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Anna Baran
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Morningstar | Alexion Beats Expectations in 1Q; Full Steam Ahead With Ultomiris Conversion and Neurology Push

Alexion reported a solid quarter, with revenue and adjusted earnings per share ahead of our expectations and management raising guidance slightly. The effort to convert patients from Soliris (which is approaching patent expiration) to Ultomiris (which was approved in the U.S. in January) is well underway, and the Soliris launch in generalized myasthenia gravis (gMG) continues to drive growth. While we may adjust our near-term estimates slightly, we do not expect a material change to our fair value estimate of $169 per share, and we continue to believe that the market is underappreciating the intangible assets behind Alexion's portfolio in rare diseases and its narrow economic moat.

First-quarter revenue of $1.14 billion represents 23% growth from last year, driven by Soliris and newly launched Ultomiris in complement-mediated diseases. Strensiq and Kanuma, both for rare metabolic disorders, performed in line with our expectations. Soliris was up 20%, driven by 23% volume growth and slightly offset, as expected, by price and currency headwinds. For the full year, we model high-single-digit volume growth in paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS) and strong uptake in gMG. The company reported over 1,000 gMG patients on Soliris as of mid-April, slightly ahead of our expectations. The strong top-line growth helped boost adjusted operating margin, up about 740 basis points to 50%. While operating expenses were below our projections in the first quarter, we don't anticipate much of a change to our full-year outlook given that several trials will be picking up in the back half of 2019, slightly later than we had previously expected.

Many of those trials will be for Ultomiris, which was just approved in PNH and is expected to garner several approvals in the coming years as Alexion continues its strategy of converting patients from Soliris to Ultomiris. Management reported that the company has filed for approval of Ultomiris in aHUS, which puts it on track for U.S. launch in 2020, if approved. We also model U.S. launches in gMG in 2021 (late-stage trials are already underway) and neuromyelitis optica spectrum disorder (NMOSD) in 2022 (late-stage trial planned for late 2019). The company also recently announced planned early-stage Ultomiris trials in amyotrophic lateral sclerosis (ALS) and primary progressive multiple sclerosis (PPMS). These opportunities are too early to model, especially given the challenges of neurologic disorders, but represent highly attractive market opportunities.

Ultomiris contributed $25 million in revenue in the first quarter, slightly below our expectations but still a healthy indicator of the conversion effort. The company cited that 22% of PNH patients are already on Ultomiris treatment, which is sizable progress toward the company's goal of 70% conversion by the end of 2020. We expect the conversion momentum to slow down throughout the year as efforts move on from early adopters. The approval of a subcutaneous dose (instead of intravenous) would be an important boon for the company, hitting on both efficacy and convenience. Late-stage trials for subcutaneous Ultomiris are underway in PNH and aHUS, but we don't expect a launch until 2022, leaving room for potential branded competitor entry.

Earlier this month, the first biosimilar for Soliris was approved in Russia, but we don't anticipate a significant impact outside of Russia and the Commonwealth of Independent States (CIS) given Alexion's patent protection in Europe. On the call, management stated that the Russian biosimilar approval was anticipated and had already been incorporated in previous guidance. Further, management surmised that the Amgen biosimilar (currently in phase 3 trials) would take about three years to enter the U.S. market, in line with our model.

The main catalyst this year will be Alexion's progress with Soliris in NMOSD, which would strengthen its position in neurology. We expect detailed phase 3 data of Soliris in NMOSD in May (following positive top-line results last September) as well as its potential approval in late June. We'd like to see a strong launch in NMOSD later this year (if approved), as this would be an indicator of the company's progress in shifting from ultra-rare indications into rare indications with larger target populations (but strong pricing power). Further, given that NMOSD is characterized by relapses and has some alternative off-label treatments, a strong launch would be a testament to the company's commercialization strategy in this potentially challenging indication.
Underlying
Alexion Pharmaceuticals Inc.

Alexion Pharmaceuticals is a biopharmaceutical company serving patients and families affected by rare diseases through the discovery, development and commercialization of therapies. The company has developed and commercialized two complement inhibitors to treat patients with paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome, as well as the complement inhibitor to treat anti-acetylcholine receptor antibody-positive generalized myasthenia gravis and neuromyelitis optica spectrum disorder in patients who are anti-aquaporin-4 antibody positive. In addition, the company has two enzyme replacement therapies for metabolic disorders, hypophosphatasia and lysosomal acid lipase deficiency.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Anna Baran

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