Isis Pharmaceuticals, Inc. (ISIS-NASDAQ)

Transcription

1 February 2, 2015 Isis Pharmaceuticals, Inc. (ISIS-NASDAQ) NEUTRAL Current Recommendation Prior Recommendation Outperform Date of Last Change 08/20/2013 Current Price (01/30/15) $68.51 Target Price $72.00 SUMMARY Isis third quarter 2014 loss of $0.23 per share was wider than the year-ago loss of $0.21 and the Zacks Consensus Estimate of a loss of $0.20. Third quarter revenues grew 86.9% from the yearago quarter to $44.1 million. We are positive on Isis agreements with Glaxo, Roche, AstraZeneca and Biogen, which not only validate its antisense technology but also provide Isis with funds in the form of upfront, milestone and other payments. We view Kynamro s approval in the U.S. as a major milestone for the company. We are also pleased with Isis progress with its pipeline. However, we remain concerned about Kynamro s sales ramp up which could remain slow due to the reimbursement process and the process of finding eligible patients. We remain Neutral on the stock. SUMMARY DATA 52-Week High $ Week Low $22.98 One-Year Return (%) Beta 1.58 Average Daily Volume (sh) 3,658,004 Shares Outstanding (mil) 118 Market Capitalization ($mil) $8,084 Short Interest Ratio (days) 7.39 Institutional Ownership (%) 89 Insider Ownership (%) 2 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 6.6 Earnings Per Share (%) Dividend (%) P/E using TTM EPS P/E using 2015 Estimate P/E using 2016 Estimate Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page Risk Level * Above Average Type of Stock Large-Growth Industry Med-Biomed/Gene Zacks Industry Rank * 71 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 38 A 24 A 42 A 147 A A 57 A 44 A 79 E 208 E E 26 E 26 E 74 E 151 E E Note: Quarterly numbers may not add to annual figures due to restatement or rounding off. Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) $0.03 A -$0.10 A -$0.21 A -$0.21 A -$0.49 A $0.27 A -$0.10 A -$0.23 A $0.07 E -$0.53 E $0.42 E -$0.41 E -$0.41 E $0.09 E -$1.15 E $0.77 E Note: Quarterly numbers may not add to annual figures due to restatement or rounding off. Projected EPS Growth - Next 5 Years % 2015 Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Carlsbad, CA-based Isis Pharmaceuticals, Inc. is a drug discovery and development company that focuses on the development of products using ribonucleic acid (RNA)-based technologies, such as antisense. Antisense technology is a direct route from genomics to drugs. Antisense drugs are the first class of drugs targeted to control expression of genes through interactions with RNA. Beyond antisense, Isis scientists have created another technology that exploits their knowledge of RNA. The company has approximately 1,200 issued patents (owned or exclusively licensed) worldwide as of Feb 10, 2014 and controls one of the largest antisense and RNA patent estates in the pharmaceutical industry. The company discovers new drugs and out-licenses them to partners for license fees, milestone payments, and royalties. Isis has partnership agreements with leading pharmaceuticals companies like Biogen, AstraZeneca, Sanofi, Roche and GlaxoSmithKline among others. Isis focuses its research and development efforts primarily in cardiovascular, metabolic and neurodegenerative diseases and cancer while its partners are involved in the development of antisense drugs in these and other areas, including inflammatory diseases. Kynamro is Isis only approved product, developed in collaboration with Genzyme, a Sanofi company. Genzyme is marketing the product in the U.S. for cholesterol management in patients suffering from homozygous familial hypercholesterolemia (HoFH). In 2013, Isis recognized $147.3 million in total revenues from licensing its intellectual property, satellite companies, and from forming collaborations with larger partners in developing antisense drug candidates. REASONS TO BUY Kynamro a Multi-Million Dollar Product: In Jan 2013, the FDA approved Kynamro for which Isis has an agreement with Genzyme. Kynamro is approved for cholesterol management in patients suffering from homozygous familial hypercholesterolemia (HoFH). Genzyme started marketing the product in the U.S. in late Mar Genzyme is currently launching the product in additional markets and has a sales force in place to promote Kynamro. Kynamro, Isis only approved product, is a second generation compound for the treatment of familial hypercholesterolemia (FH). Kynamro is an antisense drug that targets apolipoprotein B (apob) -100, which is critical to the synthesis and transport of low density lipoprotein (LDL) or bad cholesterol. By potentially knocking out the apob-100 protein via antisense technology, Isis scientists believe they can effectively lower the cholesterol of patients and reduce the risk of serious cardiovascular disease. Given the novel mechanism and narrow initial market focus of homozygous (Ho) FH, the FDA granted Kynamro orphan drug status. Meanwhile, highly encouraging phase II data helped Isis strike one of the largest biotechnology deals in the history in early 2008 with Sanofi. As per the terms of the deal, Isis will not only receive commercialization and development milestones, it will also split net profits with Sanofi on Kynamro (70% Sanofi, 30% - Isis) until worldwide sales eclipse $2 billion. Thereafter, the companies will split profits on Kynamro 50/50. This deal is a homerun deal for Isis, in our view. It provided a guaranteed $325 million in up-front funding that allowed Isis the opportunity to grow and expand its internal pipeline. Isis can receive an additional $1.5 billion in milestone payments on the achievement of regulatory and commercialization milestones. Equity Research Page 2

