Ionis Pharmaceuticals Looks Undervalued – Q4, FY Earnings Will Be Important – Ionis Pharmaceuticals, Inc. (NASDAQ:IONS)

Investment Thesis

I have been looking at biotech stocks that are developing RNA-based therapies – both anti sense and RNA interference (RNAi) – or have commercialised drugs using this form of therapy. Ionis Pharmaceuticals (IONS) is one of the biggest players in this sector with a market cap of $8.4bn, and a long history of developing innovative drug candidates that use antisense technology – short single stranded oligonucleotides that target and alter Ribonucleic acid to reduce, restore or modify the production of mutated, disease-causing proteins.

My research indicates that Ionis is a somewhat enigmatic company. By most metrics – commercialised drugs, big-pharma partnerships, strong development pipeline, positive clinical trial results, financial strength – Ionis scores very well. And yet the company’s share price stubbornly refuses to shift from around the $60 mark whilst its sector rivals have experienced strong growth characterised by sudden share price movements usually triggered by positive or negative newsflow concerning trials, drug approvals or financial results.

Ionis 1-year share price movement vs. sector rivals Source: Trading View

As we can see from the above chart, Ionis remains where it was 1 year ago whilst most of its rivals are up between 50-150%. There are several possible explanations for this.

First of all, due to its size and the large number of commercial partners it has: Pfizer (PFE) Roche (OTCQX:RHHBY) (OTCQX:RHHBF), GSK (GSK), Biogen (BIIB), Novartis (NYSE:NOV) and Bayer (OTCPK:BAYRY) it may be the case that Ionis represents an unattractive acquisition target because it would be too hard to extricate the company from its complex network of deals. Investors often buy biotech stocks in anticipation that their miracle new drug will be snapped up by a big pharma concern – witness Novartis’ recent buyout of the Medicines Company which was completed at a 25% premium to share price, or the drop in price of Arrowhead Pharmaceuticals (NASDAQ:ARWR) which some sources (The Motley Fool) blamed on the CEO’s comments that “It would shock me if anybody could write a big enough check to make sense to our shareholders.”

A second explanation for Ionis’ underwhelming share price performance could be the battle raging between antisense and RNA-interference (RNAi) treatments. Ionis uses antisense technology but scientists, physicians and the market appear to be veering towards RNAi as the more efficacious form of RNA therapy. This seems to be the reason why Ionis is struggling to generate sales volumes from its commercialised drug Tegsedi.

A third option (made persuasively in this recent SA article) making the bull case for Ionis could simply be that the stock is genuinely undervalued and therefore represents an interesting investment opportunity. Ionis has shown that it is a company that is for the long term (it first floated in 1992) and that it can survive the ups and downs of the turbulent biotech industry – the market disappointments and downturns. Perhaps it is now positioned for a period of share price buoyancy. Certainly Spinraza looks set to provide a steady source of revenues and if Tegsedi or newly approved (in Europe) Waylivra ultimately does not perform as well as management hoped, there are a cluster of drugs in late-stage trials that could take their place.

Around the announcement date of the last 2 sets of quarterly reports, Ionis has experienced a mini-price-surge. When Q3 earnings were published on Nov 6th Ionis’s share price jumped from $54 to $64 in less than 1 month, and in August when Q2 results were announced, the stock jumped from $61 to $72. As I discuss later in this article, Ionis management believes that the company will generate $1bn+ of revenues in the whole of 2019, which means Q4 will need to be a bumper one and deliver revenues of $370m – 2x more than was achieved in Q2 and Q3 to hit management’s target.

If Ionis succeeds in generating $1bn+ revenues, then it will surely be impossible for the market to ignore Ionis any longer and a significant share price uplift would be on the cards. Disappointment, on the other hand, brings other negatives into play and could see the share price move swiftly in the opposite direction. Given I believe that the company’s exceptionally strong network of backers and proven ability to develop commercialised drugs is significantly more valuable than $60 per share, I am of the opinion the stock will climb above $70 provided results are not disastrous and higher still if management proves to have a trick up their sleeve and hit their targets.

Company overview – drugs on the market

Ionis is one of only two companies (in a crowded field of drug-developers) to have commercialised an RNA-based drug (the other being Alnylam (NASDAQ:ALNY)). To date, Ionis has successfully won FDA approval for and commercialised 3 drugs.

