ALXN Buy Recommendation

Eric Ebersole
This report is published for educational
purposes by students competing in the CFA
Society of Florida Investment Research
Challenge, part of CFA Institute Global
Investment Research Challenge.
Important disclosures appear at the back of this report
Industry: Biotechnology
Sector: Healthcare
Ticker: ALXN (NASDAQ) Recommendation: Buy
Price: $ 190.55 (as of 10/27/14) Price Target: $215.11
Undervalued by: 11.95%
Earnings/Share Mar. Jun. Sep. Dec. Year P/E Ratio
2011 $.30 $0.29 $0.37 $0.36 $1.32 75.02
2012 0.45 0.47 0.60 0.60 2.12 73.37
2013 0.65 0.73 0.83 0.87 3.08 95.03
2014E* 1.53 1.12 1.27 1.23 5.07 32.83
2015E* 1.23 1.32 1.44 1.51 5.17 28.25
*Bolded/italicized figures are team estimates
Highlights
 Continued Soliris Success: Soliris is the only market approved product currently being sold by Alexion,
however, it continues to increase in sales every quarter. On average, growth year on year has been
43.11% while quarter on quarter growth on average totals 10.5%. As Soliris increases market acceptance
and continues to receive various government approvals and subsidies, the revenue generated will continue
to increase.
 Superior Market Positioning: Alexion has positioned themselves into a market in which no other
competitor exists. By targeting ultra-rare diseases Alexion is able to capture one hundred percent of the
revenue from the patients receiving treatment for each particular disease. While the total patients
diagnosed with these diseases are slim, Alexion has removed a key risk factor which almost all business
are exposed to, competition. Alexion looks to continue this tactic moving forward as they have begun
development of products targeting multiple other ultra-rare diseases. If Alexion continues to receive
patent protection and approvals, their complete market share will be protected.
 International Penetration: Alexion diversifies its revenue through four main geographical groups:
United States, Europe, Southeast Asia (Mainly Japan), and other countries such as Australia. In 2013
sixty-seven percent of sales were generated outside of the United States. This diversification helps to
reduce domestic market risk and provide stable revenues if a country were to reduce subsidization or
deny patent extension. Also, by implementing an international focus, countries belonging to alliances
such as the European Union allow for smoother entrances and may create a more welcoming attitude for
necessary government action with multiple countries allowing operation and sale of the product in each
country.
 Stock Valuation: Due to Soliris’ continued market success, superior market positioning, and
international penetration alongside strong government relations, Alexion’s stock has an expected return of
22.55%. Further, Alexion is undervalued by 13.55% with a fair value of $215.11. The total return
suggests that it is an attractive buy.
Source: Thomson Baseline
Date: 10/28/2014
Source: Yahoo! Finance

CFA Society of Orlando
Stetson University Student Research 7/13/2015
2
Business Description
Company: Alexion Pharmaceuticals, Inc. (NASDAQ: ALXN) is a biopharmaceutical company focused on
serving patients with severe and ultra-rare disorders through the innovation, development and
commercialization of life-transforming therapeutic products. Soliris, Alexion’s main product, is the first and
only therapeutic treatment approved for patients with either of two severe and ultra-rare disorders resulting
from chronic uncontrolled activation of the complement component of the immune system; paroxysmal
nocturnal hemoglobinuria (PNH), a life-threatening and ultra-rare genetic blood disorder, and atypical
hemolytic uremic syndrome (aHUS), a life-threatening and ultra-rare genetic disease.1
In 2013 thirty-six
percent of their total revenue came from the United States, thirty-three percent from Europe, thirteen percent
from Asia Pacific (mainly Japan), and the final eighteen percent came from other countries such as
Australia.2
Due to the focus on ultra-rare diseases Alexion has positioned itself as the only treatment for
multiple ultra-rare diseases therefore removing any possible competition.
Products: Due to the nature of biotech companies, Alexion currently has multiple drugs in the early stages of
development while profiting from Soliris, their marquee drug.
Competitors: The biotech industry has fierce competition as companies fight to develop groundbreaking
treatments, maintain patents, and capitalize on creating generic alternatives to capture market share. Alexion,
however, is not affected by competition because they have none. No other company targets the diseases they
do so, in turn, any patient diagnosed with these ultra-rare diseases have only one option, Alexion. This is not
to say they do not face risk, but by positioning themselves into a market where no other company exists they
have eliminated the need to competitively price their product, rather, they can choose the price that not only
allows the patient to benefit from their treatment, but also generate high margin revenues quarter after
quarter.3
Industry and Peer Group Overview
In the Biotechnology industry companies research and develop pharmaceutical drugs and treatments in order
to benefit patients diagnosed with various diseases and ailments. This is a significantly fragmented industry
comprised of more than 1,300 companies. The top 10 publicly traded companies represent approximately
seventy-four percent of the market share. These large companies specialize not only in the research and
development of new treatments, but also in providing generic substitutes to popularly prescribed medication
used by millions of people each day. Competitiveness within the biotechnology industry remains strong as
the regulatory/drug pricing environment continues to be favorable, as mergers and acquisitions continue to
remain healthy, and emerging markets remain a focus.4
Health Care Reform
Affordable Healthcare Act: As more countries continue to reform health care policies, the adverse effects
spread across various industries including biotechnology. With more and more people receiving health
insurance, biotech companies have access to individuals that previously would have gone untreated. These
expensive treatments are being funded by more taxpayer money than previously, thus creating a higher
demand for the drugs and treatments offered by the biotech industry. This increase in demand can be seen in
the return of the biotech industry (NBI) which totaled 29% over the last year compared to the S&P 500’s
10%.5
The Affordable Health Care act grants millions of Americans health benefits, who previously were
uninsured, helping create a boom in the pharmaceutical sector. Companies such as Pfizer, Bristol-Myers
Quibb, and AbbVie have already realized increased returns as a result of the new health care reform.
1
Pg F-8 2013 10-K Report
2
Pg 56 2013 10-K Report
3
Pg 20 2014 10Q Report
4
J.P. Morgan 2014 Global Biotech Outlook
5
Data found from Baseline
Exhibit 1: The Company
Exhibit 3: Insurance Holders
Exhibit 2: Largest Earners

