At some point, a company reaches a level of maximum valuation. It doesn’t mean the company becomes bad, but rather all upside is priced in and future gains are limited. In the case of Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN), might this be a reality?
Too many “ifs” in this equation
If you were an executive at a top biotech company, had a once-in-a-lifetime product, and was in the late stages of being bought out, would you sell 8% of your total outstanding shares? Well, this is the logic that some Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) investors are presenting, as CEO Leonard Bell reportedly sold 140,000 shares last Thursday, amounting to $14.8 million in proceeds. Personally, I don’t blame him!
Alexion markets and sells one drug, Soliris, which is used to treat rare genetic/blood diseases; it also has a hefty price tag of $410,000 per year. This very expensive drug is the driving force behind Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)’s market cap of more than $20 billion.
Alexion bulls point to the company’s pipeline, which includes a vast variety of potential indications for Soliris. “If” all goes to plan, Soliris could peak with sales upward of $3.5 billion annually, leaving significant upside potential, as Alexion reported sales of just $1.32 billion in the last 12 months.
However, at 15.5 times sales, Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)’s valuation is tied directly to the potential of Soliris. But strangely, even “if” the drug reaches its full potential, Alexion would still be trading at nearly 6 times sales “if” its valuation stays the same. Thus, with the industry average at 3 times sales, Alexion is very pricey, with limited upside potential.
Given Bell’s recent insider sell, I say to follow the smart money. Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) has slightly underperformed the broader market in 2013, but saw a nice pop back in July following news of interest on behalf of Roche. However, those rumors have since faded, and it now looks as though future performance will be driven by fundamentals, rather than speculation.
Far better options
Monday ended up being a day that could spark controversy for Alexion. News struck that vials of Soliris had to be recalled due to the presence of “visible particles.” Alexion states that the recall and replacement of these vials could affect 1%-2% of monthly vial consumption. Hence, with $370 million in quarterly sales, we’re talking about a fundamental impact between $2 million and $5 million.
For a company that is valued excessively, and must click on all cylinders to maintain its valuation, I view this news to be operational negligence on behalf of management and yet another sign that Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN) is too dependent on one drug.
Alexion bulls point to the company’s orphan indication as a defense for the company’s valuation. While orphan indications do allow more years of market exclusivity and often do indicate industry innovation, I think Alexion’s market capitalization has more than accounted for its potential upside.
Instead of investing in Alexion, investors interested in the orphan space should look to other companies with more promise an better pipelines, such as Sarepta Therapeutics Inc (NASDAQ:SRPT) or Regeneron Pharmaceuticals Inc (NASDAQ:REGN).
There’s still upside in this stock
Sarepta Therapeutics Inc (NASDAQ:SRPT) is still in the clinical phase, but its Duchenne muscular dystrophy drug eteplirsen has a high likelihood of earning an accelerated FDA approval some time in the next year. DMD is a rare disease, a horrible one that causes a breakdown in muscle, affecting a patient’s ability to walk.