Is Alexion a "Pricey" One-Trick Pony?

Alexion Pharmaceuticals ALXN shares have appreciated over 30 percent this year alone. It currently trades at over 55 times its expected 2012 earnings, quite a bit higher than the mid-teens price-to-earnings seen across its biotech peers. The company focuses on an extremely rare niche and its drug has no known competitors for the moment. Despite that, analysts and investors are starting to ask whether the stock is too expensive for the portfolio and target market. Alexion currently specializes in extremely rare diseases. Soliris, its only drug currently in the market, has two approved indicators, Paroxysmal Nocturnal HemoGlobinuria (PNH) and atypical Hemolytic Uremic Syndrome (aHUS). Combined, they affect less than 10,000 patients worldwide. Soliris treatment costs an estimated $400 thousand annually for each of those patients, and the company has seen an average of 45 percent increase in its annual revenue since 2008. For fiscal 1012, the company has guided to revenues of approximately $1.04 billion, which, at just under 33 percent, represents a cooling off in historical revenue growth. In a piece for Barron's, titled “A Pricey One-Trick Pony,” author Neil A Martin sees this as an indication that the stock is overvalued and overbought. Martin argues that further upside on shares is limited from here, as most of the patients for its current indicators have been identified. Its pipeline of another four compounds, Martin notes, is in its very early stages and in many cases have already-established competition. He also points to StreetSight data indicating that institutional investors, who hold 95 percent of ALXN shares, have shown a tendency to reduce positions lately. Martin believes the company's premium compared to its peers , is overdone. Looking for insight into this premium, Benzinga reached out to MP Advisor's Senior Analyst Subita Srimal, who covers mature and rising star biotech equities for her firm. "The high valuations are driven by premium pricing of Soliris and other pipeline Drugs which meet unmet need of niche markets," she told us, noting that her firm has had an Outperform rating on ALXN for the last two years. Dr. Srimal indicated she was not overly optimistic about the "reach" of Soliris, but over time had to change her views as the company seemed to be doing everything right following a long struggle. "Orphan diseases being targeted by biologics are advantageous," she continues, and referenced Genzyme, who, Like Alexion, targeted extremely rare conditions and flourished in the space until it encountered some serious issues. "Manufacturing issues like Vesivirus contamination took a toll in the case of GENZ." she says of the now-privately-held Genzyme, whose shares used to trade publicly under the ticker GENZ on NASDAQ. Alexion's Soliris execution, Dr. Srimal says, "does speak well of the management and its perseverance and focus." An Alexion-related concern that Martin referenced in his Barron's article was potential changes in the Affordable Care Act, which would pose coverage restrictions based on price in light of the increasing number of orphan drugs in the market. Dr. Srimal noted that the one indication where pricing and success are at risk is "kidney transplant (AHR), where there is competition." But no impact from the Act is expected in those areas where no other treatment exists. In the end, ALXN valuation would be impacted if sales disappoint, says Dr. Srimal, pointing out that the market size for new indications may be overestimated, since diagnosis is the limiting step. Out of 21 analysts covering the company, three have Neutral rating and one maintains a Sell rating on Alexion Pharmaceuticals shares. ALXN currently trades at $93.45, down $0.87 on yesterday's close and $1.45 less than its Friday all-time high.