Investment Summary: We see ALXN entering a profit cycle inflection from product line extensions of Soliris (into MG and possibly NMO), the launch of new products (Strensiq and Kanuma), and the build-out of the pipeline into other rare diseases under a new, well regarded CEO. We are closely watching the MG ramp after FDA approval in Oct '17. We are also watching Phase 3 data for NMO in mid-18. ALXN 1210 data has been very strong so far. We look for 1210 approval in late '18, which is next-gen Soliris and extends the Soliris franchise beyond potential patent expiration in 2020-21.
A. Long Alexion Pharmaceuticals (ALXN, $115-125, Mkt Cap:$27B, EV:$28B, Revenue '18E: $4.0B)
Company Description: Alexion develops products to treat rare diseases that meet the orphan drug status. ALXN 's largest franchise, Soliris, treats two hematology indications called PNH and aHUS. The company is currently expanding into other orphan drug indications through product extensions of Soliris and through two new products, Strensiq and Kanuma.
B. Idea Classification: Special Situation & Pipeline Inflection
C. Target Price/Downside:
Next 18-24 months: +40-50%/-15-20%
Intrinsic Value (IV) Trading Range: $115-$220
o IV: We assume 22x EBITDA AND 30x P/E, below recent M&A
o IV Support: PFE buys MDVN for 26x EBITDA; JNJ buys Actelion for 27x FY2 EBITDA; PFE acq's MDVN for 36.7x P/E; JNJ buys Actelion for 35x P/E.
D. Summary Thesis (2-3 sent's): Weakness from senior management changes and pipeline delays created an attractive entry into a compelling pipeline driven growth company. We see ALXN entering a profit cycle inflection from potential product line extensions of Soliris (MG, NMO), the launch of new products (Strensiq and Kanuma), and the build-out of the pipeline into other rare diseases under a new, well regarded CEO. We are closely watching the MG ramp after FDA approval in Oct '17. We area also watching NMO Phase 3 data in mid-18 and ALXN 1210 approval in late '18, which is next-gen Soliris and extends the Soliris franchise beyond potential patent expiration in 2020-21.
E. Conviction Level/Rating:
· High conviction in $110-120 range; Medium conviction in $135-145 range
· 1C (Buy, High Risk): We are assigning a high risk due to product concentration mitigated by well-established products with long track records. Over the next 2-3 years, three drugs will generate the majority of revenue for the company.
F. Detailed Thesis: We believe ALXN is entering a product cycle inflection that may accelerate revenue growth from product line extensions and the ramping of 2 recently launched products. More specifically, the drivers to our thesis include the recent launch of Strensiq and Kanuma, the approvals/trial readouts of MG and NMO, and the development of ALXN1210 as a next generation Soliris. Many of the key clinical events for ALXN have been de-risked. This includes:
2Q18: Positive data on Phase 3 ALXN1210 in PNH switch study (Soliris switch to 1210) met the primary endpoint
2Q18: Positive data on Phase 3 ALXN1210 in PNH naïve patients met the primary endpoint
MG was approved in 4Q18 and launched. We are tracking the launch in this multi-billion dollar opportunity
We are still waiting on:
4Q18: Phase 3 ALXN1210 data in aHUS
2019: Phase 3 subcutaneous data on 1210
Soliris, Strensiq, Kanuma, and ALXN1210 extend ALXN's portfolio into other orphan drug areas which have pricing power and no competition. Recent M&A is also focused on similar rare diseases. The risks to our thesis are execution on new product launches, potential competition in very early stages (3-5 years away), and potential biosimilar competition in 2021. Mitigating these risks are a strong franchise focused on identifying patients with rare diseases, patient tracking services, a strengthening patent estate, and a next generation product to extend the Soliris franchise.
Stock Weakness & Inflection: Since 2016, ALXN has materially underperformed (see chart below) the XLV(healthcare index) for a number of reasons including pipeline delays and senior management changes. Many of these issues have been resolved making ALXN an execution thesis. We believe quarterly results, execution under the new CEO and management team, and the launch of MG were key events for the stock. We are also watching the progress of competing products in development (see risks).
· Feb-Mar 2016: ALXN missed 1Q16 expectations on macro conditions in Brazil and Argentina resulting in weaker gov't budgets and fewer patient adds. Concerns around biosimilar competition get highlighted as AMGN announces the beginning stages of a Soliris biosimilar.
· Early June 2016: MG fails to meet primary end point but meets many secondary endpoints.
· Dec 2016: Board ousts CEO & CFO. Replaces with interim CEO & CFO from Board.
· 4Q17: Soliris gets FDA approval to launch in MG
· 2Q18: Positive 1210 data in P3 trials in PNH
ALXN(blue) vs. XLV(red)
Strensiq and Kanuma: Strensiq could represent a +$1B in peak sales opportunity that will ramp over the next 4-5 years. Kanuma could represent a $200M-300M opportunity that will ramp over the next 4-5 years. Strensiq and Kanuma were approved in EU on 9/1/15. To date, Strensiq ($340M in 2017) has exceeded expectations but Kanuma ($66M in 2017) is ramping slower than expected. Strensiq treats HPP (hypophosphatasia), a condition in which the body does not properly build bone tissue. Kanuma treats LAL-D (lysosomal acid lipase deficiency), which means the body does not properly break down fat. The disease can result in an accumulation of fatty substances in the organs resulting in very high mortality rates in infants.