3 Isis and Genzyme are conducting a 12-month study (FOCUS FH - safety and atherogenic lipoprotein reduction of mipomersen in FH). This study is being conducted to support the expansion of the FH patient population to include severe heterozygous FH (HeFH). The study is being conducted under the FDA s Special Protocol Assessment (SPA) program. We believe Kynamro has multi-million dollar potential. Cholesterol lowering agents such as statins are the largest selling pharmaceutical products in the world. Isis is evaluating different dosages as well as different administration devices. The potential to improve the efficacy of these drugs with more convenient dosing creates a large and exciting opportunity. Antisense Technology Represents Enormous Potential: We are big fans of antisense technology and believe that the number of potential therapeutic applications is enormous. Antisense drugs may have significant potential to treat a number of diseases where small molecules and biologic compounds have failed. Although still at an early stage, antisense technology with mechanisms such as small interfering RNA (sirna), RNA interference (RNAi), alternate splicing and microrna (mrna) has the potential to change the way we treat disease. We see antisense technology today where biologics were ten years ago. The promise of biologic drugs is finally delivering with blockbuster compounds such as Rituxan, Herceptin, Avastin, Aranesp, Synagis and Humira. We believe in ten years the same will be true for antisense. Antisense drugs have several specific advantages over traditional protein or small-molecule derived therapeutics. Firstly, antisense drugs are highly specific and bind to only the complementary mrna strain that codes for the specific protein being targeted. This has the potential to greatly reduce unwanted side-effects that occur through secondary mechanisms of action. Secondly, since all proteins are coded by mrna, antisense drugs have the potential to work on a broad number of diseases including cardiovascular, metabolic, inflammatory, ocular, viral, neurodegenerative disease and cancer. Finally, because all antisense drugs start with the basic hybridization of mrna targets, development timelines are shortened and response is often predictable in the early-stage of development. Scientists need only choose a specific protein to target and then create a small antisense molecule to bind to the transcribed mrna. This creates efficiency in drug discovery and time to market. Isis is a pioneer in antisense research. The company commercialized the first antisense drug in 1998 with Vitravene and has several proprietary compounds in clinical development as well as partnered programs with large pharmaceutical companies such as Biogen, Sanofi, Roche and Glaxo. Isis is also developing candidates incorporating generation 2.5 chemistry - the next step in antisense technology. According to the company, generation 2.5 drugs will be five to ten times more potent than drugs currently in development. Generation 2.5 candidates in development include ISIS-STAT3 Rx, ISIS-AR Rx and ISIS-FVII Rx. Positive on Deals: We are positive on Isis deal with GlaxoSmithKline, under which the company s antisense drug discovery platform will be used for the development of new treatments for rare and serious diseases, including infectious and ocular diseases. Isis received an upfront payment of $35 million. The deal covers up to six programs. If all six programs are successful and commercialized to pre-determined sales targets, Isis could receive almost $1.3 billion in license fees and milestone payments. Isis is also eligible to receive tiered double-digit royalties on sales of products that are commercialized. This deal is a major boost for Isis. It not only validates the company s antisense technology, it also provides the company with funds in the form of upfront, milestone and other payments. Meanwhile, Isis and AstraZeneca entered into an agreement to discover and develop five new generation antisense oncology drugs, including ISIS-STAT3Rx. As per the terms of the agreement, Equity Research Page 3

