A ‘Buy’ for Alexion on PE Performance Basis
A Good Year for Alexion? The Proof Is in the Pipeline
PE valuation for Alexion Pharmaceuticals
On February 23, 2016, Alexion Pharmaceuticals (ALXN) was trading at a forward PE (price-to-earnings) multiple of 19.78x. The company is trading at a discount compared with Regeneron Pharmaceuticals (REGN), which was trading at 23.56x its forward earnings. Amgen (AMGN) and Celgene (CELG), by comparison, were seen to be trading at a forward PEs of 12.0x and 13.69x, respectively, on the same day.
Since 2009, revenues for Alexion have grown in double digits. For 2015, total revenues earned by Alexion stood at $2.6 billion, translating to a 21% annual jump in sales. This growth was mainly driven by a volume spurt.
For Alexion, the share price and the forward PE have moved exactly in line over past one year. Alexion has traded at an average of 24.22 times of its forward earnings during the past year.
Median and average PE for the industry
According to Bloomberg, the average estimated PE for the industry in fiscal 2016 would be 28.14x whereas median estimated PE would be 18.04x of the earnings. The average and median multiple for the industry is further expected to be around 41.46x and 17.98x, respectively by 2017.
Given Alexion’s forward PE, which was 19.78x on February 23, 2016, and its strong growth prospects, Alexion seems to be a cheaper bet at current levels. However, as its drugs are costlier, any major reform with respect to pricing regulations would pose a threat to the company.
What will drive the valuation for Alexion?
With three key products as Soliris, Strensiq, and Kanuma in the portfolio, product sales and earnings are further expected to grow. This growth would drive the multiple upward, resulting in price appreciation in the long run. Biotechnology is a growth-driven industry. Hence, valuation of a company depends upon the pipeline and market opportunity for its commercialized drugs. (To have a look at Alexion’s pipeline, please refer to “Alexion Pharmaceuticals Diversifies Its Research Pipeline.”)
To diversify the risk of investing directly in the equity of Alexion Pharmaceuticals, investors can look for options such as the iShares Nasdaq Biotechnology ETF (IBB). IBB has about 3.4% of its total holdings in Alexion Pharmaceuticals’ stock.
In the next part, we’ll analyze and compare the performance of Alexion based on its operating efficiency.
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