Spinraza is an antisense oligonucleotide indicated for the treatment of spinal muscular atrophy (SMA) which works by targeting the SMN2 gene and encouraging it to make more of the survival motor neuron gene usually produced by the SMN1 gene which is deficient in SMA sufferers. ~9,300 patients worldwide are being treated with Spinraza which achieved sales >$1.5bn in 2018 and >$2.0bn in 2019 – a 22% increase (Source: Biogen Q4 earnings press release). Spinraza is sold by Biogen with Ionis earning an approximate 13.5% of all revenues. Spinraza has a list price of $750,000, or $96,300 per vial (Source: Biopharmadive).

Tegsedi is another antisense therapy developed for treatment of polyneuropathy of hereditary transthyretin amyloidosis (hATTR). Tegsedi is licensed to Akcea Therapeutics (AKCA). Akcea was in fact founded by Ionis in 2015 and acts as the company’s subsidiary focused on developing and commercialising drugs to treat rare diseases. Tegsedi earned Akcea/Ionis $17m in revenues in the first half of 2019. The drug is in direct competition with Onpattro – Alnylam Pharmaceuticals’ first ever approved RNAi treatment – as well as a new drug from Pfizer – Vyndaqel. The indications are that Onpattro is already outselling Tegsedi by 4x, with Vyndaqel expected to take the dominant share of the market once it is approved as a treatment for polyneuropathy. Tegsedi has a list price of $450,00 for a 1-year supply in the US.

Finally, Waylivra – also marketed by Akcea – was unexpectedly rejected by the FDA in August 2018 owing to safety concerns including bleeding and low platelet count (Source: Fierce Pharma) but was approved for commercialisation in Europe in May 2019 for the treatment of familial chylomicronemia syndrome (FCS) – another ultra-rare disease. Ionis hasn’t broken down sales of Waylivra but did reveal that Akcea’s total sales in Q319 were $12m – so we can estimate that ~$9-10m of that was most likely attributable to Tegsedi and perhaps $2-3m to Waylivra.

Complex network of development and commercial partnerships

Besides its product revenues, Ionis earns R&D revenue from its numerous commercial partners. Across the first 9 months of 2019, the company earned $376m in this way which represents just under 60% of total revenues for the period; however, the amount earned per quarter seems to fluctuate significantly. In the first 3 quarters of 2019, Ionis has reported total revenues of $297m, $164m and $168m which suggests the R&D revenues earned in Q1 were far greater than in the subsequent 2 quarters.

Ionis’ development and commercial partnership break-down as follows (Source: Ionis 10Q submission Q319):

Biogen – numerous strategic collaborations have been agreed with Biogen going back to 2012. All are focused on using antisense technology to advance the treatment of neurological disorders. Besides SMA, the two companies currently have 8 medicines in development for indications including amyotrophic lateral sclerosis (ALS), Alzheimer’s and Parkinson’s plus a “broad range” of other neurological diseases. Over the course of the various collaborations Biogen has paid Ionis more than $2.3bn, the 10Q reveals, although it does not reveal the future value of the agreements or define any specific milestone payments.

Bayer – Ionis is collaborating with Bayer over development of its FXI programs for treatment of clotting disorders. Bayer has assumed all development and commercialisation responsibility for this portfolio and has paid Ionis over $175m since the deal was first agreed in 2015 and will earn a further $20m should Bayer initiate a phase 3 trial for one of its FXI candidates.

GSK – an agreement with GSK has been in place since 2010 to develop new drugs against targets for rare and serious diseases. The collaboration includes 2 drugs targeting the Hepatitis B Virus (“HBV”): IONIS-HBVRx and IONIS-HBV-LRx, which were licensed to GSK following successful phase 2 trials earning Ionis a $25m fee. To date, not including the latest payment GSK has paid Ionis more than $164m.

Roche – there are 2 collaborations in place between Ionis and Roche – one to develop treatments for Huntington’s diseases (“HD”) with Roche having taken up an option to develop and commercialise IONIS-HTTRx which successfully completed a phase 1/2 clinical study in 2017, and the other is related to development of IONIS-FB-LRx for the treatment of geographic atrophy – the advanced stage of age-related macular degeneration (AMD) with Ionis conducting a phase 2 trial at present. The collaborations have earned Ionis $220m+ to date with a further $15m due if Roche successfully advances IONIS-HTTRx.

