Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. Â This isÂ best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another companyÂ or by reviewing theÂ 5 Undervalued Companies for the Defensive Investor Near 52 Week Lows – October 2014.Â By using theÂ ModernGraham methodÂ one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. Â What follows is a specific look at how Alexion Pharmaceuticals (ALXN)Â fares in theÂ ModernGraham valuation model.
Company ProfileÂ (obtained fromÂ Google Finance):Â Alexion Pharmaceuticals, Inc. (Alexion) is a biopharmaceutical company focused on serving patients with severe and ultra-rare disorders through the development and commercialization of life-transforming therapeutic products. Its marketed product Soliris (eculizumab) is the first and only therapeutic approved for patients with two ultra-rare and severe disorders resulting from chronic uncontrolled activation of the complement component of the immune system: paroxysmal nocturnal hemoglobinuria (PNH), an ultra-rare and life-threatening blood disorder, and atypical hemolytic uremic syndrome (aHUS), an ultra-rare and life-threatening genetic disease. On February 7, 2012, it acquired Enobia Pharma Corp. (Enobia). On February 8, 2011, it acquired patents and assets from Orphatec Pharmaceuticals GmbH (Orphatec). On January 28, 2011, it acquired Taligen Therapeutics, Inc. (Taligen). It acquired Asfotase alfa in February 2012.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 2/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion -Â PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 -Â PASS
- Earnings Stability – positive earnings per share for at least 10 straight years -Â FAIL
- Dividend Record – has paid a dividend for at least 10 straight years -Â FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period -Â FAIL
- Moderate PEmg ratio – PEmg is less than 20 -Â FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 -Â FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 -Â PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 -Â PASS
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend -Â FAIL
- Earnings growth – EPSmg greater than 5 years ago -Â PASS
|Value Based on 3% Growth||$32.04|
|Value Based on 0% Growth||$18.78|
|Market Implied Growth Rate||33.73%|
|Net Current Asset Value (NCAV)||$8.43|
Balance Sheet – 6/30/2014
Earnings Per Share
Earnings Per ShareÂ – ModernGraham
Alexion Pharmaceuticals does not pay a dividend.
Alexion PharmaceuticalsÂ qualifiesÂ for the Enterprising Investor but not the Defensive Investor. Â The Defensive Investor has numerous concerns including theÂ lack of earnings stability or growth over the last ten years, the lack ofÂ dividend payments and the high PEmg and PB ratios.Â Â The Enterprising Investor’s only initial concern is theÂ lack of dividend payments. Â As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel comfortable proceeding with research into the company and comparing it to other opportunities. As for a valuation,Â the company appears to be overvalued after growingÂ its EPSmg (normalized earnings) from $0.17 in 2010 to an estimated $2.21 for 2014. Â This level of demonstrated growth does not supportÂ the market’s implied estimate of 33.73%Â earnings growth and leads the ModernGrahamÂ valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value belowÂ the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. Â What do you think? Â What value would you put on Alexion Pharmaceuticals (ALXN)? Â Where do you see the company going in the future? Â Is there a company you like better? Â Leave aÂ comment on ourÂ Facebook pageÂ or mentionÂ @ModernGrahamÂ on Twitter to discuss.
Disclaimer: Â The author did not hold a position in Alexion Pharmaceuticals (ALXN)Â orÂ in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Â Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.