Pharmaceuticals(ALNY -1.55%) and its pre-clinical ALN-CC5. Alnylam is developing this compound specifically for complement-mediated diseases like PNH, aHUS, and NMO, and it appears to knock down C5 protein levels quite effectively. The challenge with ALN-CC5 will be in dosing and overall efficacy – Alnylam's current delivery technology is really only suited to the liver and the C5 protein is produced by other organs, leaving the question open as to whether ALN-CC5 can achieve an overall attractive efficacy and safety profile.

The bottom line
While I think Alexion management may be a little hasty in dismissing potential rivals, I don't think the company has much to worry about until 2020 at the very earliest. Assuming no real rivals or trial and reimbursement setbacks emerge, I believe Alexion can generate long-term revenue growth in the high teens, with FCF growth in the low 20%'s spurred in part by the lower tax rate. That supports a fair value close to $180 today, and that is without factoring in any contribution from the early stage non-Soliris/non-asoftase alpha pipeline.