Last week Canada’s Patented Medicine Prices Review Board (“PMPRB”) Hearing Panel ordered Alexion Pharmaceuticals (ALXN) to reduce the price of its top-selling drug Soliris:
The Panel has found that the price of Soliris (eculizumab) 10 mg/mL was and is excessive under sections 83 and 85 of the Patent Act. The Panel has ordered Alexion to pay to Her Majesty in right of Canada an amount calculated in accordance with Schedule A to this decision. The Hearing Panel has also ordered Alexion to lower the list price of Soliris in Canada as of September 20, 2017 to no higher than the lowest price in the seven comparator countries set out in the Patented Medicines Regulations.
The news hastened ALXN’s 3% decline last week. From a public relations standpoint the edict sounds rather ominous as Soliris represents 89% of total revenue. I had the following takeaways on the news:
It Could Hasten The Decline In Alexion’s Revenue Growth
Soliris treats ultra-rare disorders like paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS). The fact that it treats such rare diseases usually connotes a limited number of patients. The rarity of its treatments also allows the company to demand high prices. Soliris is consider one of the world’s most expensive drugs. In my opinion, Alexion could be an easy target for governments that want price rollbacks for expensive drugs.
The dollar impact from a price cut in Canada is uncertain. First of all, the company has yet to quantify the dollar impact of a potential price cut. The PMPRB wants Alexion to lower the price to “to no higher than the lowest price in the seven comparator countries set out in the Patented Medicines Regulations.” What price that is and how much lower it is than where Soliris is currently being priced is unclear.
Secondly, it is also uncertain how much in Soliris sales is derived from Canada. Of the $814 million Soliris sales reported in Q2 2017 86% was derived from the U.S., Europe and Asia Pacific. Sales to Canada would be included in the 14% sold to the rest of the world (“ROW”). What is certain is that Alexion can ill-afford any hiccups. It grew Q2 revenue and EBITDA by at least 20% Y/Y. The market has come to expect double digit growth, but it might be coming to an end. My previous article illustrated how revenue for the second half of 2017 could be less than the $1.8 reported in the first half:
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 of a growth stock like ALXN which trades at over 22x EBITDA.
A price cut in Canada could cause the company’s second half revenue to slow even further. Canada’s call for a price cut could give other countries the necessary cover to demand price rollbacks as well. A massive call for price cuts could create negative sentiment for ALXN.
It Could Hurt Alexion’s Valuation
ALXN is up 14% Y/Y and the stock appears to be priced for perfection. With an enterprise value of nearly $33 billion the company trades at 21x run-rate EBITDA. A decline in its revenue growth or an expectation of a decline could send the stock sharply lower. The company already appears to be showing strains. In Q4 2016 Alexion’s CEO and CFO resigned after the company was accused of improper sales practices. Alexion was never accused of any fraudulent behavior. However, having to rely on such a small number of customers could lend itself to aggressive sales tactics to sustain revenue growth. Sources suggested Alexion received its 2016 revenue from only 11,000 customers, which equated to about $273,000 per customer annually.
Last quarter management announced it was laying off 400 employees and moving its operations to Massachusetts. My impression is that management suspects the company’s top line could slow. Alexion might be forced to cut R&D and other expenses to offset any slow down in top line growth. The move to Massachusetts could give the company cover to cut costs without alerting the market that growth is dead.
I believe Alexion’s growth is dead. Canada’s demand for a price cut on Soliris could hasten the company’s demise. Worse, it could cause investors to lower their growth expectations for the company and cause a sell off in the stock. ALXN is a sell.