The pharmaceutical business has become one of the most competitive in the world, as companies race to develop the next blockbuster treatment for heart disease, depression or some other common condition. The deeper the patient pool, the greater the profits, so major pharmaceutical companies are willing to pour billions of dollars into developing new drugs.
Given that tough landscape, many upstarts in the industry have chosen to focus on treating rare diseases for which few if any treatment options exist.
Drugs meant to treat those orphan diseases receive an expedited review process at the Food and Drug Administration (FDA), allowing them to reach the market in just a fraction of the time of other drugs. The FDA also allows for the compassionate use of drugs which have not yet been approved for the sickest patients if the drug has been proven to be relatively safe, creating an immediate – if small – income stream earlier in the development process.
Drugs meant just to treat hundreds or even just 10,000 patients rarely sell in the sort of volume that results in blockbuster drugs that generate $1 billion or more in annual sales. But what's lost in volume can often be made up for in price.
Alexion Pharmaceuticals (NSDQ: ALXN) exemplifies this dynamic. The company's Soliris is the world's single most expensive drug, costing nearly $410,000 for a year’s worth of treatment. Initially approved for the treatment of paroxysmal nocturnal hemoglobinuria (PNH), a life-threatening condition in which the immune system destroys red blood cells during the night, it was later approved for the treatment of atypical hemolytic uremic syndrome (aHUS).
In patients with aHUS, small blood clots form in the body, red blood cells break down and, since so many clotting agents in the blood are captured in abnormal clots, patients are at risk of abnormal bleeding. As the disease progresses, organs are! damaged and shut down, resulting in death.
Both PNH and aHUS are ultra-rare diseases, likely affecting fewer than 100,000 people around the world. Ironically, since there are so few patients suffering from those conditions and there are no other treatment options, Alexion is basically free to set its own price for the drug. There's no competition to inhibit the company from making the treatment expensive. And there’s no pushback from insurance companies on a such a high price tag, because there are few other treatment options, which gives Alexion huge leverage in negotiating reimbursement rates.
With the drug approved in nearly 50 countries for the treatment of PNH and about a dozen for aHUS, the company also has many national health care systems in a vise. Shares jumped a week ago when Alexion announced that the French government agreed to raise reimbursement payments for the drug, making it much more likely that negotiations with the Spanish and Italian governments will end favorably for the company. It is also much less likely that the British government, which has questioned the cost of the drug, will take any adverse action on pricing.
But Alexion isn't exactly a one-trick or even two-trick pony; Soliris is currently in late stage clinical studies for five other indications, all of which are ultra-rare diseases. It also has two other drug candidates for the treatment of metabolic disorders, one of which is currently in registration and one which is in clinical studies. Finally, it has two other candidates for the treatment of inflammatory disorders, both of which are in clinical trials as well as a host of research companies in various therapeutic areas.
Sales of Soliris came in at just more than $1.5 billion last year, generating diluted earnings per share (EPS) of $1.27 for all of 2013. Thanks to the company's successful negotiations with France and improving outlook in other countries, it expects this year's sales to come in between $2.15 billion and $2! .17 billi! on with EPS of between $4.37 and $4.47.
But earnings could work out to be even better following the company's announcement in February that it is restructuring its operations to take advantage of huge corporate tax savings in Ireland. An Irish unit will hold the intellectual property rights to Soliris and other compounds in order to take advantage of lower tax rates. Ireland also has a large pool of pharmaceutical workers from which to draw, who also happen to command lower wage rates than other European workers, an additional advantage.
With a blockbuster drug and solid development pipeline, Alexion Pharmaceuticals rates a buy up to 187.
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