The Cure for Alexion

 | Feb 22, 2012 | 10:30 AM EST
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Alexion Pharmaceuticals (ALXN) is niche player in the biotech space, focusing on severe ultra-rare diseases that affect, at most, one out of every 50,000 people.

The Connecticut-based company's emerging business model is to develop drugs for diseases where there is essentially no competition. Soliris, Alexion's only drug on the market to date, is the only drug approved to treat a rare life-threatening blood disorder called paroxysmal nocturnal hemoglobinuria, or PNH, that attacks red blood cells. The monopoly gives Alexion remarkable high pricing power; a year's course of Soliris costs around $400,000.

With sales of Solaris accounting for all of its current business, Alexion is working hard to expand Soliris' label -- that is, the diseases Soliris can be used to treat. In September, the U.S. Food and Drug Administration approved Soliris' to treat a disease called atypical hemolytic uremic syndrome, or aHUS, which causes kidney disease and high blood pressure among children. The European Committee for Medicinal Products for Human Use, or CHMP, also recommends that the same indication be extended to Soliris in Europe.

There was further encouraging news for Alexion recently when Soliris fared well in a mid-stage study that evaluated the drug for yet another indication. The study involved patients suffering from severe and refractory generalized myasthenia gravis, or GMG, which weakens the muscles that control the eyes and eyelids. Encouraged by the positive results, the company intends to evaluate Soliris for this new indication further.

The danger, of course, is that Alexion is just a one-trick pony. After all, it has Solaris but little else.

That's why Alexion is actively expanding its potential drug pipeline, again, focusing on rare diseases that require very expensive drugs to treat. As part of this effort, Alexion recently acquired Enobia Pharma, a company whose primary asset is an enzyme in development to treat hypophosphatasia, or HPP, a genetic disorder that deprives bones of an essential protein, thereby stunting their growth. About one in 100,000 infants are born with HPP. Analysts at Oppenheimer estimate that the drug could take 80% of the global HPP market, with sales reaching $750 million-- essentially the size of Alexion's annual sales of Solaris. The treatment is in Phase 2 trials, with the launch scheduled for the second half of 2014.

From an investment standpoint, Alexion has been a strong stock market performer. It's also developed an Apple (AAPL)-like habit of beating expectations. The stock recently hit a record high after its Feb. 9 earnings announcement beat analysts' fourth-quarter estimates. Revenue rose 46% from a year earlier to $227.6 million, almost $7 million above analysts' views. Earnings rose 58% to $0.41 a share, beating forecasts by $0.07. For the full year, sales rose 45% to $783.4 million, with profit rising 55% to $1.38 a share. For 2012, Alexion sees earnings at $1.60 to $1.70 a share vs. consensus of $1.67. The low end of sales guidance matched views at $1.04 billion, with the high end at $1.07 billion.

Even before Alexion's strong earnings, Goldman Sachs had Alexion on its Conviction Buy list with a $91 price target. After the earnings announcement, Morgan Stanley raised its price target to $96. Robert Baird was even more optimistic, raising its price target to $100 -- 22% above Tuesday's closing price of $81.81.

With Alexion pulling back for four straight days last week, now is a good time to enter the stock. Buy Alexion Pharmaceuticals at market today, and place a stop at $69.50.

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