Isis Pharmaceuticals (ISIS)

Isis Pharmaceuticals


Realtime charts:
Short term chart: 3 month chart with 50 and 200 day moving averages: Long-term chart:

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On January 29, 2013, Isis Pharmaceuticals received an FDA approval for KYNAMRO, a drug for the treatment of patients with Homozygous Familial Hypercholesterolemia (HoFH).

In after hours trading, ISIS is up +1.37 (+10.24%) to 14.75.

While this might sound like an excellent breakthrough for the company, I'd like to propose a potential short position over the next 3-months on ISIS. To back up this claim, I'd like to start with a brief introduction of the company:

About ISIS

ISIS was founded in 1989 and has approximately 275 employees. It's a drug discovery and development company focused mainly on target RNA and RNA-based technologies. The most interesting of these technologies is the development around antisense.

Antisense is the theorized form of treatment for genetic disorders that would allow a specific gene to be "turned off". This can be done through the synthesis of complementary base sequences which block specific segments of the mRNA.

Theoretical Value Impact of KYNAMRO

KYNAMRO, as mentioned above, is the newest FDA approval for ISIS, having received a passing approval vote of 9 - 6. The drug treats HoFH, an extremely rare, inherited disorder that causes abnormally high cholesterol levels and heart attacks at an early age (think sub-30 years).

My short position on the +10.24% after hours increase, and the subsequent equity pricing at 14.75, based on the following:

1. Disease Rarity
2. Competition
3. Insider Trading
4. Technology

Disease Rarity

KYNAMRO only targets homoygous FH. Heterozygous FH is prevalent in about 1 in 500 people; however, homoygous FH only affects around 1 in 1,000,000 people. Taking this into consideration, and applying it to the following populations, we garner the following number of people that are possibly clients for this drug:

North America Population = 528.7m * (1/1m) = ~530 people
Europe Population = 738.5m * (1/1m) = ~740 people

However, the drug is only cleared for the use in the USA as of currently, which leads up to:

United Stats Population = 313.5m * (1/1m) = ~310 people

At an estimated list price of $250,000 - $300,000 per year, and assuming EVERYONE available uses the drug, we're showing gross income values of:

$250,000 * 310 = $77.5 million
$300,000 * 310 = $93 million

That would double their top line revenue per year (currently around $100m), and would move their company to, approximately, a break-even per year operating setup. But looking at the chart below, we can gather some interesting information (some of which will be explain in lower points, as well).



So with 101.2m shares outstanding currently, they're looking at a market cap of around $1.493 billion. Prior to the lead up to the FDA announcement (November - December), they were trading at around the $8 to $9, with a market cap of $809m to $910m. That means that KYNAMRO is expected to add $683m to $582m in value to ISIS.

However, that equates to around 6.25x to 7.35x the expected yearly MAXIMUM earnable through the gross revenue sales of the drug.

Competition

Unfortunately, KYNAMRO isn't the only drug on on the market targeting HoFM. Aegerion Pharmaceuticals received a 13 - 2 favorable voting for the release of their drug back in October 2012 (see that mid-October opening gap for ISIS in the above chart?).

Aegerion's Juxtapid not only reached approval first, but in a much more favorable vote. Why? Because it doesn't have the worrisome side effects that KYNAMRO has, which include boxed warnings of liver damage, and other effects of injection-site reactions and flu-like symptoms.

Additionally, KYNAMRO requires administration through a weekly injection. Juxtapid, on the other hand, is a daily pill (phew, needle haters!).

So what happens when KYNAMRO shares the market with Juxtapid, a drug with easier intake and less side effects? Well assuming they can retain 1/2 the small market, our above figures are adjusted to the following:

$250,000 * (310/2) = $38.75 million
$300,000 * (310/2) = $46.5 million

And thus, you're looking at a 14.7x - 12.5x multiple on the expected yearly maximum earnable through the gross revenue of the drug sales.

Insider Trading

But, if the insiders are jumping all over the stock then it definitely seems more legitimate towards long term value.



Yes, that's MASS insider selling once the stock price reaches $14 - $15. Throughout January, here were the transaction, mostly in the $14 range:

- Richard Geary, Senior Vice President of Development at Isis Pharmaceuticals, sold 6,610 shares on December 13, 2012 - January 16, 2013 and currently holds 4,254 shares.

- Frank Bennett, Senior Vice President of Research at Isis Pharmaceuticals, sold 309 shares on January 16, and currently holds 2,110 shares.

- Stanley Crooke, Founder, Chairman and Chief Executive Officer of Isis Pharmaceuticals, sold 1,460 shares on January 16, and currently holds 877,226 shares.

- Brett Monia, a founding member of Isis and Senior Vice President of Antisense Drug Discovery, sold 641 shares on January 3-16, and currently holds 5,695 shares.

- Elizabeth Hougen, Senior Vice President, Finance & CFO, sold 242 shares on January 16, and currently holds 300 shares.

- Lynne Parshall, Director, Chief Operating Officer of Isis Pharmaceuticals, sold 759 shares on January 16, and currently holds 2,941 shares.

- Patrick O'Neil, Senior Vice President, Legal & General Counsel, sold 1,538 shares on January 4-17, and currently holds 1,763 shares.