3
Analysts believe that profits for biotechs will increase from $359 billion in 2013 to $476 billion in 2020.6
Obamacare will pave the way for a major rebound in sales with an estimated $115 billion in new business
over a 10-year period. Enrollment in the Medical health insurance program alone is expected to increase by
about 19.5 million people, according to a study conducted by GlobalData. Because pharmaceutical
companies were among the largest supporters of the Affordable Care Act they were able to implement
changes to the legislation in order to create beneficial reforms by implementing new rebates to provide higher
profit potential. This increase in profitability has brought new companies into the market as seen by the more
than thirty IPOs last year in the biotech industry.
European Healthcare Reform: Alexion will not reap as many of these benefits because they are focused on
such a small segment of the market, however, this also means they have minimal exposure to the negative
effects. Unfortunately, health care reform will have its drawbacks that could include cuts in subsidies and
tax credits to competing companies who are researching the same drug or treatment. Luckily, Alexion is the
only company researching and developing treatments for various ultra-rare drugs and has a proven track
record to receive approvals, subsidies, and tax credits from the FDA, EC, and other government agencies.
Countries such as Spain, France, Italy, and Germany are progressing towards new health care acts. These
provisions could lead to a decline in Alexion’s profits if controlled pricing were determined. However,
subsidization would most likely continue due to the political risks of cutting payments for a small
population’s treatments that could lead to death. While Europe has not concluded with a new healthcare act,
each government is determining its own plan to implement the changes seen in the United States. The biotech
industry will be affected by these factors but the positives outweigh the negatives. Short-run costs will be
experienced, but long-run profits will be realized in the future.
Competitive Positioning
Strong Consumer Relationships
Alexion has established itself as a business to business vendor who relies on targeting the large distributors
rather than advertising and marketing itself towards individual patients. Other drugs, such as Tylenol or
Advil, exist in a homogenous market segment thus creating the need to differentiate themselves from the
competition through advertising. Because Alexion treats ultra-rare diseases it is more important that they
target large distributors as well as health care professionals so that once a diagnosis is made those in a
position to do so look to Alexion to benefit their patients. Physician awareness of the options to help patients
diagnosed with the ultra-rare diseases Alexion targets ensures that they will recommend drugs such as Soliris.
Because Alexion’s product is not sold directly sold to consumers over the counter, physicians are one of the
only parties that are able to inform patients of the possibility of Alexion’s treatments. Due to the nature of
these ultra-rare diseases physicians’ knowledge of these ailments is limited. Informing doctors of the
benefits, cost, and process of the treatment allows for not only the doctors to be more informed, but also the
patients because they will be receiving a better explanation. As more physicians become aware and educated
on Alexion’s products the revenues will increase as a result of more physicians prescribing the treatment to
their patients.
Brand Value and Selling Price Premium
In the pharmaceutical industry physicians and their patients care more about cost-efficiency than
differentiation of the brand. Biotech companies build their brand value by ensuring a cost efficient product
that creates the best benefit for the patient. Alexion increases brand value through establishing itself as a
takeover target, drug research, international penetration, and corporate social responsibility that can be seen
in its unit sales growth year after year. Because Alexion has no direct competitors, they must ensure
effective, cost efficient treatments in order to build their brand as beneficial to customers. Consumers are
purchasing a product that significantly increases their chance to combat the deadly illness they have and
Alexion is able to charge a premium. Alexion does not only charge a premium due to its health benefits, but
also because of the continued government subsidization products such as Soliris receive. Alexion’s strong
brand value has enabled them to become highly profitable throughout the last eight years and will continue to
grow moving forward.
Growth Strategies
Alexion currently has three growth strategies they focus on in order to create high shareholder value and
increase top line, as well as bottom line growth: Becoming a Takeover Target, Drug Research, and
International Penetration.
6
http://www.forbes.com/sites/brucejapsen/2013/05/25/obamacare-will-bring-drug-industry-35-billion-in-profits/

