How can you distinguish a great biotech stock from a good one?
Opinions will vary, but here are a few ideas. The biotech should be profitable and on the path to even higher earnings. Its financial performance shouldn't be overly dependent on one drug. The stock should outperform most of its peers. Management should prioritize shareholder interests.
Only a handful of biotechs meet all of these criteria. At least one, though, appears to be on the cusp of moving to the next level -- Alexion Pharmaceuticals (NASDAQ: ALXN). Here's why Alexion might be poised to shift from good to great.
Checking off the list
Profitability hasn't been an issue for Alexion in several years. And while there have certainly been ups and downs, the trajectory definitely looks positive.
That's the past, though. What about Alexion's future earnings potential? The company projects 2015 adjusted earnings will increase by at least high single digits compared to last year. That's not bad, but it's not great. However, analysts expect year-over-year earnings growth of over 13% -- and Alexion tends to beat analysts' estimates. What's even better is that analysts also project Alexion's earnings will increase by an average rate of 25% over the next five years.
What about stock performance? If biotech stocks in general have been hot, Alexion's share prices would probably be described as scorching.
Every dollar invested in the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) five years ago would have almost quadrupled by now. That's impressive. Consider, though, that the same dollar invested in Alexion would have multiplied nearly seven-fold. That's staggering.
With this performance, it would be hard to argue that Alexion's management hasn't highly prioritized shareholder interests. Dr. Leonard Bell founded the company in 1992 and has guided Alexion as CEO for 23 years. During his tenure, Alexion has received multiple awards, including being named three years in a row to Forbes magazine's list of the world's most innovative companies.
The next hurdle
There is one criteria of a great biotech that Alexion hasn't checked off yet, though. The company's revenue stems totally from one drug -- Soliris.
The reason for not wanting a biotech to be overly dependent on one drug is really about risk. Success of a rival drug could be especially damaging for a company with a one-trick pony. In the case of Soliris, though, this risk doesn't appear to be too great. The drug treats two very rare diseases -- paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS) -- that don't have any other approved treatments.
Alexion thinks that Soliris could help other conditions also. The biotech has clinical trials under way targeting the drug as a potential treatment for neurological diseases refractory myasthenia gravis and relapsing neuromyelitis optica as well as delayed graft function and antibody mediated rejection, both of which are transplant-related conditions .
And Soliris probably won't be the only revenue-generator for Alexion for much longer. The company has filed for regulatory approval for asfotase alfa in treating hypophosphatasia in the U.S., Europe, and Japan. Peak annual sales for the drug could eventually top $1 billion.
Alexion appears to be well-positioned to check off all the criteria put forward earlier for identifying a great biotech stock. One potential fly in the ointment happens in a couple of weeks, however: The company's longtime CEO is retiring.
That doesn't seem likely to present a problem for investors, though. COO David Hallal was named to take Dr. Bell's place as the new CEO. Hallal has been with Alexion since 2006 and played a key role in the launch of Soliris. His previous experience includes 25 years in the biopharmaceutical industry, with time at two biotechs that some would categorize as great already -- Amgen (NASDAQ: AMGN) and Biogen Idec (NASDAQ: BIIB). Leonard Bell will stay on as chairman, and the pick of Hallal as CEO indicates that staying the course was what the board of directors wanted.
Profitable. Higher earnings likely in store. Sizzling stock performance. Solid management. A second blockbuster drug potentially on tap. Good to great? Alexion seems ready to potentially make the leap.