Alexion Pharmaceuticals: Growth At A Reasonable Price (GARP)


I find it very interesting that Alexion Pharmaceuticals Inc. (ALXN) after going public in 2001, did not generate their first profit until December 2008. As we all know, this was in the throes of what is now known as the Great Recession of 2008. Moreover, Alexion’s adjusted operating earnings have grown from $0.20 per share in $2008 to $10.53 by 2019 representing an outstanding 43.72% compound annualized growth rate. Therefore, based on historical operating results since the company turned profitable, Alexion Pharmaceuticals represents a quintessential example of a true growth stock.

However, this biotech company specializing in rare diseases did experience a 4% drop in earnings in fiscal 2015 followed by an additional 7% drop in earnings for fiscal year 2016. At its peak, Alexion’s stock price exceeded $200 a share and commanded a high growth stock P/E ratio of close to 40, which up till then was justified and supported by its operating growth. However, at those high valuations the stock was vulnerable to any form of earnings weakness, and therefore, dropped to under $100 a share and a P/E ratio of less than 20 by the end of May 2017 resulting from the temporary slowdown in growth.

Since that time, the stock has modestly recovered to over $100 a share even though earnings advanced at a compound growth rate of 31.63% over the years 2017, 2018 and 2019. The moral of the story is, that since it had its minor earnings hiccups in 2015 and 2016, the company’s operating results (earnings) have grown significantly faster than its stock price. The result is an attractive biotechnology growth stock opportunity that can today be purchased at a significant discount to its earnings justified valuations based on its future growth expectations.

Negative Overhang Resolved

Alexion was able to generate a profit in 2008 thanks to its blockbuster drug Soliris, which was originally approved in 2007 but has also expanded its use for several additional rare disease applications since. Alexion offers patients with specific rare diseases the only treatments that are available which gives them great market share and pricing power. More importantly, Alexion also has two additional drugs to treat all career diseases and as I will illustrate later, a promising pipeline. Consequently, analysts expect Alexion to continue its leadership position in rare disease markets.

However, despite the long-term opportunity the company offers, it was plagued with negative headwinds that prevented the stock from rising to its true earnings justified valuations. One big negative, was a dispute between their much larger rival biotech giant Amgen over their blockbuster drug Soliris’ patents. According to Morningstar, the companies entered into a royalty-free license agreement that will provide Alexion ample time and opportunity to continue converting their rare disease patents from Soliris to next-generation Ultomiris.

Although the licensing agreement with Amgen would allow them to enter the market with their own biosimilars in 2025, Alexion’s future lies in their developing a subcutaneous dose of their next-generation medicine Ultomiris. Alexion is also evaluating Ultomiris to treat COVID-19, which if successful could provide a significant boost to the company’s revenue generation. Regardless, Alexion also has a very robust pipeline of drugs in phase 3 as depicted on the following screenshot: