Is the Worst Yet to Come for Alexion Pharmaceuticals?

By Keith Speights Markets Fool.com

It's usually not a good sign when a company's CEO suddenly departs. It's definitely not a good sign when both the CEO and CFO leave at the same time. That's what just happened for Alexion Pharmaceuticals (NASDAQ: ALXN), with the company's stock falling nearly 14% in intra-day trading. Could the worst be yet to come for the once high-flying biotech?

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Image source: Getty Images.

One David out, two Davids in

On Monday, Alexion announced the exit of CEODavid Hallal and CFO Vikas Sinha. The company said that Hallal left "for personal reasons" and that Sinha left "to pursue other opportunities." David Brennan, former CEO of AstraZeneca and current Alexion board member, was named interim CEO.David J. Anderson, former CFO at Honeywell, came on board as Alexion's CFO.

Hallal had been with Alexion since 2006. He was promoted to CEO in April 2015. Prior to taking the top spot, Hallal served as COO for the biotech. Sinha joined Alexion in 2005 and became the company's CFO in 2012.

It's obvious that this wasn't a case of two executives simply opting to leave for greener pastures. Alexion not-so-coincidentally also announced that an investigation being conducted by itsAudit and Finance Committee was near completion. This investigation was announced on November 9, when the company stated that it would delay filing of its 10-Q quarterly report.The investigation stems from allegations made by a former employee about Alexion's sales practices for lead drug Soliris.

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Other shoe to drop?

The decision by Alexion's board of directors to delay filing of the quarterly report in November rather than move forward hinted that there was reason to suspect real problems existed.With the abrupt exits of Hallal and Sinha, investors are justifiably worried about what the results of the internal investigation will be.

A worst-case scenario would involve findings of criminal activity and a significant impact on previous financial results that required restating multiple quarterly reports. If this were to happen, Alexion's stock would very likely plunge more than the nearly 40% drop the stock has experienced year to date.

Although the departures of its CEO and CFO appear to indicate the investigation will uncover some problems, there are reasons to think the situation might not be as bad as it could be. Alexion announced on Monday that the investigation had not turned up anything that would require a restatement of previous financial results. While that could change, it's certainly good news that over a month of digging hasn't yet revealed anything along those lines.

Alexion also stated that it expects to submit its 10-Q for the third quarter in January 2017 or earlier. That's also good news, since further delays could cause problems with the listing of the stock on the NASDAQ exchange and potentially even with creditors.

What's next

At this point, what happens next for Alexion is a guessing game. My hunch is that the internal investigation will, at minimum, identify internal control problems that were serious enough to warrant the ousting of David Hallal andVikas Sinha.

If Alexion reveals widespread financial issues that cause restatements of prior periods, the drama could stretch out for months to come. If it doesn't, the biotech could return to something approaching normalcy in early 2017.

Despite the current controversy, sales for Soliris continue to grow at a solid pace. Alexion plans to file for regulatory approval for a new indication for the drug in treatingpatients with refractory generalized myasthenia gravis in the first quarter of next year. I think the fundamentals are in place for Alexion to rebound once the dust settles from the investigation. Worse days might be ahead for the biotech in the near term, but I expect better days will come eventually.

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Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.