3 Reasons Why Alexion Is the Real Deal

by Susan J. Aluise | November 4, 2011 2:48 pm

It has been a good year for Alexion Pharmaceuticals (NASDAQ:ALXN[1]) — earnings are up, its star drug Solaris is coming on strong and the company’s stock is on a tear. The stock’s performance has moved it to the head of the class among its peers in the biopharmaceutical niche. But does ALXN have what it takes to go the distance?

Biopharmaceuticals, which are drugs created primarily from antibodies or living organisms like viruses and bacteria, are one of the most promising niches in pharmaceuticals because these drugs can treat rare and difficult conditions. ALXN’s peers in the biopharmaceutical space include Amgen (NASDAQ:AMGN[2]), Allergan (NYSE:AGN[3]) and Roche/c (PINK:RHHBY[4]).

All investors dream of being able to predict a stock sector boom — and better yet, picking the next big winner. After all, who wouldn’t have liked to say “I bought Amazon (NASDAQ:AMZN[5]) back in ’97 at $1.50”? Of course, for every Amazon, there were scores of two-year wonders like WebVan and Pets.com. So in picking hot emerging market stocks, it’s good to be talented, better to be lucky, and best to be both.

With drug patents expiring now, pharmaceutical companies stand to lose billions of dollars a year in revenue, making pricey biopharmaceutical drugs that treat rare diseases a big area of opportunity. But so far, ALXN has made a pretty big splash with its signature drug, Soliris, which treats a rare, life-threatening blood disease. Here are three reasons why Alexion is the real deal:

  1. The World’s Most Expensive Medicine. Soliris is considered an “orphan drug,” which means it treats a condition that very few people have — but for which the company can charge a lot of money. Solaris treats a condition that causes anemia when a person’s red blood cells spontaneously break down overnight. Named the “World’s Most Expensive Medicine” back in 2010, one year of treatment for the IV-delivered drug costs abut $500,000. Sales of the drug were higher than expected in the third quarter; the FDA’s recent approval of the drug to treat another condition is likely to further boost sales.
  2. Strong Performance. Alexion’s revenue has grown by nearly 270% in the past five years. In its third-quarter earnings report last month, the company’s net earnings jumped 44% to $204 million. Net income more than doubled in the quarter to $64.6 million (34 cents a share). ALXN beat The Street, which had expected about $199 million in revenue and 29 cents a share. The company also has raised its revenue and earnings forecasts for the year.
  3. Solid Fundamentals. At about $65, ALXN is trading more than 83% above its 52-week low of $35.51, which it hit this time last year. With a market cap of about $12 billion, the stock has a price-to-earnings growth ratio of 0.9, indicating that it is slightly undervalued. The stock has about $445 million in cash and no debt. Analysts estimate ALXN’s annual growth rate at nearly 38% a year over the next five years.

Bottom Line

While no one can predict future results, ALXN is the real deal and has a strong position in a narrow but important niche. The financials are pretty solid, too. It also will not be affected by the looming patent expirations that could wreak havoc with pharmaceutical manufacturers over the next few years. The biggest risk at this point is the impact of health care reform on its sales, since payers would be strongly motivated to exclude — or reduce payment for — orphan drugs like Soliris.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.

  1. ALXN: http://studio-5.financialcontent.com/investplace/quote?Symbol=ALXN
  2. AMGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMGN
  3. AGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AGN
  4. RHHBY: http://studio-5.financialcontent.com/investplace/quote?Symbol=RHHBY
  5. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN

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