4
Becoming a Takeover Target: Alexion’s high growth and brand value has created takeover value for larger
companies examining acquisition opportunities. The biotech industry is very aggressive in takeovers, which
Alexion has been a part of. The recession caused a slight decrease in mergers and acquisitions within the
biotech industry but has seen a recovery over the last couple of years. Merger and acquisition exits have
remained steady throughout the last five years, even through the economic downturn in 2008. Merger and
acquisition exits were at its highest level since 2007 in 2012 and continue to increase year over year.
Companies like Johnson & Johnson have the potential to acquire Alexion to broaden their research and
development segment, while also profiting from Soliris. Currently, Alexion has no acquisition bids but with
the release of Asfotase Alfa beginning to become a closer reality, potential buyers will start to evaluate the
company. Alexion will most likely take the purchase price so long as a high enough premium is paid and
they are able to function as they did previously. With its financial stability and continued growth, Alexion
will be able to choose from the pool of buyers because they are not in need of capital. Companies such as
Amgen, Allergan, and AstraZeneca saw buying premiums of 89%, 60%, and 88% premarket speculation
respectively. Alexion will be able to see similar premiums and an acquisition would help to significantly
increase the stock price creating great potential returns for shareholders.
Drug Research: Alexion has four drugs that it currently has in the development/trial phase that will help to
improve brand value:
 Soliris (eculizumab): Eculizumab is currently being marketed by Alexion to those suffering from PNH
and aHUS. However, research has shown that it has a statistically significant impact upon Acute
Antibody Mediated Rejection (AMR) in both living and deceased donor scenarios. Moreover, it was also
concluded that it help patients with AMR following renal Transplantation. These three treatments are
currently in Phase II of development meaning it is being testing on over 100 participants in order to test
the drug’s efficacy and safety. Soliris has been granted orphan drug designation for the prevention of
graft rejection, kidney transplant graft function, prevention of DGF, neuromyelitis optics, and myasthenia
gravis.
 Asfotase Alfa: Asfotase Alfa is a target enzyme replacement therapy in Phase II clinical trials for patients
with Hypophosphatasia, a life-threatening metabolic disease characterized by impaired phosphate and
calcium regulation, leading to progressive damage to multiple vital organs. Interim results of the trial
were presented at the European Society of Pediatric Endocrinology meeting held in September 2013.
Results of 15 enrolled and treated patients representing a range of HPP characteristics were summarized,
showing that the primary efficacy endpoint was achieved with a high degree of clinical and statistical
significance. In 2013, Asfotase alfa received Breakthrough Therapy Designation from the FDA.7
 cPMP (ALXN 1101): ALXN 1101 targets MoCD Type A, a rare metabolic disorder characterized by
severe and rapidly progressive neurologic damage and death in newborns which results from a genetic
deficiency in cyclic Pyranopterin Monophosphate (cPMP). There has been some early clinical experience
with cPMP replacement therapy, but no approved therapy available for MoCD Type A. In October 2013,
cPMP received Breakthrough Therapy Designation from the FDA for the treatment of patients with
MoCD Type A. cPMP has finished Phase I of development and is currently transitioning into Phase II.8
 ALXN 1007: ALXN 1007 is designed to target rare and severe inflammatory disorders and is a product
of proprietary antibody discovery technologies. Results from Phase I were collected and after an FDA
review Alexion has moved into Phase II of development in which they will begin a study with patients
suffering from anti-phospholipid syndrome, a severe life-threatening and ultra-rare disorder. This study
began in the second quarter of 2014 and during the second half of the year they are expecting to start a
second proof-of-concept study in another severe life-threatening and ultra-rare disorder
International Penetration: Presently, Alexion generates over sixty percent of its revenues from
international sales. While more than thirty percent of revenues are generated domestically, Alexion has seen
great growth and acceptance in international markets. Alexion has continued to focus on entering
international markets since the approval of Soliris for sale in the United States and multiple countries in
Europe. The most recent development of international penetration can be seen in Alexion’s focus on Japan.
Japan’s government is reviewing Asfotase alfa in order to decide its potential benefits to determine whether
they wish to grant Alexion subsidization. As more treatments finish Phase II and III Alexion will submit
approval documents to try to gain subsidization in countries where Soliris already receives these benefits.
7
Pg 23 2014 Q2 10Q Report
8
Pg 23-24 2014 Q2 10Q Report
Exhibit 4: Mergers & Acquisitions
Exhibit 6: International Revenues
Exhibit 5: Pipeline
18%
13%
33%
36%

