Alexion Investors Want Answers

By Motley Fool

Perhaps in an attempt to get out in front of findings from an ongoing internal investigation into improper sales practices, Alexion Pharmaceuticals' (NASDAQ: ALXN) board of directors has shown its CEO and CFO the door. Is the board's retreat from these long-term executives a signal that a second shoe's about to drop?

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by Todd Campbell to discuss the investigation and its potential impact on the company and its shareholders.

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A full transcript follows the video.

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This podcast was recorded on Dec. 14, 2016.

Kristine Harjes: Second topic of the day for this show is a management shake-up at a rare-disease company calledAlexion. This wasanother news item that came out on Monday,and the stock was down 13%. This is a pretty big company,so that actually erased $3 billion of market cap.Todd Campbell:Kristine,is this going to be a "where there's smoke, there's fire"kind of situation?

Harjes:It could be.(laughs) We'veyet to see the fire, but there is certainly smoke. Do you want to explainwhat that smoke is?

Campbell:All right. We have asituation where, we'll call them the two most important executives in the C-suiteof Alexion have been shown the door. Now,the official line is thatthe CEO left because of personal reasonsand the CFO has leftto explore other opportunities. But that's boilerplate conversationthat always comes out in the press releases. The reality isthat somewhere along the line recently,both of these long-term executives --these people that have been employed by Alexion for a decade -- havelost the confidence of the board. You can't help but wonderif that loss of confidence stemsfrom an investigation that's been ongoing at this companyfor the last month-and-a-halfinto their sales practices.

Harjes:Right. There were allegations made by a former employee abouthow their main drug, Soliris, is sold. This caused Alexion to delay its filing of its 10-Q for the third quarter with the SEC. In thislatest press release, we hear that they arealmost finished with this investigation that's going on,and they probably won't end up having to resubmithistorical results. They are still expecting to submit this 10-Q in January, which, they'd better, if they don't that'sBad News Bearsright there. But,you have to think that the timing of thiscouldn't be coincidental.

Campbell:Yeah.I'm reading between the lines here and I'm seeing that press release, when they're saying, "We won't have to restate anything," that doesn't address the whole investigation. Theinvestigation was into the sales practices,and whether or not those sales practices were within their code of conduct. If I take that and extrapolate that out a little bit,you can't help but wonder whether or not there were, dare I sayshenanigans, that may have been going on,as far as either obtaining reimbursement, or how they're handling patients, or whatever. Investors have seen thisover the course of the last year or sowith a couple different companies,Valeantobviously being one of them, where there were some behaviors that were embraced in the sales force that weren't up to snuff, or up to the sniff test.

Harjes:Thatkind of begs the question,will this company beat the next Valeant?

Campbell:Right. And it'sway too soon to tell, and there's a lot of differencesbetween this company and Valeant. This company, for one, isextremely profitable. They are already making a lot of money.

Harjes:Right, the rare-disease space isextremely lucrative.

Campbell:Yeah. But,I think you do have to look at that, and Soliris is anextremely expensive drug, we're talking more than $500,000 a year for this drug. It treats a very, very small patient indication. Addressable market is tiny. So,if you have anything that jeopardizes either their pricing poweror their reputation among payers,prescribers, and patients,then there could be some fallout that could be Valeant-like to this company. Wejust don't know. We have this information gap that we're sitting inright now, because we know that the leaders are gone, and we know new leaders have been put in place. Andboth of those leaders, by the way, they're solid people. You have David Brennantaking over as CEO, he came fromAstraZeneca, where he was --

Harjes:And that's interim, right?

Campbell:Right. He ran that for about six years. You have David Anderson, he's the CFO now, he was the CFO ofHoneywell, and he did that job for a decade or so. These are highly talented orexperienced people that theoretically can navigate some pretty crazy waters. The question is, how crazy will those waters be? Andinvestors just don't know. We don't know.

Harjes:Yeah, you'rekind of waiting for the other shoe to drop there. I will point out, given that David Brennan,the new interim CEO,is just that -- a placeholder for now. There is an executive search firm that's been hired to find apermanent replacement. That, to me, suggeststhat this was abrupt, unexpected, and again,makes it seem like it's possibly due to some uncovered bad news. So,definitely, something smells a little fishy here.

Campbell:"Here's your hat, what's your hurry?", right?

Harjes:What is that?

Campbell:I don't know if you've ever heard the saying, but, "Here's your hat, what's your hurry?" Basically,showing them the door relatively quickly. I think, you have to wonder. Whenyou have someone from the board who's taking over now in that role, you're right, this is not what you call a smooth and planned transition.

Harjes:Yeah. So, youlook at this company. They have Soliris. They also have another ultra-rare disease drug called Strensiq. They also have another one called Kanuma. All three arevery expensive,they are for ultra-rare diseases. The company has a little over $1 billion in cash on the balance sheet. What do you think? Is this dip a good buying opportunity, or...? What do you think?

Campbell:I am always very hesitant to buy...I don't necessarily know if this is a dip,or if this is the beginning of an avalanche.

Harjes:Well,it wouldn't even be the beginning.This company is down 40% year to date.

Campbell:Yeah. And yet, it's stilla pretty highly priced stock. We won't bring valuation into the issue on biotech at this point.I think there's a lot of risk. There's a lot of potential. Like anything else we've talked about, Kristine, it's a matter ofdiversification and risk tolerancewhen you're talking about biotech. If you can't stand the thought that this stock could collapse another 50% from here, then you should not be investing in it, even if you feel it's "on sale."

Harjes:Right.I kind of agree as well,but I think my personal risk tolerance might havejust gone down temporarily after thisOphthotech blow-up.

Kristine Harjes owns shares of Ophthotech. Todd Campbell owns shares of Ophthotech. The Motley Fool owns shares of and recommends Valeant Pharmaceuticals. 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.