My Disclaimer
I am a value investor. I am not a licensed or registered investment professional. I currently own NO shares of the company mentioned in this post. Financial statement data was obtained from the company’s most recent SEC 10-K filing.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent
The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do
Alexion is a biopharmaceutical company focusing on those affected by rare diseases. The company has developed and commercialized two approved complement inhibitors to treat patients with paroxysmal nocturnal hemoglobinuria (PNH) and atypical hemolytic uremic syndrome (aHUS), as well as the first and only approved complement inhibitor to treat anti-acetylcholine receptor (AChR) antibody-positive generalized myasthenia gravis (gMG) and neuromyelitis optica spectrum disorder (NMOSD) in patients who are anti-aquaporin-4 (AQP4) antibody positive. Alexion also has two highly innovative enzyme replacement therapies and the first and only approved therapies for patients with life-threatening and ultra-rare metabolic disorders, hypophosphatasia (HPP) and lysosomal acid lipase deficiency (LAL-D). Industry peers include Regeneron Pharmaceuticals, Genzyme Corporation, and Achillion Pharmaceuticals, Inc.

Recent Acquisitions and Divestitures
There were no substantive acquisitions or divestiture during fiscal 2019.

Subsequent Events
In October 2019, the company entered into a definitive agreement to acquire Achillion Pharmaceuticals, Inc. (Achillion), a clinical-stage biopharmaceutical company focused on the development of oral Factor D inhibitors. Achillion is developing oral small molecule Factor D inhibitors to treat people with complement alternative pathway-mediated rare diseases, such as PNH and C3 glomerulopathy (C3G). The company currently has two clinical stage medicines in development, including danicopan (ACH-4471) and ACH-5228.

The acquisition of Achillion closed in January 2020. Under the terms of the agreement, the company acquired all outstanding common stock of Achillion for $6.30 per share, or approximately $926 million, inclusive of the settlement of Achillion’s outstanding equity awards. The acquisition was funded with cash on hand. The transaction includes the potential for additional consideration in the form of non-tradeable contingent value rights (CVRs), which will be paid to Achillion shareholders if certain clinical and regulatory milestones are achieved within specified periods. These include $1.00 per share for the U.S. FDA approval of danicopan and $1.00 per share for the initiation of Phase 3 in ACH-5228.

Management anticipates accounting for the transaction as a business combination and are currently evaluating the purchase price allocation. Due to the proximity of the completion of the acquisition to the filing of this Form 10-K, it is not practicable to provide a preliminary purchase price allocation of the fair value of the assets purchased and liabilities assumed in the transaction. The Company expects to finalize the valuation and complete the preliminary purchase price allocation in the first quarter of 2020.

Short-Term Target
My current short-term target for the stock is $109.74, with an initial trailing stop set at $79.14. Based on a recent price of $80.35, upward price movement will find resistance at $82.47, and again at $92.89, with final resistance found at $96.90. Downward price movement will find no support.

Volatility Value
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. My current beta ratio for this stock is 1.20 and my volatility value is $101.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts. Considering the company’s earnings, $362 million ($1.63 per share) of net income after taxes, came from from sources unrelated to day to day operations and/or income tax benefits.

Momentum Target
My momentum target for the stock is $1017. Momentum targets are determined by integrating a company’s most recent annual EPS and year-over-year earnings growth, with the current yield of a 10-year treasury. Momentum investing often requires investors to trade in stocks that have already enjoyed significant gains while making no allowances for overall market corrections or the sustainability of a company’s earnings.

Growth Target
My current growth target for the stock is $871. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 53 shares of stock with a cost basis of $188.71 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $108.55 per share. During that holding period you would have collected $0 in regular and special dividends, and your initial $10K investment would have returned to you $5,752 a loss of 42% excluding regular and special dividends.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 5.05%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 104 insider trades involving 1,020,611 shares of stock. Of those 104 insider trades, 64 were Buys involving 661,633 shares of stock, and 40 were Sells involving 358,978 shares of stock, creating an insider buy to sell ratio of 1.8 to 1.

Prior Average Valuations
My average valuation for the prior five year period of FY 2015 through FY 2019 was $52. The stock price during that time period averaged $144, earnings averaged $3.04 per share, and the average PE Ratio was 47. The current PE Ratio is 7.

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $80 and my equity value (market cap plus cash less debt) is $81, making my E2E Ratio, 1.01.

Fair Value Investing
Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $172. My worksheet target prices are derivatives of my fair value estimate.

Alexion Pharmaceuticals, Inc. (Nasdaq: ALXN) – FYE 12/2019 – UNDER VALUED – The stock is currently trading at levels below my most recent $103 initiate target. Please See Linked PDF Worksheet

There you are, short and, hopefully, to the point.

Wax
Revised on 03/22/2020