5
Corporate Social Responsibility: Alexion strives to be a good corporate citizen and active member of the
community through involvement in local programs that focus on community development, education, the
arts, and health and wellness.9
Corporate social responsibility creates positive brand value and instills not
only the belief that Alexion wants to help those with ultra-rare diseases, but also those in the community who
may be less fortunate than others. As more members of the community see Alexion’s philanthropic work, the
brand value will increase through media attention as well as word of mouth so when a patient is diagnosed
with an ultra-rare disease both the doctor and patient will have a positive attitude towards the company.
Unit Sales Growth: Alexion benefits from strong brand value that can be seen in its continued increase in
unit sales. This growth in unit sales total can be attributed to the increase in availability as a result of
subsidization. Also, as more individuals are diagnosed with the ultra-rare diseases like aHUS and PNH
Soliris will see a rise in prescriptions and in turn an increase in sales growth. Because Alexion has no
competitors in the ultra-rare market segment of biotechnology they are able to charge a premium for their
product. Some may argue that these (higher selling prices) may not be evidence of stronger brand value.
Since approval, unit sales of Soliris have increased 43.1% on average since its approval in 2007 which is
28.2% higher than the industry average.10
This is stronger evidence for the brand value because Alexion is
selling more therapeutic products with a higher premium.
Customarily, companies in the Biotechnology industry receive incentives in the form of patent protection, tax
breaks, and subsidization from the government for creating innovative drugs. As the only pharmaceutical
company with therapy approved for the treatment of aHUS,11
Alexion enjoys the benefits of total market
share and is the obvious candidate to enjoy a cost benefit from controlling an entire market segment.
Currently, Alexion has one market approved drug, Soliris, which continues to see sale volume growth well
above the market average. The research and development costs were greatly reduced upon Soliris’ approval
thus allowing Alexion to operate at a lower cost basis than comparable companies in the industry.
Economic Factors
Outlook: The industry research and development, product sales, and revenue growth are positively
affected by GDP growth, government approvals and subsidization, physician awareness, and continued
discovery and diagnosis of ultra-rare diseases. The overall outlook of the industry for the next few years
is positive due to healthier economic forecasts, which outweigh the rising risk of negative health care
reform, loss of patent protection, and increasing interest rates.
Expansion through Economic Recovery: During the recession, Alexion experienced a steady increase in its
revenue averaging forty-two percent. This change mainly increased from the approval of Soliris in 2007 by
the FDA and EC for treatment of PNH and in 2011 for aHUS. As the economy recovers, companies and
individuals are more willing to invest which will lead to Alexion having more capital to increase its research
capabilities and fund more advanced development. With a stronger economic outlook and expected growth in
pharmaceutical sales in particular, Alexion will see greater growth in revenue.
Geographical Growth: Alexion has its strongest market share in the United States with 36% of total sales.
Outside of the United States, there is substantial growth internationally in countries such as France, Japan,
and Australia. Pharmaceutical regulations vary cross country and allow for easier penetration than in places
such as the United States. Sales in Australia have grown tremendously since September 26 from the
subsidization passed by the Pharmaceutical Benefits Advisory Committee allowing Australians living with
aHUS greater access to Soliris. As no competitor exists the international market is a pure growth
opportunity. As more countries approve subsidization the international market will benefit Alexion by
increasing its customer base and provide opportunities for aggressive acquisitions.
Investment Summary
Strong Government Support: Continued support from both domestic and international governments every
year help Alexion continue its financial success. The FDA (Food and Drug Administration of the United
States) and the EC (European Commission) have been strong backers of Alexion’s vision to help patients
who would otherwise go untreated. On September 18, 2014 The Pharmaceutical Benefits Advisory
Committee (PBAC) recommended to the Australian government that Soliris be subsidized on the
Pharmaceutical Benefits Scheme (PBS) and was approved.12
The subsidization totaled $57 million over the
next for year and allows greater access for Australians to receive Soliris to help restore critical organ function
and increase the possibility of putting the disease into remission. Japan granted Asfotase Alfa orphan drug
designation allowing for various tax credits as well as extending the patent.
9
http://alxn.com/about-alexion-pharmaceuticals/corporate-responsibility.aspx
10
Data from Bloomberg
11
http://alxn.com/products/soliris-atypical-hemolytic-uremic-syndrome.aspx
12
http://www.thepharmaletter.com/article/australian-government-announces-funding-available-for-soliris
Exhibit 9: Healthcare $/GDP
Exhibit 8: Healthcare $/Sales
Exhibit 7: Unit Sales/Op. Inc.