Technology

So considering the above inputs, I'm left only to believe that the value is being created through the potential technological (and future) breakthrough of the antisense therapy innovation. Here are the other players that are working directly on this technology:

- Bio-Path Holdings, Inc.
- Gene Signal
- Circadian Technologies Ltd.
- Antisense Pharma GmbH
- Biovista
- Mirrx Therapeutics
- Quest Pharmaceutical Services
- OligoEngine, Inc.
- Novosom AG
- Sarepta Therapeutics
- MoleculA
- Isis Pharmaceuticals (our player!)
- Gene Tools LLC
- GeneSegues
- BIOMOL International, LP
- Sequitur Incorporated
- Syngenix Limited
- NeoPharm
- Prosensa
- Hybridon Inc.
- Expresson BioSystems
- EpiGenesis Pharmaceuticals Inc.
- Cruachem Limited
- AVI BioPharma
- Altair Therapeutics, Inc.

According to a NY Times article this morning, both Sarepta and Prosensa are developing drugs for muscular dystrophy that have shown promise in early clinical trials. However, they note that Dr. Cy Stein, a longtime antisense researcher, states that "it was too early to say that antisense had arrived...there have been false dawns in the field before."

So unless we believe that we'll see headlines of an imminent and widespread breakthrough by ISIS in antisense technologies (like overcoming current issues with providing sufficient potency and lowering of toxicity levels), we can more likely expect ISIS to continue spending and generating yearly losses (mounting up on the $2 billion already spent).

Maybe they should have learned previous rival Gilead Sciences (market value of $60 billion), which also formed in the last 1980s to tackle antisense technology, but eventually ended up giving up the heavy cost burden of technology R&D for the benefit of developing antiviral drugs using other, less exploratory techniques.

Disclaimer: I'm no currently holding a position for or against ISIS, but assuming Emily Anne lets me try and make up the FB, AAPL, and ZNGA losses, we might be entering a short position.

ido1um:
Disclaimer: I'm not currently holding a position for or against ISIS, but assuming Emily Anne lets me try and make up the FB, AAPL, and ZNGA losses, we might be entering a short position.

Not likely.

Seems that the pipeline is what everyone is excited about...

http://www.isispharm.com/Pipeline/index.htm

...which certainly changes everything now that they've released their first antisense drug in 15 years (one other - vitravene - approved 15 years ago).

Emily Anne:

ido1um:
Disclaimer: I'm not currently holding a position for or against ISIS, but assuming Emily Anne lets me try and make up the FB, AAPL, and ZNGA losses, we might be entering a short position.

Not likely.

Could you elaborate?

Since my recommendation of a short @ $14.75 (or higher), the stock has traded down slightly (after it's enormous boost), but only negligibly so.



So, it seems that market investors haven't fully caught up with my line of reasoning for the over-valuation of the ISIS equity price.

I'll try to explain this in a more direct and simple manner. Here is the last 1-year chart for ISIS.



Notice the value throughout all of 2010, 2011 and Q1 2012? Right, it's not $14+, it's more around the $8 - $10 price range. This is when their normal pipeline of drugs was operating and they weren't imminently nearing an approval.

The lead-up to their $15+ starting in Q2 2012 was due to the anticipatory approval of KYNAMRO, which then lead to the price plummeting once Aegerion's Juxtapid was announced as approved in mid-October 2012.

The rise back started to occur once KYNAMRO was nearing its FDA approval, with the final 10%+ bump coming at the announcement. However, many pundits of this stock claim that the value increase has nothing to do with KYNAMRO, but with the pipeline of new drugs that they're working on.

To ensure that this was the case, as the above value increases / decreases seems to clearly align with the ebb and flow of approval on the KYNAMRO drug, I took a look back at ISIS's pipeline from December 2011 vs. today. Here's what I saw:



The notable changes to the pipeline are the following:

- The total over the last 1 year 3 months has increased with 4 more drugs in the pipeline.
- Preclinical has an increase in 2 drugs, 1 from the rare category, 2 from the inflammatory category, and -1 from the cardiovascular category.
- Phase I and Phase II have the highest shifts in numbers, with Phase I decreasing to 6 total (from 11) and Phase II increasing to 15 (from 9). However, 4 of the 6 increases in Phase II are coming from rare diseases (not great money makers).
- Phase III remains the same, with KYNAMRO being the addition to the approved (now at a total of 2).

Now, drug manufacturing can take a while, but considering the almost negligible changing in this pipeline, and the fact that ISIS is still sitting on the same Phase III drugs from when their value was at $8 per share, I don't see the pipeline being the source of the drastic value increase.

Thus, the investment options are left as...

- Short if you believe that KYNAMRO value won't be enough to push ISIS into operationally positive income territory, and that the pipeline isn't providing the $14+ value (but instead the underlying $8 value).

- Long if you believe that KYNAMRO doesn't matter for the overall value, but that the pipeline is going to churn out a blockbuster somewhere over the next 3 - 5 years (note, their highest concentration of drugs is on "rare" category, which is hard to have a widespread hit if the underlying group you're curing is negligible).

- Don't trade since you probably didn't read all of this text.

Who "ido1um" traded and went opposite of my recommendation to short on February 2nd?

ido1um

Something you may interested to read before your next pharmaceutical recommendation