Monday, February 24, 2014
Investing in Biotechnology Earnings Growth
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Biotechnology was full of success stories in 2013. And some of those stories just got more exciting in February as the Nasdaq Biotech Index (IBB - Trend Report) rallied 13% off the lows. My FTM Portfolio also surged higher on the back of names like Pharmacyclics (PCYC - Trend Report), Medivation (MDVN - Trend Report), and Alnylam (ALNY - Trend Report).
But Alexion Pharmaceuticals (ALXN - Trend Report) was one of the heavy lifters of that IBB performance since it comprises nearly 5% of that index. ALXN shares rallied 17% this month to hit an all-time closing high of $181.52 after a strong quarterly report in late January that first vaulted the stock over 20% in one day from the low $130s to over $160.
What was all the excitement about that had this biotech superstar making a $50 (nearly 40%) move in under 3 weeks? Sales and taxes, of course.
Alexion's revenues jumped 38% to approximately $442 million in the final quarter of 2013 -- beating the consensus by over $10 million -- driven by strong sales of their key drug Soliris, which is the only treatment available for paroxysmal nocturnal hemoglobinuria (PNH).
PNH is a rare genetic blood disorder characterized by the onset of severe hemolytic anemia, chronic fatigue and intermittent episodes of dark colored urine, known as hemoglobinuria. Because of the life-saving benefits for these patients that only come from Soliris, major insurance companies support one of the highest price tags of any drug treatment at roughly $440,000.
This may seem unfair to some minds, but Alexion was founded in 1992 and it's been a long and bumpy road to profitability. If biotech companies don't have visibility on potential financial outcomes, they cannot invest the billions in laboratory and clinical R&D necessary to discover specialized drug therapies that are both effective and safe in treating rare diseases that may only afflict a few thousand people.
In 2011, the FDA cleared Soliris for treating children and adults suffering from atypical hemolytic uremic syndrome (aHUS), an ultra-rare genetic disorder. In Nov 2011, a similar approval for the drug was granted in the EU. Japanese approval for the aHUS indication came in Sep 2013.
Zacks Investment Research reports while Alexion is testing Soliris and a number of other compounds in a variety of different disease indications, the drug recorded sales of $1.55 billion in 2013, up 37%.
Irish Tax Haven
Besides raising guidance on sales of Soliris to $2 billion for 2014, the company detailed plans for exceptional corporate tax savings as they develop operations in Ireland. This reworking of Alexion’s tax structure was largely unexpected by analysts who were modeling a tax rate for 2014 coming into the quarter of 23% compared with the new 11% revealed last month.
The company informed investors in their last conference call that effective from 2014, its Irish units are holding certain intellectual property rights to Soliris and other compounds. Obviously the company stands to benefit greatly from lower tax rates thus aiding its long-term growth prospects.
But the move also makes sense for a global pharma company providing disease treatment around the world to centralize operations in tax-friendly region with a strong pool of biopharma workers.
Alexion also stated that it intends to utilize its net operating loss (NOL) balance (approximately $9 million at the end of 2013) as well as tax credits ($190 million at the end of 2013) to offset its taxable profits.
These measures are reflected in the company s adjusted tax rate projections of 11%-12% for 2014, 13%-14% in 2015, and 16%-18% in 2018. The move to invest heavily in Ireland is indicative of management's efforts to increase shareholder value.
Following these announcements in late January, Wall Street analysts began revising their models for Connecticut-based ALXN.
Stifel Nicolaus raised their earnings estimates and price target to $207 from $138 citing that the FY14 bottom-line guidance provided the first glimpse of longer-term earnings leverage associated with the completion of the offshore operational realignment that would "optimize" the company's longer-term tax rate structure, generating more than $20 per share in incremental upside.
Both Canaccord Genuity and Brean Capital analysts were out immediately after the company report on January 30 and raised their outlooks and price targets to $200. On February 7, the stock began making the move up from $155 and on Feb 10, Deutsche Bank sealed the deal with their PT bump from $125 to $205.
With consensus projections for EPS of $4.76 in 2015, here's what the growth trajectory looks like for Alexion based solely on Soliris.
ALXN Pipeline and Valuation
But those estimates could accelerate even higher in the coming years as the company develops its drug pipeline. Stifel analysts also noted that they expect an improving catalyst calendar and an expanding/diversified pipeline to further support additional multiple expansion for ALXN shares.
Alexion currently has several candidates in clinical development focusing on different areas. Alexion expects to launch seven products in the 2014-2018 time frame. And the company inked a deal with the privately held Moderna Therapeutics in January for the discovery and development of messenger ribo nucleic acid (mRNA) therapeutics to treat patients suffering from rare diseases.
Most developmental biopharma companies face regulatory risk as they run the FDA gauntlet. But William Blair analysts explain the extra challenges for Alexion.
Because the company targets "ultraorphan" markets with its drug therapies, where the diseases are often poorly characterized and few alternative therapeutic options exist, they face FDA approval pathways that are not always well-defined, and any regulatory setbacks with investigational compounds in Alexion's pipeline could pressure the shares.
Alexion's trailing 12-month price-to-sales multiple is 20X, compared to its peer group multiple of 9.4. With a $35.3 billion market cap, the stock is trading over 17.5 X 2014 sales estimates, above its peer group multiple of 9X. On a P/E basis, ALXN is trading at just over 50X this year's earnings estimates of $3.50.
Apparently the analysts are quite comfortable with this valuation for a biopharma company with a blockbuster drug, an expanding pipeline, and the loopholes of the Irish.
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