6
Growing Patent Total: Pharmaceutical company health comes not only from increasing revenues by
creating new drugs, but also renewing and creating patents in order to solidify current market share and
capture new market share. Currently, Alexion has two hundred twenty-one patents that have been passed by
the FDA and five hundred nineteen pending. It is crucial that these pending patents are approved so that they
continue to keep their market share and not allow competitors to create generic substitutes that would reduce
Alexion’s revenue and competitiveness. As the biotech industry continues into 2015 with its current
momentum, as seen in its consistent revenue growth, Alexion must stay competitive and consistent in its
ability to innovate its current products in order to gain extended patents and develop revolutionary drugs and
treatments to create more patents to complement its current total.13
Industry Growth: The Biotechnology Industry is poised for growth in the future. Since the recession, the
industry has experienced positive growth with an improving economy contributing to its recovery. The
Industry also profits from increasing government subsidies internationally due to health care reform.
Biotechs have seen an average of 14% increase in revenue growth. Our estimates indicate that Alexion’s
revenue will grow 4% from significant industry growth of 11.4%.14
Diverse Geographical Revenues: In 2013 Alexion’s domestic sales only made up thirty-three percent of
total revenues. The other sixty-seven percent is spread across three other continents spanning over 10
countries. By targeting multiple international markets Alexion has diversified not only their market risk, but
also foreign exchange risk. As domestic markets begin to contact or expand, this effect is lessened by its
position in other markets. Because Alexion targets ultra-rare diseases it can be difficult to grow a patient
base due to the nature of the exclusivity and minimal patients. By spreading its operations internationally
Alexion can discover new patients who need care and grow relationships with doctors in order to recommend
their product.
Attractive Valuation Indicates a BUY: The various valuations performed reveal a consensus that Alexion
stock is undervalued. The fair value estimate is $220.11, which suggests an undervaluation of the current
stock price by 13.55%. Furthermore, Alexion currently enjoys being the only company with treatments for
multiple ultra-rare diseases in the industry. The easiest way for individuals to invest in this business
model is to buy Alexion stock.
Financial Analysis
The Value of Treatment Diversification
Treatment Diversification to Top Line Growth: Treatment approval and diversification contribute to top
line growth by increasing revenue generated by various segments. Currently, Alexion has one market
approved treatment, Soliris. Top line growth has increased 38% since Soliris’ approval in 2007. By
diversifying the products contributing to top line growth Alexion will be able to not only increase revenue,
but also create a more diversified flow of cash in order to protect against market downturns or risks outside of
Alexion’s control. Currently, Alexion has multiple treatments nearing approval for market sale. Asfotase
Alfa is estimated to gain approval in Japan for treating HPP by late 2015. This will create a second revenue
stream which will greater increase Alexion’s top line growth. Alexion has estimated by 2018 all treatments
currently in phase II and III will be approved. While this cannot be guaranteed, approval of multiple drugs
will drive top line growth higher.
Treatment Diversification Contributing to Margin Stability: Alexion’s margins have continued to remain
stable over the last five years. By increasing the amount of treatments offered Alexion will reduce R&D
expenses and increase top line growth. This shift from a focus in development to sales will further solidify
margins. Gross profit margin will become even higher than currently, over 90%. Also, diversification will
allow for Alexion to hedge against possible sales reduction for any treatment. This risk diversification will
ensure that a decrease in revenue will not greatly affect margins, therefore keeping them high. Alexion has
maintained a strong emphasis for years to come and can achieve this through treatment diversification year
after year.
Organic Revenue Growth
Since 2009, Alexion’s revenue has shown to greatly outperform industry growth, with an average of 49.4%
per year versus the 28.19% of the Biotechnology Industry. The company’s growth is a result of continued
organic growth. While Alexion has executed three major acquisitions since 2011 totaling over $1.2 billion
they are yet to realize returns because the treatments have not been approved to enter the market.
13
Data from Bloomberg
14
Figures from Bloomberg
Exhibit 10: Patents Totals
Exhibit 11: Top Line Growth
[
T
y
p
e
a
q
u
o
t
e
f
r
o
m

