Internal Investigation, Lawsuits, Management Changes, A Failed Clinical Trial and New Competition, Heighten Speculation About the Future.

AlexionHQWinter2016NEW HAVEN: The Elm City’s new flagship company Alexion Pharmaceuticals [NASDAQ: ALXN] is finding itself under the microscope of lawyers, financial regulators, investment bankers and even bio-scientists as it reacts to significant financial and drug discovery events in the past 30 days.

In late November, the company announced an internal investigation into sales practices of its main revenue producing drug, Soliris. To date Soliris, with 2015 revenues of 2.5 billion has been the company’s sole financial driver.

The company’s stock trading was frozen for a short period as it declined to release its 10Q report on time. The company did file in early January stating there was no need for any material changes to its previous filings or restatements.  How that plays out with the lawsuits and whether it puts the issue to bed remains to be seen. Company analysts have said that whistleblower claims at big companies have become more common and part of the investment landscape. A 10Q report however, requires senior management to personally certify, in writing and under oath the accuracy of a company’s financial information.

What the company did release very quickly,surprising investors and analysts, were CEO David Hallal and CFO Vikhas Sinha who would have had to sign the 10Q.

Officially the company said Hallal was leaving for “personal” reasons and Sinha to pursue “other opportunities.” The investment news website Seeking Alpha however, argued that the pair was avoiding the filing responsibility under federal law [Sarbanes Oxley] to certify the report. It added that, “Alexion implied the executives departed due to the company having lost confidence in them.” 

Hallal took over from Alexion founder David Bell in April 2015, Bell remained as Chairman of the Board. An Alexion board member since July 2014

david brennan splash
New CEO Brennan

a former Astrazeneca [NYSE: AZN] CEO David Brennan, was chosen to “temporarily” take the position of CEO and headhunting firm Spencer Stuart was tapped to find a permanent replacement.  Former Honeywell International [NYSE:HON] CFO David Anderson was chosen as the company’s new CFO.  Brennan signed the 10Q certifying its statements.

Two investor class action lawsuits have already been filed against the company and several law firms across the country are seeking claimants. Building a class of disgruntled stockholders to join in, won’t likely prove a difficult task.

In early December, Alexion stock tumbled to $113 per share, its lowest level in three years. The company’s stock’s price however, had already come down along with many bioscience stocks from their 2016 highs, Alexion’s 52 week high was $193
per share. 

Two newly approved drugs are expected to fortify the company’s sales pipeline. The integration of its acquisition for $8.4 billion in June 2015 of Synageva of Lexington, MA, brought  the drug Kanuma and a previous acquisition in 2012 of Enobia of Montreal, Canada for $610 million brought the drug Strensiq.  Both drugs were approved by the FDA in late 2015 and like Soliris, treat rare diseases where there are no other current drug treatments.

Kanuma treats Lysosomal Acid Lipase Deficiency, [LAL Deficiency], a disease that prevents the body from adequately disposing of fatty acids. Leading to problems in the liver, spleen, and blood vessels. Stensiq treats Perinatal, Infantile and Juvenile-onset Hypophosphatasia (HPP),  an inherited rare metabolic bone disease that disrupts bone mineralization. Symptoms include weakening and softening of the bones that cause skeletal abnormalities. Hypophosphatasia affects an estimated 1 in 100,000 newborns.

The market for the two acquired drugs is estimated to have a potential of nearly $1.7 billion annually. They are off reportedly off to a slow start however. After a year plus on the market sales of the two are expected to be less than $200 million so far.

With new drugs coming on line, things started out pretty rosy in 2016 with the company moving into a new global corporate headquarters in downtown New Haven. Initially the company considered that 400-600 employees would occupy its new tower, 1,000 are said to be already there. The company has told the city to expect as many as 1,700 jobs could come to New Haven.

The original allegation about the Soliris sales practices was raised by a former employee of the company. 

The “listed” price of the drug for an annual treatment is currently approximately $450,000 per year, but the company offers a variety of methods to reduce that cost, including grants where necessary for patients. One explanation floated about the investigation revolved around how the company treated booking grants for the drug.

Alexion has been seeking new uses for Soliris and just received some bad news in that arena too.  Results from a Phase 2/3 trial of eculizumab (Soliris) showed “the drug failed to reach its primary endpoint for the prevention of delayed graft function in recipients of deceased donor kidneys.” There were no previously available treatments for this condition that can cause the loss of a transplanted kidney.

Competitors for Soliris have also begun to rise with their own clinical results coming in the most recent quarter. Alnylam Pharmaceuticals [Nasdaq:ALNY] of Cambridge, MA is a $3.5 billion market cap company that is developing a drug using RNA gene splitting technology, if successful their drug would compete directly against Soliris. The company said results from a Phase 1/2 trial when used with Soliris showed safety and improvements for patients and the need of less Soliris. That drug is still at least a Phase 3 trial success and FDA approvals down the road.

A smaller biotech Seattle’s Omeros  [NASDAQ: OMER] with less than a half billion dollar market cap just announced the FDA is signing off on the company’s plans for clinical development and manufacturing of another competing drug. The company is seeking accelerated approval, claiming it believes it has demonstrated “clinical advantages over Soliris.”

To qualify for accelerated approval, a drug must treat a serious condition and generally provide a ‘meaningful advantage’ over available therapies, the Omeros’ drug has already been tested in Phase 2 studies. 

The even smaller Akari Therapeutics [NASDAQ:AKTX] based in London with only a $87 million market cap is another competitor with a drug [Coversin] trying to close in on Soliris.  Akari’s drug is derived from a protein produced by ticks. Akari claims it targets the same body chemistry as Soliris and that side effects are minimal. Coversin is taken orally, while Soliris is infused weekly. Akari expects to move into Phase 3 trials of Coversin in 2017.

For several years Alexion has been
rumored to be a target for acquisition from a larger pharmaceutical company. The industry has been driven by consolidation fueled by an expected push back from government over pricing, and the need to obtain more scale to deal with the increasing costs of drug development. 

The acquisition target theory circulated on investment news media goes that most of the big fish are already taken in the “pharma space” or would receive a hostile response from governments in the US and Europe.

Alexion is by no means a giant, but with its approximate $30 billion market cap, and a currently captive market, it remains a potentially juicy target.

The alternate argument has been that big pharma companies don’t want orphan drugs that treat fewer than a few hundred thousand patients worldwide. Making the case harder, Alexion stock trading at 15 times sales was too overpriced for the “street.”

Be that as it may, the Streetinsider.com  a reliable investment news source reported in early December that Alexion “was approached by a large U.S.-based drug company interested in a merger, according to a person claiming to have knowledge of the matter. The name of the suitor wasn’t made available.” 

The site continued with, “a number of large U.S. and foreign players are known to be shopping for drugs large enough to move the needle on revenue, and slightly troubled companies like Alexion probably aren’t being ruled out.”

Alexion has not responded to the rumor.