Alexion Suddenly Ousts CEO, CFO; what’s really going on?

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Alexion Pharmaceuticals Inc. (New Haven CT), maker of one of the world’s most expensive medicines, announced on Monday (December 12, 2106) its CEO and CFO were departing amid an internal probe of the company’s sales and disclosure practices.

Alexion's CEO & CFO depart amid an internal probe of sales and disclosure practices Click To Tweet

David Brennan, the former chief executive of AstraZeneca PLC (London) and an Alexion board member, will serve as interim chief executive, according to Forbes. David J. Anderson, the well-regarded former chief financial officer of Honeywell International (Morris Plains NJ), will assume the CFO role.

“One thing I feel about the culture of this company is how deeply people in the company feel about this mission of the company,” said Brennan in an interview, noting Alexion’s focus on rare diseases. “We have no intention of changing that. We’re not looking at a change in strategy.”

A press release said that the departing CEO, David Hallal, was leaving “for personal reasons;” the departing CFO, Vikas Sinha, was said to be leaving “to pursue other opportunities.” But a source familiar with the thinking of Alexion’s board of directors said the board lost faith in both executives.

The departures bring to a climax a rocky few months for Alexion. For almost all of its 24-year history, Alexion was run by its founder, Lenny Bell, a physician and scientist. It became one of biotech’s big success stories based on the sales of a single drug, Soliris, that is used to treat two rare diseases, one at a list price $480,000 a year and a second, on average, for more.

The patients who receive Soliris number in the thousands, whereas sales of the drug are measured in billions of dollars. Last year’s sales figure, $2.6 billion, was more than double the sales Alexion reported in 2012. Alexion now also sells two other drugs for other rare diseases.

In April 2015, Bell stepped down as CEO, though he remains Alexion’s chairman. He was replaced by Hallal. In November, Alexion announced that an employee had told its board of directors of “sales practices that were inconsistent with company policies and procedures.”

The board’s audit and finance committee said that it was looking into the allegations, and “the related disclosure and other considerations raised by such practices.” As a result, Alexion delayed the filing of its third quarter results with the Securities and Exchange Commission, known as a “10-Q.”

“What we’ve said is that as long as the investigation is ongoing we wouldn’t be able to say anything else,” Brennan said. “The company is looking at all the matters associated with this investigation from an accounting perspective from a disclosure and sales perspective, and that’s what we need to do in order to file the 10-Q.”

Brennan said that the 10-Q should be filed by January, and that the company’s full-year results should be ready to be filed with the SEC in February. Brennan said that the 10-Q will likely contain some details on the findings of the internal investigation, and may set out the steps that Alexion needs to take with regard to the investigation.

“I think the 10-Q will be one bookend on this investigation and it may lead to some assessment of how we need to do things,” Brennan said. “I consider the 10-Q to be a milestone in this.”

Brennan said that it was unclear how long he will stay in the CEO role. He will serve on a search committee to look for a new chief executive. “I am committed 120%. I don’t have parameters around a time frame.” One of CFO Anderson’s top priorities will be to put the accounting questions behind Alexion. “We need to move on,” Brennan said.

Alexion shares are down 17% so far this week to $110.01.

Steve’s Take:

When the top two members of the management team of an established company leave together with their reasons being “personal” and “to pursue other opportunities,” I usually think, okay, they’ve talked to their lawyers and been told to say something very specific, and very short.

Nothing–and I mean absolutely nothing–else is to be said, other than, perhaps, “No comment. Have a nice day.” Well, as a former practicing lawyer, I can attest to the high probability there’s legal liability afoot.

That’s why I agree with Bloomberg’s Max Nisen that the sudden resignations of a CEO and CFO in the middle of a probe of sales tactics is the sort of development that needs more explanation. Especially to investors.

Why investors? Oh that’s right; after the company announced the senior management changes, shares of rare disease focused Alexion fell 17%. The move erased nearly $4 billion from its market cap.