7
Looking forward, company revenue organic growth estimates are broken into three categories: (1)
Economic/industry growth, (2) approval of treatments in final stages of development,
and (3) continued government support.
Economic/Industry Effects: Current economic conditions, such as healthcare reform and recession
recovery, have enabled the biotech industry to thrive. Since 2009 the biotech industry has seen
28.19% growth. Alexion has greatly benefited from these effects and will continue to through 2015.
These benefits will continue to drive organic growth as more patients are diagnosed with the ultra-rare
diseases and are able to elect treatment. As the economy continues there will be an increase in capital
investment leading to higher organic growth through Alexion allocating these funds towards
increasing drug development and in turn improving organic growth. Alexion must take international
economic factors into account as they continue their focus on international penetration. International
economic uncertainty may take away organic growth as Alexion may choose to delay entrance into
countries in order to focus on stable markets they are currently operating in.
Approval of Treatments in Final Stages of Development: Alexion has multiple treatments in the
final stages of development and will see a significant increase in profits upon approval. By continuing
to push treatments through the necessary phases Alexion can grow closer to gaining market approval
for these treatments. Upon market approval Alexion’s organic growth will improve greatly as the R&D
allocated to these treatments will greatly decrease and will begin to generate revenues. Currently,
Asfotase Alfa is the closest of these treatments and is scheduled to gain market approval in the latter
half of 2015.
Continued Government Support: The third contribution to the company’s revenue growth is derived
from continued government support. As Alexion continues to focus on entering international markets it is
crucial that they are able to gain government support. In order to remain profitable the cost of treatments
must be subsidized by the government in order to make it attainable for patients. If not, it would be
detrimental to organic growth since sales would greatly decrease due to the cost of treatment being high.
Also, Alexion cannot begin selling other treatments until the necessary government approvals have been
attained. Alexion’s relationship with the respective governments of each country they operate in is critical so
that they continue to diversify their cash flow and increase top line and organic growth.
Acquisition Growth
Alexion has made three major acquisitions in the last three years that have led to the continued increase
in organic growth. In quarter one of 2011 Alexion paid $115 million to acquire Taligen. This
acquisition allowed helped to broaden Alexion’s portfolio of preclinical compounds and expand their
capabilities in translational medicine.15
During the same time Alexion acquired Orphatec for $8.2
million in order to profit from their research and development on treatments for molybdenum cofactor
deficiency (MoCD). A year later the company paid $1.1 billion in to acquire Enobia in February 2012
in order to control their premier drug, Asfotase Alfa.16
This was a long-term focused deal that enables
Alexion to profit from Asfotase Alfa when it becomes approved within the next year. Acquisition
growth has complemented organic growth because both rely on researching and developing new
treatments for ultra-rare diseases. Alexion has not realized any return from these acquisitions because
none of the treatments gained through these acquisitions have been approved for sale. However, since
the acquisitions significant progress has been made towards registration. As these treatments begin to
enter the market Alexion will see significant increases in revenue as it did when Soliris finished its
development process and was approved for sale.
Margin Expansions
Gross Margin Improvement: Alexion has continued to keep gross margin extremely high with Q3 2014
reflecting 90.7%. Over the last twelve quarters gross margin, on average, has totaled 89.7%. This margin
stability ensures that a large decrease in revenue or increase in cost will not greatly affect gross profit and in
turn net income. Based on the pro forma estimates, Alexion will continue this trend into the next four
quarters with gross margin amounting to 93.1%, on average. This consistent margin performance indicates
strong financial health and will allow Alexion to continue its growth strategies without fear of risking losses.
Profit Margin Benefitting from R&D Expense Stability: The largest expense for any biotech company is
research and development because all the company’s efforts are devoted to creating innovative drugs. Over the
last 12 quarters Alexion has maintained R&D expense growth of 17.3%. It is crucial that Alexion continues to
increase R&D at a steady rate so that they can continue to create innovative treatments which will continue to
grow its revenues. While R&D is over 30% of total operating expenses, the historic stability of this growth
continues to reflect Alexion’s ability to control costs while increasing revenues. Operating expenses for the next
15
16
Exhibit 12: Acquisitions
Exhibit 13: Profit Margin

8
four quarters show a decrease which is consistent with historical trends.17
Currently, a majority of Alexion’s
R&D expense is focused on finishing Phase II and III trials rather than developing the treatments. Unless
Alexion develops a new drug investors can expect profit margin to benefit from low expense growth.
Earnings
Alexion has developed a reputation for regularly beating earnings. Through its acquisitions and organic
growth, Alexion has been able to maintain stable earnings growth year over year coming out of the
Recession. Since 2009, EPS has been growing year over year an average of 26% compared to the industry’s
21%. Looking forward, earnings growth is anticipated continue this trend due to strong expected growth in
the industry and the company’s top line, as well as a reduction in general operating expenses.
Pro Forma: Based on the assumptions that (1) the company revenue will grow approximately 9% quarterly
for the next year, (2) the gross margin will be between 92-94%, (3) R&D expenses will continue to increase
approximately 17%, the next four quarters EPS are estimated to be $5.17, beating earnings estimates of $5.03
(Appendix 4). For the next four quarters, EPS will see an increase of 111% from the previous four
quarters.18
Keeping with this upward trend, earnings are expected to grow by an average of 19.81% per
quarter in 2015.
Return on Equity
Alexion has a ROE of 34.6% versus Allergan’s 25% and has recently begun outperforming Allergan.
Alexion’s higher ROE is a result of a higher profit margin, higher inventory turnover, and higher leverage.
This pattern of Alexion having better fundamentals seems to hold up over time. Specifically, the constant
growth in profitability during the recession, Alexion has demonstrated an overall superior effectiveness in
operations and continued financial stability. Alexion has a lower (inventory) equity multiplier than Allergan
as of 2013 (1.39 vs. 1.64). This lower equity multiplier indicates Alexion’s state of low asset use to finance
debt compared to its comparable, Allergan.
Efficiency
Sales per R&D: Alexion’s revenue growth is outpacing its research and development expenses, as
demonstrated by its rising sales per R&D dollar. While the Allergan generates $6.04 of revenue for every $1
spent in R&D, Alexion produces $4.89. Historically, Alexion has seen this ratio decrease by 7.3% over the
last two years while Allergan’s sales per R&D has increased .58% over the same time. This difference comes
from Alexion’s increase in developing Asfotase alfa since acquiring Enobia in 2012. This indicates that the
company’s R&D initiative is effective in promoting greater revenue growth. This is a result of Alexion’s
ability to develop new treatments and gain approval quickly in order to begin the Phase II and III testing
process. Currently, Alexion has amount of treatments in testing which reduces expensive enabling Alexion
to further increase financial efficiency. By lowering its R&D costs relative to comparable companies in the
industry, Alexion is able to use its higher efficiency to grow its bottom line.
Cash Flow
Total Net Cash Flow: Due to the high research costs of the industry, biotechnology companies place an
emphasis on cash flow. On average, over 60%, or about $290 million, of Alexion’s cash flow comes from
operations.19
The investment cash outflow, which has been around $370 million20
per year on average, was
17
Pro Forma Income Statement
18
This large increase is influenced by a large tax payment incurred in Q4 2013 as a result of deferring taxes
19
Data from Reuters
20
Data from Reuters
Exhibit 14: Earnings per Share
Exhibit 15: Return on Equity
Exhibit 16: Sales per R&D

