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Morningstar | Alexion's Conversion to Ultomiris Ahead of Schedule; Shares Remain Undervalued After Strong 2Q

Narrow-moat Alexion reported solid second-quarter operating results, with total revenue of over $1.2 billion, up 15% from last year. Soliris, now approved for four rare diseases, contributed $981 million in revenue, up 9% from last year. Soliris' double-digit volume growth was offset by pricing headwinds in Canada, which may have a small impact on the rest of the year. Metabolic drugs Strensiq and Kanuma both posted double-digit growth, together contributing $168 million. Following this quarter's strong results, management raised guidance for the full year. While we may make some adjustments to our model, we do not anticipate a material change to our fair value estimate of $169 per share.

We were pleased to see that Ultomiris is surpassing our expectations, with $54 million in revenue in the second quarter, more than doubling revenue from the first quarter. Management reported that 40% of paroxysmal nocturnal hemoglobinuria, or PNH, patients have switched from Soliris, which is approaching patent expiration, to Ultomiris, which offers a more convenient dosing schedule of every two months at a slightly lower price. This means Alexion is tracking well with its goal of converting 70% of PNH patients to Ultomiris by the end of 2020. Successful patient conversion from Soliris to Ultomiris remains a key pillar of our narrow moat rating, as we believe that Alexion will be able to avoid severe sales declines despite inevitable biosimilar entry because patients will be hesitant to switch back to Soliris' inconvenient dosing schedule of every two weeks.

The company has several advanced clinical trials initiating through 2020, including a phase 3 superiority trial of ALXN1840 in Wilson's disease, a phase 2/phase 3 trial of ALXN1830 in warm autoimmune hemolytic anemia, and a phase 2/phase 3 trial of CAEL-101 in AL amyloidosis. We expect research and development costs to grow in the double digits each year but remain under 20% of total revenue for the medium term.

Further, the company announced an addition to its already-abundant pipeline of clinical trials, with plans to initiate a phase 3 trial for Ultomiris in hematopoietic stem cell transplant-associated thrombotic microangiopathy, or HSCT-TMA, a serious complication of stem cell transplants with no approved treatment options. While there may be some off-label use of Alexion's therapies in this indication, Alexion has not shared any early trial results, so we are not yet including this in our model. Competitors such as Omeros' narsoplimab and Akari Therapeutics' nomacopan (Coversin) already have trials under way in HSCT-TMA, but Alexion's experience with clinical development compared with these small competitors suggests the company could catch up quickly and further expand the addressable patient population for Ultomiris.

We give little credit to the rest of Alexion's pipeline in our model at this point, given that many candidates are still in early stages. This includes planned trials of ALXN1830 in generalized myasthenia gravis and Ultomiris in primary progressive multiple sclerosis and amyotrophic lateral sclerosis. Overall, because of the company's focus on rare diseases with high unmet need and strong pricing power, we see a path to continued excess returns that support a narrow economic moat.