Akcea/Novartis – Akcea has an agreement with Novartis in place and received $150m from the company for the license to develop and commercialise AKCEA-APO(NYSE:A)-LRx for the treatment of cardiovascular disease (“CVD”) and elevated levels of lipoprotein. The drug showed positive results from a phase 2 trial in January (Source: Akcea press release). Novartis declined an option to develop a second cardiovascular drug, AKCEA-APOCIII-LRx . Akcea has received over $343m from this collaboration and Novartis is now responsible for all future development of the drug.

And finally, in October 2019, Akcea entered a collaboration with Pfizer for development of CVD and metabolic disease treatment AKCEA-ANGPTL3-LRx which is currently undergoing a phase 2 trial for non-alcoholic fatty liver disease (NAFLD). Subsequent to this trial, Pfizer will assume all responsibility for development of the drug and with Akcea eligible to receive up to $1.3bn in milestone sales-related payments plus a mid-teen to low-twenty share of all annual worldwide net sales.Akcea expects to receive a $250m upfront payment from Pfizer as part of the deal.

A huge pipeline of drug candidates

To summarise, then Ionis currently has 3 approved drugs (Tegsedi, Waylivra, Spinraza), and 4 drugs in pivotal phase 3 trials: (IONIS-HTTRx with Roche for treatment of Huntington’s, Tofersen (IONIS SOD1RX ) with Biogen for treatment of ALS, AKCEA-APO(A)-LRx with Akcea/Novartis for lipoprotein-driven CVD, and Akcea’s AKCEA-TTR-LRx for treatment of hATTR polyneuropathy.

If the above suggests that Ionis is in for a busy year, consider that the company expects to initiate at least 10 new phase 2 trials in 2020 and 5 new phase 3 trials in 2020 – 2021 and make at least 10 new New Drug Application (“NDA”) submissions to the FDA before 2025.

Here is the full Ionis pipeline breakdown (from a presentation delivered by the company at the JPM Annual Healthcare conference in January).

Ionis clinical pipeline. Source: JPM Healthcare conference presentation Jan 2020

There is also a pre-clinical pipeline incubating 10 new medicines, with another 5 expected in 2020. 10 candidates entered the clinic and phase 1 trials in 2019, and 5 more are expected to do so in 2020. There is clearly some substance to the claim made in the recent JPM presentation (and reiterated by the company’s new CEO Brett Monia in his speech at the conference) that Ionis expects to be “the most successful biotech ever.”

My vision for Ionis for the future is bold, it’s simple, and maybe a little ambitious, but it’s one that I really do believe we can achieve at Ionis. It’s a vision in which I believe this can be the best, most productive biotech company ever in the history – in the history, in the health care industry in the history of biotech, that will serve patients, putting patients at the center for the treatment of severe diseases worldwide. Brett Monia at the JPM healthcare conference Jan 2020.

Antisense and LICA

Antisense oligonucleotides (ASOs) and RNA interference (RNAi) are the two opposing poles of the RNA drug development industry, and Ionis is firmly on the side of ASO.

The science behind both (and other RNA focused treatments) is extremely complex as you might expect, but this is a useful explanation of the differences from a 2016 NCBI article:

Broadly speaking, RNAi operates sequence specifically and post-transcriptionally by activating ribonucleases which, along with other enzymes and complexes, coordinately degrade the RNA after the original RNA target has been cut into smaller pieces3. Antisense oligonucleotides bind to their target nucleic acid via Watson-Crick base pairing, and inhibit or alter gene expression via steric hindrance, splicing alterations, initiation of target degradation, or other events.

Essentially, whilst ASOs use single stranded RNA, RNAi uses double stranded fragments of RNA which are broken up by the RNA-induced silencing complex (RISC) with one strand lost and the other binding to RNA. Both techniques use Watson-Crick base-pairing to bind to their targets, silencing the genes that are responsible for producing disease-causing proteins.

Comparison of ASO and siRNA methods. Source: NCBI

Ionis uses a technology called Ligand Conjugated Antisense (LICA) which is now in Generation 2.5 which (the company says) increases the potency of its drugs leading to smaller dosing requirements and more precise targeting to specific tissues in the body. LICA also brings nearly all methods of drug administration into play enabling Ionis to treat a wider range of diseases.