9
mainly used for acquisitions and the purchase of new production facilities.21
The financing cash outflow, of
about $1.2 billion, was used to financing the acquisition of Enobia, Taligen, and Orphatec during 2012.
Operating cash flow has been closely related to net income, and financing cash flow to operating cash flow.
Investment cash flow is also known to compliment operating and financing activities. Based on these events
and assumptions, the total net cash flows is estimated to be $806 million in 2014, $1.017 billion in 2015, and
$1.283 billion in 2016.
Free Cash Flow: A more relevant measure of cash flow is free cash flow, which is operating cash flow after
capital expenditures. Since 2009, Alexion has generated an average free cash flow of $145 million. Looking
forward, expected free cash flows continue to increase annually at a rate of 48.2%. Thus, estimated free cash
flow will be $693 million in 2014, $1.02 billion in 2015, and $1.52 billion in 2016.
Free Cash Flow/EBITDA Conversion Margin: In an effort to measure earnings quality and liquidity, the
free cash flow/EBITDA conversion margin was examined. A high ratio would suggest that more cash flow
or liquidity flows through the same dollar earnings, and, thus, the quality of earnings is better. In comparison
to the Peer Group, Alexion has consistently maintained a higher conversion margin. Whereas the Peer Group
converts on average only 13.53% of earnings to free cash flow, Alexion is able to convert 16.27%. This
shows that Alexion is better equipped than its peers to create free cash flow to pay off debts as they arise. It
also indicates that Alexion has a superior earnings quality.
Debt
Debt to Equity: Currently, Alexion has $417 million in current liabilities and $255 million in fixed liabilities
bringing totaling $672 million in debt.22
Compared with a similar company, Alexion carries a significantly
lower amount of long-term debt compared Allergan. Currently, Alexion has $10.4 million in long-term debt
while Allergan has $1.49 billion. In 2012 Alexion’s debt to equity ratio was .33 and increased to .39 in 2013.
Normally, this increase in debt to equity could be of concern. However, much of the increase in debt came
from deferred long term liability charges. These charges were not a result of poor financial management
during this year, rather, just an accumulation of deferring charges. The other values increase at a normal rate
in comparison to previous years. Also, retained earnings increased significantly since 2011. Retained
earnings for 2011 were $(128,619) which increased to $379,098 in 2013. These two variables influenced the
change in debt to equity. Alexion reflects strong financial performance in its ability to manage debt while
grow earnings.
Debt to EBITDA: More importantly, it is informative to look at Alexion’s debt-to-EBITDA ratio because it
shows the amount of time it will take the company to pay off its debt. Alexion’s current debt to EBITDA is
1.13, compared to the Allergan’s 2.92. The debt to EBITDA suggests that the company is less capable of
paying its debts compared to their peers. However, Alexion has less debt compared to Allergan and has a
current ratio of 3.75 suggesting they can pay short term debt obligations using current assets such as cash,
cash equivalents, and accounts receivable.
Solvency: Alexion currently has $80.5 million outstanding on a $240 million senior secured term loan
facility payable in equal quarterly installments of $12 million starting June 30, 2012 and a borrowing
availability of $187.55 million under a $200 million senior secured revolving credit facility through February
7, 2017. Alexion’s interest coverage ratio is 2.4 suggesting they are financially capable of covering current
interest payments if earnings were to decrease. With current sales growth Alexion is projected to fulfill all
debt obligations due to its increasing free cash flow and lack of large debt outstanding such as bonds.
Valuations
In this section, the fair values of Alexion’s stock are estimated using multiple valuation models. The growth
rates used to create the estimates can be seen in exhibit 24. It should be noted that all input data were derived
from historical company data and pro forma estimates.
Growth Duration Model: The Growth Duration valuation, a relative P/E model, is often used to compare a
company with significant growth potential to its stable industry. It is a relevant model for Alexion because
they have experienced a higher volatility in growth compared with the average firm in the Industry Peer
Group. Using earnings growth rates between 7% and 30% in the simulation, the median fair value for
Alexion is estimated to be $220.11, undervalued by 13.53%.
Sales Franchise Value Model: The Sales Franchise valuation is often used when dealing with companies
that are able to produce significant franchise value, i.e. repeating its business model at a higher profit margin.
This model distinguishes between a company’s current profit margin and the margin that can be derived from
future opportunities. The underlying assumption for Alexion is that it will be able to improve its profit
21
22
Pg 30 2013 10K Report
Exhibit 18: Debt to Equity
Exhibit 17: Free Cash Flow
Exhibit 19: Growth Rates

