Healthcare Business

Why Alexion Could Have the Most Upside of All Established Pharma & Biotech Stocks

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.