Well, Alexion Pharma’s investors got no such additional explanation Monday morning. What they got instead was a succinct, if not perky, telegram-esque introduction to their substitutions. There was no Q&A. Just, back to work! Also suspicious was the board’s announcement that it has hired the executive search firm Spencer Stuart to find a permanent replacement CEO.

So, let’s say I’m an Alexion investor and this is all I have to go on. What to do. Do I cut and run? But calm down; what has actually happened? Given that the board did not have a permanent CEO already lined up, it is highly likely that it recently uncovered some probably injurious news that led to the senior management change.

One possible explanation, preferred by Brian Feroldi at Motley Fool, that can help to shed some light on the surprise move is that the board wasn’t happy with the company’s sales practices for Soliris, the ultra-expensive drug that treats two rare diseases.

The board had previously announced it was conducting an investigation into allegations made by a former employee in regards to the way the company sold Soliris. The investigation caused the company to delay its third-quarter 10-Q filing with the Securities and Exchange Commission.

In Monday’s press release, the board specifically stated that the investigation was nearly complete and that it had not yet identified any facts that would require a restating of historical results. However, given the sudden departure of the CEO and CFO, it is likely that the audit uncovered something unsettling to the board.

On the other hand, Alexion arguably is in robust shape. Lead drug Soliris is an undisputed blockbuster. The company had two new rare-disease drugs approved last year and has promising follow-on drugs in its pipeline. Analysts expect Alexion to top $3 billion in sales this year, with the vast majority coming from Soliris, and $4 billion by 2018.

But the lack of information about Alexion’s sales issues and executive departures–still cryptic after the company’s nine-minute, previously penned call Monday–makes those impossible to ignore.

The probe’s focus on Soliris is particularly worrisome. The drug accounted for 91.2% of Alexion’s sales in the third quarter, a greater proportion than any other product for any other drugmaker on the Nasdaq Biotech Index with at least $250 million in quarterly revenue, according to Bloomberg.

Alexion’s degree of dependence on Soliris is unique among bigger biotechs. Selling expensive “orphan” drugs–those that treat rare diseases–is a complicated and high-stakes business, Nisen points out. Soliris is one of the most expensive such drugs in the world, with a list price of $538,000 a year for one of its indications and $725,900 for another disease it treats.

Even a relatively small disruption in Soliris sales volume or reimbursement as a result of this investigation could have a whopping impact on Alexion. There’s also a chance there are broader issues with the way the company sells medicines for rare conditions and that fixing them could take some time.

Even before news of the investigation broke, shares were down 37% year to date, due to public criticism of high drug prices generally and a partial failure of a study aimed at getting Soliris approved in another disease. Any hint of misconduct may lump the company in with the likes of Martin Shkreli’s Turing Pharma and more recently, Valeant Pharma.

Alexion’s feeble communication with investors is making an uneasy situation worse. In Monday’s press release, the board specifically stated that the investigation was nearly complete and that it had not yet identified any facts that would require a restating of historical results. But the abrupt departure of the CEO and CFO? That certainly suggests that the audit uncovered something highly disconcerting to the board.

Still, there’s a lot of informational distance between “no restatement” and “what’s the big deal?” Something unidentified in that gap was sufficiently dire to cause two simultaneous high-level exits.

Many of us have been in similar situations as investors where we start the week with worrisome news, and then there’s the first wave of immediate bail-outs, followed by a dearth of new news. Hold or fold? What should I do?

For whatever it may be worth, I’ve realized that there is no should; no simple answer. And there aren’t any guarantees, especially in an Alexion situation where there’s initially a modicum of dispositive facts. You can never know for certain if the day after you fold could have been the day everything becomes clear, factually, and things actually are just fine.

Steve's Take: There are no simple #investment answers in cases like Alexion Click To Tweet

All you can do is know your intentions, listen to your instincts, and then make the best choice based on what you feel is right. We’ll just have to wait and see in this perplexing case.

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Disclaimer: All posts are purely my opinion. I am not a financial advisor, so please conduct your own due diligence on any and all stocks mentioned.