10
margin by releasing a new product within the next year while also entering foreign markets. Using its current
profit margin of 69.36% and the expected future profit margin of 89.16%, the median fair value for Alexion
is forecasted to be $210.11, undervalued by 10.4% (Appendix 6).
Average Fair Value: By averaging the valuation models used, the estimated fair value of Alexion is
$215.11, meaning it is undervalued by 11.95%.
Investment Risk
Foreign Currency: As a result of Alexion’s international business model they are exposed to foreign
exchange risk, primarily from the Euro, Japanese Yen, and British Pound against the US Dollar. Alexion
enters into foreign exchange forward contracts, with durations up to 36 months, to hedge exposures resulting
from portions of forecasted revenues that are denominated in currencies other than the U.S. dollar. As of
June 30, 2014 Alexion had open contracts with notional amounts totaling $1,410,389 that qualified for hedge
accounting. The fair value of foreign exchange forward contacts that are not designed as hedging instruments
was zero as of June 30, 2014.23
Uncertainty of Clinical Testing and Approval of Product Candidates: Completion of preclinical studies
or clinical trials does not guarantee that Alexion will be able continue into the next phase of development and
in turn can eliminate the possibility of the product making it to the market. Currently, Soliris is the only
product that has received regulatory approvals, but has not been approved for any indication other than for
the treatment of patients with PNH and aHUS. It is possible that the other products, such as cPMP and
ALXN 1007, may never make it through the entire development process. Due to this possibility, it is crucial
that Soliris continue to gain approval and Asfotase alfa can receive its first secondary approval
Operations: Alexion relies on governments to offer subsidies, patent extension, tax credits, and approvals in
order to continue their current growth and remain profitable. Currently, Alexion has no outstanding bonds
but holds debt in a credit agreement with multiple banks that provide for a $240,000 senior secured term loan
facility payable in equal quarterly installments of $12 million starting June 30, 2012 and a $200 million
senior secured revolving credit facility through February 7, 2017.As of June 30, 2014, the is $81.5 million
outstanding on the term loan, open letters of credit of $12.44 million, and borrowing availability under the
revolving facility of $187.55 million This exposure from debt makes it can difficult to obtain financing for
additional acquisitions and makes Alexion more vulnerable to industry downturns and competitive pressures.
Intellectual Property: Alexion’s business and competitive position will be harmed if they cannot obtain
new patents, maintain our existing patents and protect the confidentiality and proprietary nature of our trade
secrets and other intellectual property, our business and competitive position will be harmed. In the event
Alexion is unable to renew patents a competitor will be able to capitalize on producing and selling the
product cheaper than currently provided. The sensitive nature of the technology used in biotech research
creates exposure wherein competitors could obtain trade secrets through potential collaborations.24
23
24
Pg 48-50 2014 Q2 10Q Report

Important disclosures appear at the back of this report
Table of Contents
Appendix 1: Income Statement 12
Appendix 2: Balance Sheet 13
Appendix 3: Statement of Cash Flow 14
Appendix 4: Pro Forma Income Statement 15
Appendix 5: Capital Asset Pricing Model 16
Appendix 6: Growth Duration Model 17
Appendix 7: Sales Franchise Value Model 18

12
Appendix 1: Income Statement

14
Appendix 3: Cash Flow Statement

15
Appendix 4: Pro Forma Income Statement

16
Appendix 5: Capital Asset Pricing Model
Required Rate of Return: 7.81%

17
Appendix 6: Growth Duration Model
Fair Value: $220.11
Undervalued By: 13.53%

18
Appendix 7: Sales Franchise Value Model
Where:
S Current Sales per Share $7.83
m Current Profit Margin 69.36%
m’ Profit Margin on the New Sales 89.16%
T S/I (I: Invested Capital) 1.11
k Require Rate of Return 12.5%
G Present Value of Future Sales Growth $3.41
Fair Value: $210.11
Undervalued By: 10.4%

19
Sources:
Reuters
Baseline
Bloomberg
Morningstar
Yahoo Finance
Google Finance
Alexion 10-Q
Alexion 10-K
Alexion Announcements
Alexion Transcripts
Alexion Conference Calls
J.P. Morgan 2014 Global Biotech Outlook
Forbes
ThePharmaLetter
Disclosures:
Ownership and material conflicts of interest:
The author, or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author, or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias
the content or publication of this report.
Receipt of compensation:
Compensation of the author of this report is not based on investment banking revenue.
Position as an officer or director:
The author, or a member of their household, does not serve as an officer, director or advisory board member of the subject company.
Market making:
The author does not act as a market maker in the subject company’s securities.
Disclaimer:
The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author to
be reliable, but the author does not make any representation or warranty, express or implied, as to its accuracy or completeness. The
information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute
investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security.

ALXN Buy Recommendation

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to ALXN Buy Recommendation

Similar to ALXN Buy Recommendation (20)

ALXN Buy Recommendation