Introduction

Alexion is an ultra-orphan disease company which is currently undervalued by the market.  A series of missteps by the prior management have created an interesting opportunity for investors.  However, with a biologic in the ultra-orphan space that is growing double digit and has potential line extensions on the horizon we believe there is significant value.  

The previous management overpaid for Synageva, lacked financial discipline and pursued aggressive sales behavior ultimately led to a complete overhaul of the executive team.  Their operation expenses are bloated and for a company that has 92% GM, their non-GAAP net income is only 36% of revenues.  

On March 27, 2017, ALXN named former Baxalta CEO Ludwig Hantson as its new CEO.  At Baxalta, he was CEO of the company through its spin-off from Baxter to its acquisition by Shire.  Prior to Baxalta, Dr. Hantson was President of Baxter BioScience, a $6 billion global business unit of Baxter where he drove significant value into its pipeline by adding 25 New Molecular Entities and Biologics License Applications, and launching 13 new products.  Prior to Baxter, Hantson was at Novartis from 2001 to 2010, including CEO of Novartis Pharma North America, CEO of Novartis Europe, and President of Novartis Pharma Canada.  Though not as biotech focused a background as some investors might have wished, we believe that Hantson has experience with orphan diseases from his time at Baxalta and Baxter and will be able to bring some much needed financial, R&D, and ethical discipline to the organization.  

Soliris

Their main drug is Soliris, a biologic which is approved to treat two ultra orphan diseases - Paroxysmal Nocturnal Hemoglobinuria (PNH) and Atypical Hemolytic Uremic Syndrom (aHUS).   Soliris is a very high priced drug due to the very small patient population is serves.  PNH patients can bring in $500k a year in revenue.  

Soliris (eculizumab)

Soliris is designed to inhibit a specific aspect of the complement component of the immune system and thereby treat inflammation associated with chronic disorders in several therapeutic areas, including hematology, nephrology, neurology and transplant rejection. Soliris is a humanized monoclonal antibody that effectively blocks terminal complement activity at the doses currently prescribed. The initial indication for which we received approval for Soliris is PNH.

Paroxysmal Nocturnal Hemoglobinuria (PNH)

PNH is a debilitating and life-threatening, ultra-rare genetic blood disorder defined by chronic uncontrolled complement activation leading to the destruction of red blood cells (hemolysis). The chronic hemolysis in patients with PNH may be associated with life-threatening thromboses, recurrent pain, kidney disease, disabling fatigue, impaired quality of life, severe anemia, pulmonary hypertension, shortness of breath and intermittent episodes of dark-colored urine (hemoglobinuria). We continue to work with researchers to expand the base of knowledge in PNH and the utility of Soliris to treat patients with PNH. Soliris is approved for the treatment of PNH in the U.S., Europe, Japan and in several other territories. We are sponsoring a multinational registry to gather information regarding the natural history of patients with PNH and the longer term outcomes during Soliris treatment. In addition, Soliris has been granted orphan drug designation for the treatment of PNH in the U.S., Europe, Japan and several other territories.

Atypical Hemolytic Uremic Syndrome (aHUS)

aHUS is a severe and life-threatening, ultra-rare genetic disease characterized by chronic uncontrolled complement activation and thrombotic microangiopathy (TMA), the formation of blood clots in small blood vessels throughout the body, causing a reduction in platelet count (thrombocytopenia) and life-threatening damage to the kidney, brain, heart and other vital organs. Soliris is approved for the treatment of pediatric and adult patients with aHUS in the U.S., Europe and Japan. We are sponsoring a multinational registry to gather information regarding the natural history of patients with aHUS and the longer-term outcomes during Soliris treatment. In addition, the FDA and European Commission (EC) have granted Soliris orphan drug designation for the treatment of patients with aHUS.

