Investors have flocked to the dividends of Big Pharma and flocked to the limitless upside of major biotech outfits for years. Valuations are no longer considered high for these two healthcare sectors, and some investors would consider even the large biotechs to be “cheap” based on historic earnings and sales multiples with upside ahead. There is just one small problem looking at major drug and biotech companies in that they are all considered to be close to their fair market value.
Most investors are probably going to expect perhaps 8% to 10% upside in the most established biotechs and pharma stocks looking out beyond the end of 2020. And a screen through the Refinitiv universe of consensus analyst stock target prices leaves very few options for big upside in the established companies. Again, these are the larger companies with products on the market and in the bio-pharma stocks that do not have COVID-19 fever having driven their stocks to the moon and beyond.
One major exception to this rule of limited upside may be Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN). The biotech outfit posted positive earnings with total second quarter revenues rising 20% from a year earlier to $1.44 billion. And while it posted a GAAP report of -$4.84 in earnings per share, its non-GAAP diluted earnings of $3.11 per share (used by analysts) was more than 50-cents above expectations.
Investors have a history of not being very pleased with Alexion, but there are a lot of positive trends here that could be viewed more favorably in the months ahead. Low valuations, continued growth, beating earnings, raising guidance, activist investors, loose merger hopes, an expanded and diversified, drug pipeline, and higher analyst price targets just might all add up to something for longer-term investors.
Alexion Pharmaceuticals saw its stock rise only 0.2% to $104.81 on Thursday despite its earnings beat including additional good news ahead. There are likely to be multiple analyst adjustments in the next few days, but some investors are going to look at the company’s report wondering why the stock did not do better. Some investors are going to look at its $23 billion market cap being perhaps too low as well for the upside opportunities the company has. The company could even still be looked at as a takeover-hopeful by optimistic investors, even if some caution there is merited.
One positive note inside the earnings indicated that its ULTOMIRIS has now been established as the new standard of care in Paroxysmal Nocturnal Hemoglobinuria (PNH) with more than 70% patient conversion from SOLIRIS in the United States. Alexion also has now diversified its commercial-stage portfolio with the announced acquisition of Portola (May, 2020) and with the addition of ANDEXXA to its lineup. The company also has received approval in the European Union for ULTOMIRIS in atypical hemolytic uremic syndrome and has also announced positive Phase III study data for weekly subcutaneous ULTOMIRIS formulation.
Along with earnings, Alexion updated its capital allocation strategy and it plans to return $500 million to $550 million in 2020. The company is now targeting at least one-third of its average annual free cash flow to shareholders covering the years of 2021 out to 2023. Alexion has been public since the 1990s and its stock previously peaked above $190 back in 2014.
As for why Alexion may be cheap to the eye of biotech investors, it just has a lot more upside than almost all profitable and established major drug companies and biotechs. It is currently valued at only about 10-times earnings, and it is expected to post close to double-digit sales growth of up to $6 billion in 2021. Refinitiv’s consensus analyst target price is up at $138.42, indicating upside potential of more than 30% from the current levels. Some analysts are much higher at the time that its prior peak was nearly double the current stock price.
By acquiring Portola, which has a mere $1.4 billion market cap at the current time, Portola is only just now starting to see revenues and on a standalone basis it was expected to post losses for multiple years ahead. With 2 US FDA-approved products, which are touted as “the first and only of their kind” in treating blood-related disorders, Portola also brought along established partnerships with Bristol-Myers Squibb, Pfizer, Bayer, Daiichi Sankyo and others.
One firm which is handily above the base-line for upside is Wedbush Securities. The firm’s Laura Chico has a $156 price target that implies roughly 50% upside from the current share price. Her take after earnings was that there was a lot to liker in the quarter with a solid beat to earnings, increased guidance and with a new targeted and defined stock buyback plan being put in place.
The Wedbush report did note that COVID-19 impacted its uptake to an extent, but Chico noted that Alexion was largely able to navigate these headwinds and that the specific share repurchase targets is a better deployment of its capital for shareholders (rather than more acquisitions) despite an expected increase in its share count from 2021 to 2023. Chico’s prior price target was $142, and the higher $156 target is supported by strong execution across both commercial and R&D groups.
Alexion is not the only pharma and biotech stock that was hurt during COVID-19. The industry has seen wide interruptions to drug trials and to drug studies as patients want to (or were ordered to) stay away from medical and clinical settings to avoid coming in contact with the novel coronavirus.
One other criticism of Alexion is that the company has been making multiple acquisitions as it tries to gain larger pipelines of future drugs. SVB Leerink analyst Geoffrey Porges, who had a Outperform rating and an even higher $159 price target, has not been as favorable on Alxion’s use of cash on acquisitions that have not added value. The analyst pointed out that some $4 billion has been spent on acquisitions in the last 3 years alone with a negative return on invested capital to date. Porges even pointed out that Alexion is suffering from one of the lowest (earnings) multiples in the entire biotech sector and has been trading for the last two years as if its underlying core business might suddenly evaporate.
Porges warned that Alexion’s dependence on rare-disease drugs Ultomiris and Soliris (at $4.3 billion combined of its $5 billion in 2019 sales, but he also opined that its joint franchise is strong and that existing products have solid growth potential over the coming 5-year period. Issues such as continued activist pressure or an acquisition of the company were noted as two ways the company can be forced into a better focus.
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To show some balance against endless upside potential, we took a look at BofA Securities. The firm’s Geoff Meachum has only a Neutral rating after an earlier downgrade in 2020 and the analyst has a sub-consensus price objective. He still raised his official price target to $125 from $120 in the call, noting that its “Beat and Raise” quarter and its new structured capital return plan looks better than it did before. The Neutral ratting also included notes about solid execution in the quarter, stronger guidance (similar to pre-COVID guidance) that should still be beatable ahead. Meacham also added Andexxa to the mix for determining its valuation.
Alexion is not universally loved by investors. The activist Elliott has noted deal rumors by Amgen and noted that the best return for shareholders would be from an acquisition of the entire company. While an acquisition may bring upside, growth-oriented investors might see concerns of slower growth being bogged down by a history of underwhelming acquisitions. In short, they might not want to pay a premium for a company that hasn’t made great work of its own expensive deal-making in recent years. And while most investors love to hear that a potential acquisition may be the case, the reality is that investors should never view a company solely because it could see an acquisition down the road.
Short sellers are not currently heavily betting against Alexion. The latest short interest from mid-July was 4.42 million shares short, down from 4.76 million shares short at the end of June.
24/7 Wall St. always tries to remind readers that analyst calls individually should never be used as a sole basis to buy or sell a stock. There may be additional analyst reports in the coming days, and it would be easy to see how or why some analysts who cover Alexion might be thinking about trimming some of their upside price targets after such a long period of disappointments. Then again, there is also the notion that maybe not even a theme of bad news or negativity has to last forever.
Alexion’s $104.81 latest stock price is against a 52-week range of $72.67 to $125.52. Alexion may not have the absolute greatest story of all biotechs based on a muted valuation and based on a disappointing stock history. But for companies in the large-cap space with defensible revenues in biotech and pharma it is just very hard to find implied upside that is up in the 30% to 50% range at this time for companies that have established revenues, earnings and set rules for a stock buyback plan.
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