LICA-enabled methods of treatment. Source: Ionis website

To date, Ionis has validated LICA for use with the liver (using the GalNAC sugar molecule binding technique delivery system pioneered by Alnylam) and the pancreas and are hopeful that it will add further organs in the near future. More than anything, ASO and RNAi treatments are restricted by the difficulty of delivering molecules safely to their target destination – which is why most RNA treatments target diseases related to the liver (thanks to the GalNAC breakthrough).

Ionis is generally considered to be a leader in the field of RNA-based neurological treatments. In December 2019, the company licensed IONIS-MAPT Rx (Source: Ionis press release) – a drug targeting Alzheimer’s that is designed to restrict the tau protein in the central nervous system (tau misfolding or “tangling” is thought to be a likely cause of Alzheimer’s) – to Biogen, earning a $45m upfront payment with potential for up to $155m in milestone payments.

Furthermore, IONIS-HTTRx is licensed to Roche which has initiated a pivotal phase 3 study involving 660 patients, with an open label extension of the trial also planned. Phase 1/2a data showed that the treatment appeared to be safe, and that levels of abnormal Huntington protein in the participants’ spinal fluid decreased in response to the drug (Source: Huntington’s disease news). One drawback is the use of intrathecal injection, similar to a spinal tap to administer neurological drugs. Besides Huntingdon, Ionis is also looking at Prion and Lafora disease, Parkinsons’ and Multiple Sclerosis (MS) amongst others.

On the flipside, Ionis faces a real battle to demonstrate that LICA and ASO based treatments can match the efficacy of RNAi and there have been some negative signs recently. The underwhelming performance of Tegsedi versus Onpattro will surely concern the company as there are few direct comparisons between the two treatment types to be made in the market but this is one. Tegsedi comes with a boxed safety warning and is more expensive than Onpattro. Furthermore, a recent survey of physicians (Source: Biopharmadive) conducted by SVB Leerink suggested that the majority of physicians favour Onpattro.

Meanwhile, whilst the stock price of RNAi pioneers Alnylam and Arrowhead intermittently surge, Ionis’ stubbornly refuses to budge – a sign, perhaps, that the market has voted in favour of RNAi over ASO. This argument is reinforced by recent activity such as Novartis’ $9.7bn purchase (Source: FiercePharma) of siRNA (“small interfering RNA”) treatment inclisiran.

It is far too premature to suggest that Ionis’ portfolio is a busted flush of course, but if the company’s drugs cannot compete with rival treatments for sales, then serious questions will be presumably asked about the future value of Ionis’ vast portfolio.

Can Ionis match its 2019 guidance?

Ionis is the last of the RNA therapeutics companies to report its full-year results for 2019 – this should happen later this month. The company laid out expectations for the FY in its JPM conference presentation as follows:

By my calculations, these figures are going to be tough to hit unless Ionis enjoys a stellar fourth quarter. The company has earned revenues of $629m in the first 3 quarters of 2019, so needs another $371 in Q4 to hit its $1bn target. That is more than twice the revenues earned in either Q2 or Q3, which seems high, even allowing for the unpredictable nature of the R&D payments the company receives. Unless management knows that they are due to receive $200m+ in R&D payments in Q4, it seems possible the company will miss, which is unlikely to please analysts or investors.

Similarly, operating income for the first three quarters of 2019 is just $105m; therefore the company will need to find an extra $260m of profit after R&D and SG&A expenses if it does not want to miss here too.

Ionis net income at Q319. Source: 10Q submission.

Strong cash position and hardly any debt

On a more positive note, Ionis has short-term assets of $2.4bn available and total liabilities of just $1.3bn, so it is in a very healthy position and with operating expenses of ~$165m per quarter – its commercial partners foot most of its drug-development and commercialisation bills – will have no issues sustaining its operations for years to come.

Conclusion: sleeping giant or crumbling empire?

The truth as always lies somewhere in between – given the sector it is in Ionis has a strange tendency to fly under the radar of investors, possibly because it is hard to define as a company, or possibly because the market lacks faith in its antisense based solutions. Perhaps with so many trials ongoing there is too much newsflow for investors to accurately pick out a drug making particular progress.

Because of its history and backers, sales of Spinraza and healthy finances I make Ionis a buy, concerns about its ability to compete with rival treatments notwithstanding – I believe Ionis has the smarts not to get left behind and as mentioned in my intro, it is one of only two companies to have a drug approved – and the only company to have had 3 approved. Sometimes a bird in the hand is worth 2 in the bush.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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