Overvaluation Will Deflate Prospects In A Niche Neurology Market

Key Takeaways

• Alector's limited target market and intense pricing pressures threaten future revenue growth and profit potential, even with successful regulatory outcomes.
  
• Persistent financial losses and competition from larger biotech firms increase risks of dilution, delays, and challenges in attracting resources and partnerships.
  
• Strategic partnerships, regulatory momentum, and a differentiated pipeline position Alector to capitalize on growing neurodegenerative disease demand with enhanced approval prospects and profitability.

Catalysts

A late-stage clinical biotechnology company, develops therapies that is focused on counteracting the devastating progression of neurodegenerative diseases.

• Alector's commercial prospects remain constrained by the extremely small FTD-GRN addressable market of only 8,000 to 17,000 patients in the US and EU, severely limiting potential future revenues even if latozinemab achieves full regulatory approval and rapid uptake.
  
• Ongoing government pressure on drug pricing, especially for neurological disease therapies in the US and Europe, is poised to significantly restrict the company's ability to achieve premium pricing or expand long-term net margins, regardless of initial regulatory designations or rare disease status.
  
• With no late-stage, revenue-generating products on market and R&D costs expected to continue exceeding $130 million annually, the company will likely face persistent net losses and possible shareholder dilution from additional fundraising if regulatory or clinical setbacks occur.
  
• Heightened regulatory complexity and changing trial requirements-including broader inclusion criteria and demand for more rigorous co-primary and biomarker endpoints-raise the risk of delays, increased trial costs, and longer timelines before Alector sees any impact on earnings.
  
• Intensifying consolidation in the biotech sector favors larger, better-capitalized firms, making it increasingly difficult for Alector to compete effectively for talent, funding, and partnership deals, ultimately compressing future operating margins and shareholder returns.

Alector Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Alector compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Alector's revenue will decrease by 43.3% annually over the next 3 years.
• The bearish analysts are not forecasting that Alector will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Alector's profit margin will increase from -142.1% to the average US Biotechs industry of 14.2% in 3 years.
• If Alector's profit margin were to converge on the industry average, you could expect earnings to reach $2.1 million (and earnings per share of $0.02) by about August 2028, up from $-115.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 65.8x on those 2028 earnings, up from -1.8x today. This future PE is greater than the current PE for the US Biotechs industry at 14.3x.
• Analysts expect the number of shares outstanding to grow by 4.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.9%, as per the Simply Wall St company report.

Alector Future Earnings Per Share Growth

Risks

• The aging global population and increased prevalence of neurodegenerative diseases, including Alzheimer's and frontotemporal dementia, are likely to drive sustained demand for Alector's therapeutics, which could meaningfully support future revenue growth.
  
• Advancements in biomarkers and precision medicine are increasing the likelihood of regulatory approval for Alector's biomarker-driven, genetically targeted therapies, supporting higher earnings potential and net margins over time.
  
• Strong partnerships with established pharmaceutical companies such as GSK provide non-dilutive funding, shared development risk, milestone payments, and commercialization expertise, improving cash flow stability and potential profitability.
  
• Alector's robust and differentiated pipeline, enabled by its proprietary brain delivery platform, positions the company to address multiple high-value opportunities in neurology and immuno-neurology, increasing the chances of durable competitive advantages and long-term earnings growth.
  
• Rising regulatory support-including FDA breakthrough therapy and orphan drug designations for late-stage programs-could expedite approval processes and improve market access, accelerating revenue realization and enhancing net margins as therapies reach the market.

Valuation

• The assumed bearish price target for Alector is $1.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Alector's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $10.0, and the most bearish reporting a price target of just $1.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $14.8 million, earnings will come to $2.1 million, and it would be trading on a PE ratio of 65.8x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of $2.0, the bearish analyst price target of $1.0 is 100.0% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.