MG & NMO: We see additional product cycles emerging from Soliris extensions. Soliris in MG had a PDUFA in Oct 2017 and was approved. MG could be a $1B opportunity. In mid-2018, we expect trial data for NMO, which could be a $700M-$1B opportunity. In MG, Soliris treats refractory myasthenia gravis (MG), which is an autoimmune disease of neuromuscular juncture resulting in muscle fatigue and failure throughout the body. It can also impact breathing. While MG failed the primary end-point of the trial, ALXN filed after positive meetings with FDA and EMA based on the totality of data. Soliris in MG achieved stat significance on 18 of 22 pre-specified end points. In NMO, Soliris treats severe/relapsing Neuromyeltis Optica (NMO) which is inflammation in the optic nerve and spinal cord. NMO is viewed as a high risk asset with low expectations.
ALXN 1210: The development of ALXN1210 is key to extending the life of ALXN's Soliris (C5 inhibitor) franchise beyond 2020 or 2027 if new IP holds. ALXN 1210 is considered to be a next-generation Soliris that allows for monthly dosing instead of every other week (2x/month). Two P3 trials in PNH(naïve & switch) have read out positively. We expect P3 trials in aHUS to read out towards the end of 2018. Note, ALXN has filed additional patents on Soliris to extend the IP globally. The Phase 3 PNH Switch study of ALXN1210 tested patients previously treated with Soliris that switched to 1210 compared to patients currently treated with Soliris (VERY IMPORTANT STUDY). The Switch study result will be important in converting existing Soliris patients to ALXN1210 and extending patent protection.
P&L: EBITDA Margins compressed from 2014 peak 51.2% to 42%in 2017 due to R&D, product launch costs, and the acquisition of Synegeva, which had Kanuma product launch costs and no revenue. We estimate margins will expand back to peak margins by 2020 from revenue growth and as the infrastructure scales from the product launches of Kanuma and Strensiq.
Balance Sheet: ALXN ended 2017 with $2.9B in debt vs. 2016 at $3.1B in debt, down from $3.5B in 2015. ALXN generated $1.8B of EBITDA in 2017, implying leverage of 1.6x, which is roughly at the low end of the range of the peer group.
G. Variant Perception: Key areas of variance vs. investor expectations:
ALXN's product cycle and pipeline are under-appreciated by investors and revenues and EPS may exceed current expectations.
Soliris is a very strong drug that sets a very high bar for competition to enter this market. If competitors are successful in replicating Soliris, physicians may resist transitioning existing Soliris patients to new therapies given the high mortality risk of patients.
H. Key Issues & Exposures for Thesis
Strensiq & Kanuma together generate $560M, $720M and $850M from 2017-20
Soliris grows +8.6%, +12-13%, +12-13% in 2018-20.
Total revenue grows: +13%, +17%, +15% in 2018-20.
Strensiq revenue/patient ID ramp
Kanuma revenue/patient ID ramp
Competition:
o AMGN biosimilar: Ph 1 data, still waiting on results
o Other competitors have been delayed or are years behind a potential launch
o Ultimately, we see competition addressing the 20% of people that do not respond to Strensiq
I. Trend: Secular/Cyclical/Internal/Timing (Why now?)
· Internal: Multiple product launches and pipeline progression datapoints. We view ALXN as an internal execution story and we will be focused on revenue results for Soliris, Strensiq, and Kanuma. We will also be focused on the following pipeline products: ALXN1210, Soliris MG, and Soliris NMO.
· Secular: N/A
· Timing (Why now): Recent weakness has created an interesting setup into MG, NMO, and ALXN1210 pipeline events. Also, competing products are in phase 1 and 2 with data in 2017. If these fail (as 2 others have) given the high bar from Soliris, ALXN's multiple should expand.
J. Risks:
· Competitive threats to Soliris from a variety of competitors including companies developing biosimilars of Soliris with a similar mechanism of action (MOA) like AMGN to next gen Soliris competition from RARX, AKTX, NVS, OMER, and RHHBY. However, ALNY and another biosimilar company recently failed to meet the hurdle of Soliris and these have been abandoned.
o AMGN: Disclosed ABP 959 Phase 1 biosimilar program, may have updates in 2018.
o RARX: RA101495 (Novel oral C5 inhibitor) currently in Phase 2 in PNH with mixed data in 2H17. MG data expected in 2018.
o AKTX: Conversion (Novel C5 inhibitor) mixed Phase 2 data in PNH
o NVS: LFG316 currently in Phase 2, may have updates through 2018. Unusually quiet on this.
o RHHBY: R07112689 currently in Phase 1/2.
o OMER: OMS721 limited Phase II data was reported and showed efficacy but baseline was not reported and there is uncertainty on safety. Larger study numbers and longer term follow-up are needed, company plans to run a Phase 3 study in aHUS, but commercialization still years away.
· Mixed results in Soliris and Strensiq
· Government pricing concerns in US driven by election year rhetoric as well as international governments (Canada conducting hearings on Soliris price).
· FX could pressure revenues
K. Catalyst/Inflection: Stock Impact (Large, Medium, Small, Unclear)
· 2018: MG ramp - Large
· 2018: Trial data of NMO - Large
· 2017-18: ALXN1210: Progressing through development - Large
· Competitor trial updates
L. Current Sell Side Thoughts:
· 18 Buys/5 Holds
Scenario Table: See below for Base, Bull, & Bear Cases
