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.