Alexion's Rare-Disease Reign Not Over

After conducting a deeper dive into the competitive dynamics that Alexion ALXN is facing, we’ve lowered our fair value estimate to $169 per share from $172. The shares are still in 4-star territory, however. We think the market is underappreciating Alexion’s invaluable rare-disease expertise and network of patients and doctors, which pose high barriers to entry for branded competitors. The company’s narrow economic moat is underpinned by intangible assets, including patent protection and orphan drug exclusivity with its rare-disease portfolio. We’ve incorporated price headwinds and likely competitor entry into our model, offset by strong volume growth in treatment of generalized myasthenia gravis (approved in 2017) and neuromyelitis optica spectrum disorder (if approved in 2019).

We think Alexion has smartly priced Ultomiris, which was approved in December 2018 and offers a more convenient dosing schedule of six to seven times per year compared with Soliris’ 26 or more infusions per year. By offering it at a slight discount to Soliris, which has an average net annual price of over $450,000 by our estimates, the company should be able to efficiently convert patients to Ultomiris, allowing Alexion to maintain share even as biosimilars and potential branded competitors encroach.

Despite the outsize success of Soliris in the last decade, Alexion is coming out of a few turbulent years. After an expensive acquisition in 2015, an investigation of aggressive selling tactics in 2016, and nearly complete management turnover plus restructuring in 2017, we believe that Alexion is finally on the other side of some serious missteps in execution by previous management. While the new leadership’s record is largely unproved, the strong launch in generalized myasthenia gravis, the approval of Ultomiris, and recent promising early-stage acquisitions point to a new era for the beleaguered biotech.

We downgraded our moat trend rating for Alexion to negative from stable, taking into the account the upcoming patent expiration of Soliris in 2021. Whereas Alexion’s narrow moat was once cemented by clear patent protection, we think the forthcoming likely biosimilar hit and pricing pressure are indications that the company’s competitive position is more precarious in the next five years compared with the past several years. With that said, patent-protected Ultomiris (with peak annual sales of over $5 billion) and the label expansions in orphan drug indications generalized myasthenia gravis and potentially neuromyelitis optica spectrum disorder should help the company earn returns above its cost of capital throughout our explicit forecast period.

We see several potential catalysts in the year ahead, including the rollout of Ultomiris that began in January, potential approval of Soliris in neuromyelitis optica spectrum disorder in mid-2019, and trial readouts from pipeline candidates. We’re looking forward to more details on the pipeline at the company’s investor day later this month, as well as an update on the Ultomiris launch. The pipeline (which is relatively early-stage) contributes only modestly to our valuation, so successful future readouts could provide upside to our fair value estimate.