Alexion's top-selling Soliris

Last week Alexion Pharmaceuticals (ALXN) announced it was moving its headquarters from New Haven, CT to Boston/Cambridge:

The new crew in charge of Alexion $ALXN is pulling up stakes from New Haven, CT and moving its headquarters to the big biopharma hub in Boston/Cambridge. And the dramatic move will come with some big layoffs.

In a top-to-bottom revamp, Alexion CEO Ludwig Hantson announced plans to downsize R&D as it reorganized the pipeline. The biopharma company also plans to shutter a variety of facilities, including the Alexion Rhode Island manufacturing facility and “certain regional and country-based offices.” And it will spend up to $440 million in a shakeup that includes layoffs in the commercial group as well as administrative offices as it moves 400 jobs to Boston.

The move will involve a reorganization of R&D, lay offs and shuttering of certain facilities. The announcement sounds rather ominous. I explain below.

Is Alexion’s Top Line Growth About To Slow?

Alexion has a gift for perplexing investors, me in particular. Maybe I simply look at everything with a jaundiced view, but I find it hard to believe that a growth company who wants to simply change its R&D profile and engage in M&A has to pack up and move to Boston. General Electric’s (GE) operations have been in a steady state of decline. It also recently moved its headquarters from Stamford, CT to Boston; part of the attraction was to garner a lower corporate tax rate.

Alexion’s growth is not dead, at least not yet. Its Q2 revenue and EBITDA grew Y/Y by 21% and 22%, respectively. Revenue from top-selling Soliris was up 16%. Soliris represents 89% of total revenue. Soliris treats ultra-rare disorders like paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS). At over $200,000 per person is it considered one of the most-expensive drugs in the world. The rarity of the disease it treats could make it difficult for Alexion to grow revenue simply due to volume increases.

Secondly, the drug could become a victim of its own success. The faster its revenue grows the more difficult it become to sustain it. The mid-point of management’s full-year 2017 revenue guidance suggests 12% growth Y/Y:

Again, we’re reaffirming our 2017 revenue guidance following the strong start in the first quarter. And importantly, our revenue forecast is at the midpoint of the guidance range. So, let’s go through a few specifics, starting with the summary. We continue to expect total revenues to be in the $3.4 billion to $3.5 billion range. At the midpoint, 12% total growth year-over-year and includes $50 million to $60 million of currency headwinds or call it around 2% at the round negative impact from currency.

Alexion had sales of $1.8 billion in the first half of 2017. The mid-point of $3.5 billion full-year sales suggest $1.7 billion in the second half of 2017, or a 6% decline versus the first half. This would appear unbecoming a growth stock like ALXN which trades at over 22x EBITDA.

Management must now either cut costs or tell the market it is no longer a growth company. It appears to have chosen the former. Alexion will also lay off 20% of its 3,121 workforce (600 people) and hopefully wring out $250 million in costs through restructuring efforts. The extra cash flow is expected to be used for business development and bolt on acquisitions. Alexion has been a one-trick pony for years now. It the company could have diversified its operations through business development and bolt-on acquisitions it likely would have done so already.

Good Luck On The Acquisition Front

Alexion has $1.4 billion in cash on hand and low debt levels. However, talk of being acquisitive sounds like a sea change from its previous strategy of financial engineering to prop up the share price. Over the past 42 months the company has spent $1.3 billion on share repurchases. That is capital that could have been used for an acquisition. The fact is that Alexion might not have enough dry powder to make a meaningful acquisition. It definitely could not compete on price with larger acquirers like Gilead (GILD), Novartis (NVS) or Allergan (AGN).

It likely does not the cash flow to make an sizeable deal that might not bear fruit until two to three years later. It also begs the question, “What does Alexion have to even attract a potential seller other than money?” It is not know as an incubator of biotech firms like some of the more acquisitive firms. Having its name in the press pursuant to questionable sales practices could also deter potential sellers.

Conclusion

Talks of restructuring and cost cuts have arisen as Alexion’s second half 2017 revenue could decline vis-a-vis the first half. Alexion’s failure to diversify away from Soliris could come back to haunt it. Growth appears dead. Avoid ALXN.

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