The company has guided to 2017 Soliris sales of $3.025 - $3.1B.  This is after expected FX headwinds, and includes $70-110M in lost sales due to trial recruitment for their follow-on agent, ALXN1210 (more on that below).  Thus despite the 8% sales growth based on the mid-point of guidance, Soliris grew 22% on a volume basis in the 1Q 2017 (before significant impact from ALXN1210 trial enrollment).  We believe double-digit growth is sustainable for Soliris and the overall franchise for years to come.  Though PNH is growing in the high single digits, aHUS should be able to sustain double-digit growth.  

ALXN1210 and Competitive Landscape

Soliris is currently 90% of ALXN's revenues.  The composition of matter patent on Soliris expires in 2021 in the US.  The next generation agent, ALXN1210 is currently in pivotal development and has composition of matter patents through 2035 in the US and Europe.  Soliris is currently dosed every 2 weeks.  ALXN1210 is being investigated with every 8 week dosing.  Phase I/II data presented at the American Society of Hematology meeting in December of 2016 (https://ash.confex.com/ash/2016/webprogram/Paper90053.html) demonstrated that monthly dosing with ALXN1210 was well tolerated and effective in PNH patients, with the higher 1800mg monthly maintenance dose performing slightly better.

All patients showed rapid reductions in mean LDH levels at Week 1 (the first evaluable time point), which were sustained over the study analysis period. As of the study analysis cutoff, treatment with ALXN1210 led to a mean reduction in LDH levels of 86 percent in Cohort 1 (baseline to Week 24) and 85 percent in Cohort 2 (baseline to Week 20). Four out of 6 patients in Cohort 1 (67 percent) and 4 out of 5 patients in Cohort 2 (80 percent) achieved LDH normalization, and 5 out of 6 patients in Cohort 1 (83 percent) and 5 out of 5 patients in Cohort 2 (100 percent) achieved mean LDH levels ≤1.5 times the upper limit of normal. Among five patients with one or more transfusions in the year prior to the study, one patient in Cohort 1 required a transfusion, while no patients in Cohort 2 required a transfusion with ALXN1210 treatment. In addition, mean levels of hemoglobin, another marker of intravascular hemolysis, were improved or stable in both cohorts.

A sell-side note also commented on patients that were dosed with Q8W (every 8 week) and Q12W (every 12 week) dosing.  The 8 week dosing led to reductions in LDH levels that were sustained over 3 months with no signs of breakthrough hemolysis.  Based on FDA input it appears that the Q8W was selected as the paradigm for pivotal trials.  

ALXN is currently enrolling Phase III trials for both PNH and aHUS and expected to complete enrollment by year end 2017 (see below).  They are targeting an approval for ALXN1210 in late 2018 or early 2019.  

ALXN is also examining subcutaneous versions of ALXN1210 and have a Phase I trial ongoing.  A subcutaneous version of ALXN1210 would be an additional differentiating factor and benefit for doctors and patients.  

A number of other companies are trying to create competitors to Soliris.  However, it is often very difficult for newcomers to compete with the established incumbents in these orphan disease markets.  This is because the incumbent has built the networks to the patients and the doctors over the course of years, thus when it can be difficult for other companies to even recruit patients needed for their clinical trials.  Even once competitors get approved, it can be difficult to get patients to switch.  The charts below demonstrate for Fabry and Gaucher, two other orphan diseases with new competitors launches, that incumbent has done well maintaining share.  The dip in Fabrazyme market share was actually due to a manufacturing constraint for Fabrazyme.  

Akari reported data on April 24th that while sufficient showed no signals of benefit over Soliris.  Four of the five patients were able to reach LDH levels < 1.8X upper limit of normal (ULN), but one patient had to be withdrawn due to a co-morbidity.  Ultimately without any clinical differentiation vs. Soliris, we believe it will be extremely difficult for this agent to enroll patients.  OMER's MS721 targets upstream elements of complement which may mean insufficient reductions in hemolysis and lack of clinical benefit.  Other competitors, such as ALNY's ALN-CC5 were initially promising with reductions in C5 expression but ultimately failed to reduce hemolysis (show clinical benefit).  Thus ALN-CC5 is now attempting to demonstrate benefit if dosed in combination with Soliris (by reducing the dose and treatment frequency).  Overall, if ALXN is able to execute on their development plan for ALXN1210 we believe they are well positioned to extend their dominant franchise.  

