Get Ready for the Fall

"The bigger they are, the harder they fall." It's the worst nightmare of every investor in today's market -- buying a hot stock just before it takes a nosedive.

Every day, MSN Money publishes a list of stocks whose shares have just hit new 52-week highs. And every day, investors read the list and tremble -- some with greed, others with terror. On our Motley Fool CAPS investing community, these top stocks usually enjoy favorable ratings, since everyone loves a winner. But what should you do when some of CAPS' smartest investors pan one of these hot stocks?

For starters, consider using the "52 week high" list as a starting point for further research. Stocks can rise for many reasons, but a little help from Motley Fool CAPS can make it easier to figure out how worthy those reasons are. Let's see what the more than 110,000 stock gurus (and counting) in CAPS have to say about the list's latest contenders:

Five stars = highest possible CAPS rating; one star = lowest. Companies are selected from the "New 52-Week Highs" list published on MSN Money on the Saturday following close of trading last week. One year ago and recent prices provided by Yahoo! Finance. CAPS ratings from Motley Fool CAPS.

Everybody loves a winner
When stocks soar on the wings of success, bears become rare. So it's not surprising to find this week's list populated primarily by stocks enjoying above-average four- and five-star ratings. One of these stocks, however, does not look like the others. That one being Alexion Pharma, a "biopharmaceutical company working to develop and deliver life-changing drug therapies for patients with serious and life-threatening medical conditions."

A more generic statement of purpose for a biotech has yet to be written. Getting a bit more specific, if not much more informative, Alexion currently markets a drug called "Soliris" used in the treatment of "paroxysmal nocturnal hemoglobinuria," and also has a handful of drugs in preclinical and phase 1 and 2 clinical trials. That should be enough to give you an idea of what the company is about.

Now, for some specifics from our CAPS members on why they think Alexion's own life may be in danger, let's delve into:

The bear case against Alexion Pharmaceuticals

Last year, irishmanbob wondered aloud: 

... why the run-up in price of a company whose claim to fame is just one orphan drug for a rare disease abbreviated PNH? I believe it's because of the future promise of this drug against diseases for which there has not been much successful intervention to date, such as Rheumatoid Arthritis. If this drug is found to work against diseases which ravage a large section of the human population, then [Alexion] may have found a huge future revenue stream. What they need to do now, is find a way to develop those potential drugs, or partner-or perhaps sell themselves-to a larger company with the resources to do such development. I believe that's what drives the current interest in the stock.

In April, CAPS All-Star abetens2 also homed in on Alexion's signature drug for criticism: 

Paroxysmal Nocturnal Hemoglobinuria -- extremely rare condition. Can Alexion justify an extremely high price for because of the rarity of the disease? Probably not. Notice that they are recording sales but not receiving cash. Their accounts receivables are going up, because they are not collecting payment. I think it will be very difficult to get insurance to cover soliris, especially at the current price-- if they do cover it, they will negotiate extreme discounts, e.g. paying only 20-30% of alexions's charge. Expect only about 30% of their accounts receivables to ultimately be converted to cash.

All of which adds up to what T011363 says Alexion amounts to: A "cash burning machine."

Sure, Alexion has potential. Earlier this year, fellow Fool Brian Lawler singled out the company as one of several companies  that have made beaucoup bucks from developing "orphan drugs" -- a list that also includes United Therapeutics (NASDAQ:UTHR) and BioMarin (NASDAQ:BMRN). But given a choice between potential and profits, you'll pardon me if I choose the latter every time.

Right now, Alexion just doesn't fit the bill. Valued in excess of $3 billion, Alexion sells for nearly 30 times sales. Yet it earns no profits, nor is it generating cash. To the contrary, Alexion burned through well over $170 million over the past four quarters, and its burn rate has been speeding up, not slowing down, over the past few years. The company already has less cash in the bank than debt on its balance sheet, and at the rate things are going, it could run out of cash by the end of the year.

Now, maybe when the earnings news comes out tomorrow, we'll find that the situation has changed radically for the better. If that's the case, Alexion will surely soar. But for today, until proven wrong, I have to tag this one with the label of a stock that's "ready to fall."

Time to chime in
Of course, the aim of this column isn't just to tell you what I think about Alexion Pharmaceuticals -- or even what other CAPS members are saying. We really want to hear your thoughts. Click on over to Motley Fool CAPS and tell us what you think.

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