The year 2020 has truly been a roller coaster ride for the stock market. After the extreme lows in mid-March, the market reached unimaginable highs on Nov. 24. The Dow Jones Industrial Average (^DJI 0.80%) crossed the 30,000 mark for the first time ever, while the S&P 500 (^GSPC 1.26%) also marked its all-time closing high. However, both indexes retreated on Nov. 25, after the release of worsening U.S. jobless claims data.
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In such a volatile market, it is quite difficult to find reasonably safe and high-growth biotech stocks. Surprisingly, two names fit the bill. Leading rare disease player Alexion Pharmaceuticals (ALXN) and neuropsychiatric disorder player Intra-Cellular Therapies (ITCI -0.62%) are well-poised for an upward trajectory in coming months.
Alexion Pharmaceuticals
Alexion Pharmaceuticals is a rare gem in the biotech industry. The company's focus on rare and ultra-rare diseases means that it is working with a very small patient pool. However, it also means limited competition and significant pricing power for most of Alexion Pharmaceuticals' drugs, since the patients hardly have other alternative treatments available. The company currently markets five rare disease drugs -- Soliris, Ultomiris, Strensiq, Kanuma, and Andexxa. Alexion Pharmaceuticals also has a rich research pipeline, with over a dozen clinical programs targeting rare diseases in areas such as nephrology, neurology, cardiovascular, and metabolic diseases.
Soliris has been approved by U.S. Food and Drug Administration (FDA) for three rare diseases , paroxysmal nocturnal hemoglobinuria (PNH), atypical hemolytic uremic syndrome (aHUS), and generalized Myasthenia Gravis (gMG). While the drug has long been the major revenue driver for Alexion Pharmaceuticals, it may face competition in PNH indication from Apellis Pharmaceuticals' (APLS 0.91%) late-stage drug candidate pegcetacoplan by 2021 and from Amgen's (AMGN 0.75%) biosimilarby 2025.
To reduce the pace of Soliris' revenue erosion, Alexion Pharmaceuticals entered into a settlement with Amgen to delay the launch of the Soliris biosimilar to 2025, which would have otherwise entered the market as early as 2022. The company is also focused on converting Soliris patients to Ultomiris, another drug launched commercially in April 2019.
In the third quarter, Alexion Pharmaceuticals achieved its target of converting more than 70% of PNH patients on Soliris therapy to Ultomiris across top markets. The company has also reduced annual cost per patient for Ultomiris by 30% as compared to Soliris maintenance treatment in aHUS indication, and plans to extend this pricing strategy to all future Ultomiris indications. This move will further accelerate conversion of Soliris patients to Ultomiris.
The strategic success of Alexion Pharmaceuticals is reflected in its robust financial performance. Despite COVID-19 headwinds, Alexion Pharmaceuticals' third quarter revenues and non-GAAP earnings per share (EPS) are up year over year (YoY) by 26% and 16%, respectively.
Soliris continued its blockbuster run in the third quarter, with revenues up YoY by 5% to $1.4 billion. However, it was Ultomiris which reported a dramatic 222% YoY revenue increase to $289 million in the third quarter. Besides Soliris and Ultomiris, the hypophosphatasia (HPP) drug Strensiq is also emerging as a meaningful revenue driver for the company, further reducing the excessive reliance on Soliris. In the third quarter, Strensiq's revenues were up YoY by 23% to $189 million. Alexion Pharmaceuticals ended the third quarter with $2.3 billion cash and $3.0 billion total debt on its balance sheet. The company has generated free cash flow of $2.1 billion in 2020 year to date (YTD).
Despite a robust product portfolio, promising drug pipeline, and healthy financials, the company is trading at a forward price-to-earnings (P/E) multiple of 9.5. This is quite cheap for such a promising and stable stock. Alexion Pharmaceuticals is definitely a good pick for healthcare investors with average risk appetite.
Intra-Cellular Therapies
Intra-Cellular Therapies' lead asset, lumateperone, has demonstrated encouraging results across multiple neuropsychiatric indications. Caplyta (lumateperone capsules) was launched as a schizophrenia treatment in late March 2020. Despite the pandemic causing patients to limit physician visits, Caplyta has reported a four-fold increase in total prescriptions in the third quarter as compared to the second quarter.
A much larger opportunity exists for lumateperone as a treatment for bipolar-related depression, since almost 11 million Americans suffer from this condition which has only limited FDA-approved treatment options. The company has already reported positive results for the drug as an add-on therapy to the mood stabilizers lithium or valproate for treating major depressive episodes related to bipolar 1 or bipolar 2 disorder. Intra-Cellular Therapies also demonstrated efficacy of lumateperone as a single-agent treatment for bipolar-related depression in a Phase 3 trial. The company is getting ready to submit an application seeking approval from the FDA for lumateperone, as a single agent treatment or add-on therapy, for bipolar-related depression. Intra-Cellular Therapies expects FDA's decision in the second half of 2021.
Lumateperone was seen to cause far fewer side-effects as compared to other antipsychotic drugs in clinical programs. A better safety and tolerability profile implies higher treatment compliance, which in turn can lead to improved outcomes. Intra-Cellular Therapies is also studying lumateperone in major depressive disorder, another indication with huge growth potential. Lumateperone could emerge as a blockbuster therapy as early as 2024.
Intra-Cellular Therapies boasts of a healthy balance sheet. The company has over $723 million cash and only $29 million debt on its balance sheet. Assuming annual cash burn rate to be close to $300 million (1.5 times of the company's net loss in the last 12 months to account for increased late-stage research and commercialization expenses), the company can sustain operations until the end of 2022 without any capital raise.
Hence, although Intra-Cellular Therapies is excessively dependent on the prospects of lumateperone, the clinical progress of this lead asset and the robust balance sheet make it an attractive proposition for healthcare investors with a slightly above-average risk appetite.