Myasthenia Gravis

In June 2016, ALXN reported top-line results from the Phase 3 REGAIN study (https://clinicaltrials.gov/ct2/show/NCT01997229) evaluating Soliris in generalized myasthenia gravis which missed the primary endpoint of mean change in MG-ADL with a p=0.0698.  This was a highly refractory population, with ~50% of patients having failed 3 prior therapies.  Given the totality of the data, the unmet medical need, the refractory nature of the patients in this population, and the known safety profile of Soliris we believe this has a good chance of being approved.  The FDA PDUFA date is October 23, 2017.  This will be an important catalyst for the stock.  

Myasthenia gravis is a chronic autoimmune neuromuscular disease that causes weakness in the skeletal muscles, which are responsible for breathing and moving parts of the body, including the arms and legs.  The name myasthenia gravis, which is Latin and Greek in origin, means "grave, or serious, muscle weakness."  The prevalence of MG in the United States is estimated at 14 to 20 per 100,000 population translating to approximately 36,000 to 60,000 cases in the United States. However, myasthenia gravis remains underdiagnosed and the prevalence is probably higher. Soliris is targeting the refractory population of MG, which is estimated to be <10% of patients.  Assuming 40,000 MG patients in the US with 8% refractory, average annual revenue per patient of $400k and 50% penetration yields $640MM in sales.  The ex-US opportunity would be at least as large.  

Though the primary endpoint of the REGAIN was missed, all the measurements were trending in benefit of the drug.  Sensitivity and responder analysis show that the drug is active.  Physician feedback has generally been supportive of approval noting that the drug is clearly active, and the clear unmet medical need in refractory MG.  Importantly, the FDA accepted the sBLA filing of Soliris for the treatment of refractory MG on March 8th, 2017.  The PDUFA date is October 23, 2017.  Though approval is a relatively low bar it means the FDA is willing to consider the totality of the data.  The FDA has historically been more willing to accept less statistically rigorous datasets for orphan diseases.  

Valuation

The new CEO recently cleaned house, announcing a new Chief Commercial Officer, and searches for new CFO, Head of R&D and Head of HR.  While the stock reaction was negative given the departure of the CFO, we do not view this as necessarily alarming that the new CEO wishes for a clean start and a team loyal to him.  

At the BofA Conference in May 2017, Hantson noted:  

"Number two is our R&D productivity. And I think some of you might know that our expenses are 22%, 23% of sales, which I cannot justify at this point because I don't see the R&D productivity. And I wish I could justify it and be at those levels. I'm excited about 1210. I'm excited about MG and then more for Soliris has a little bit more risk in the development plan. And these are our jewels within the pipeline. Everything else that we have in the pipeline is under review."

Similarly, he has noted that the SG&A expenses may need to be reviewed too.  

"I believe that our SG&A -- our infrastructure is aligned with an organization that would have 3 products successfully across the globe in 50 countries, and that's not where we are. We have one asset that is really a success story across the globe."

We agree that there is significant room for margin improvement given that R&D was 25% of sales and SG&A was 31% of sales in 2016.  This is on $3B in revenues and for ultra-orphan diseases that do not require large sales forces.  We believe there is significant room for improved cash generation and profitability in this business with a 92% gross margin.  We believe that given the significant room for top-line growth and margin improvement that ALXN can trade up to $147 based on our DCF as the Street gets more comfortable with ALXN1210 profile and Hantson streamlines the organization.  

Risks

ALXN1210 data is weaker than expected or competitor data is stronger.  FDA fails to approve Soliris for MG.  Hantson may not cut R&D and SG&A as expected.  Government or media pressure given the high costs of these drugs.