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Morningstar | Alexion's Fourth Quarter Beats Expectations, but 2019 Guidance Disappoints on Volume Outlook

Narrow-moat Alexion reported solid fourth-quarter earnings, with total revenue of over $1.1 billion (up 24% from last year) and adjusted net income of $486 million (up 44% from last year) beating both our and analyst expectations. The beat was largely driven by the strong launch of Soliris in generalized myasthenia gravis (gMG), which we expect will be the main driver of growth in 2019 for Soliris in addition to the potential mid-year launch in neuromyelitis optica spectrum disorder (NMOSD), if approved. Management's guidance for 2019 top-line growth of 13% was lower than we expected, seemingly on Soliris volume, but operating spend guidance as a percentage of total revenue was much lower than we had anticipated. We will review our model after the firm's full-year filing is released, but we do not expect a change to our fair value estimate of $172 per share.

Fourth-quarter growth was driven by 30% volume growth compared with last year, slightly offset by price and foreign exchange effects. The fourth quarter's price headwind was higher than expected at 5% due to rebates and reimbursement, including a new reimbursement agreement in Turkey. Although the company didn't disclose many details, we believe this could indicate that Alexion is finding difficulty securing reimbursement in smaller international markets, forcing prices down in order to formalize reimbursement agreements abroad. However, management's pricing guidance for 2019 of a 2% headwind was slightly better than we had previously modeled (3%), indicating the company's belief that overall pricing will stabilize.

Sustainable pricing strategy is a key goal of Alexion, evidenced by the fact that recently approved Ultomiris, the next-generation version of Soliris that offers patients a much more convenient dosing schedule, is priced at a discount to Soliris. The firm's pricing strategy should help secure rapid reimbursement and aid the company's lofty conversion goal of converting 70% of its PNH patients to Ultomiris in the next two years. While these aggressive conversion efforts dampen our growth expectations for the near term, we view this as a necessary strategy to ward off significant declines once Soliris biosimilars begin to enter the market (potentially as early as 2022 in Europe).

We estimate that management's 2019 revenue guidance indicates overall volume growth in the mid-teens, slightly lower than we expected, partially due to the announced $25 million revenue headwind to Soliris from a switch to third-party distributors in smaller international markets. Additionally, some Soliris volume will be cannibalized by late-stage Ultomiris trials in gMG, NMOSD, and atypical hemolytic uremic syndrome (aHUS). Further, several competitors have reached late-stage trials, which will have a negative impact on Soliris volume and potential growth in 2019. We continue to believe that Soliris sets a high bar on both efficacy and safety despite competitors' progress.

Looking forward, we expect Alexion to add modestly to its recently fortified pipeline in 2019. In the last 10 months, the company has added three clinical-stage candidates: Wilson Therapeutics' WTX101 (now ALXN1840) for Wilson disease ($855 million acquisition); Syntimmune's SYNT001 (now ALXN1830) for rare IgG-mediated diseases ($400 million acquisition); and Caelum Biosciences' CAEL-101 for light chain amyloidosis ($60 million collaboration agreement with option to acquire). While these candidates don't contribute significantly to our valuation yet, we see these additions as an important step by management to fill in the gaps in the pipeline and shift concentration away from Soliris and Ultomiris. Additionally, the company is testing Ultomiris and a next-generation subcutaneous version in several indications, and we expect Soliris to be approved in NMOSD mid-year.