4 REASONS TO SELL Isis received an upfront payment of $25 million. Isis will also receive milestone payments and royalties on the sale of commercialized products. The company has entered into agreements with several other companies including Biogen and Roche. Isis agreements with Biogen and AstraZeneca represent potential milestone and licensing revenues of more than $2 billion. Isis also stands to receive royalties under these agreements. Pipeline Showing Progress: Isis has several candidates in mid or final stages of development which hold strong potential for the company some of these candidates could reach the market by The next months should be catalyst rich with the company expected to report results from several studies. Interesting candidates include ISIS-TTRRx and ISIS-APOCIIIRx. Drug Indication Stage Partner Kynamro HeFH Phase III Sanofi Plazomicin Multi-drug resistant, Phase III Achaogen gram-negative bacterial infections ISIS-TTRRx Transthyretin (TTR) Phase III Glaxo amyloidosis ISIS-CRPRx Atrial fibrillation Phase II Coronary artery disease Phase I completed ISIS-APOCIIIRx Cholesterol management Phase III ISIS-STAT3Rx Advanced cancers Phase Ib/IIa AstraZeneca Metastatic liver cancer Phase Ib/IIa ISIS-FXIRx Clotting disorders Phase II ico-007 Diabetic macular edema Phase II ico Therapeutics Inc. ISIS-SMNRx Spinal muscular atrophy Phase III Biogen Idec ATL1103 Acromegaly Phase II Antisense Therapeutics Limited Custirsen Non-small-cell lung Phase III Teva, OncoGenex cancer Metastatic castrate Phase III Teva, OncoGenex resistant prostate cancer EXC 001 Unwanted scarring Phase II Pfizer Source: 10K and company press releases Highly Dependent on Kynamro: We are concerned about Isis dependence on Kynamro for future growth. With all eyes focused on the commercialization of this candidate in the U.S., slow uptake and lackluster performance of the drug would be a major disappointment for the company. Kynamro s sales ramp up could be slow due to the reimbursement process and the process of finding eligible patients. Reliance on Partnerships: Isis is highly dependent on its corporate partners for the development and commercialization of its pipeline. Many of the drugs in the company s pipeline are being developed or funded by companies like Biogen, Glaxo, Roche, OncoGenex, and Sanofi among others. If any of the company s partners fail to fund the programs or terminate the partnerships, Isis future prospects would be severely hampered. Target Markets Very Competitive: Kynamro is targeting the highly competitive and crowded cardiovascular disease market. In addition to competing with existing therapies, the company will Equity Research Page 4

5 RECENT NEWS also face competition from companies that are pursuing the development of drugs based on oligonucleotide-based technology. Moreover, competition exists in the form of Aegerion Pharmaceuticals, Inc. s Juxtapid. Isis Improves 2014 Outlook Jan 8 Isis expects 2014 pro forma net operating loss in the mid-to-high teens range. On its third quarter call, the company had mentioned that it expects to improve upon its initial guidance of net operating loss in the low $50 million range. However, it did not provide a specific guidance regarding the same at that time. The new guidance represents almost a 70% improvement from the company s initial forecast of a low $50 million range. Thanks to its partnership programs, the company now expects to end 2014 with cash of more than $725 million, exceeding its initial cash guidance by over $150 million. Isis has partnership agreements with leading health care companies like Biogen and AstraZeneca. The company recently inked an agreement with health care giant, Johnson & Johnson for the discovery and development of antisense drugs for treating autoimmune disorders of the gastrointestinal tract. Our Take Isis Pharma s 2014 outlook looks promising. We are encouraged by the company s association with several big companies as well as its broad pipeline. The company currently has 33 candidates in its pipeline including 7 phase III and 15 phase II candidates. We expect investor focus to remain on the company s pipeline going forward. Isis Pharmaceuticals Posts Wider-Than-Expected Loss Nov 7 Isis Pharmaceuticals, Inc. (ISIS) reported a loss of $0.23 per share in the third quarter of 2014, wider than the year-ago loss of $0.21 per share and the Zacks Consensus Estimate of a loss of $0.20 per share. Third quarter revenues grew 86.9% from the year-ago quarter to $44.1 million. R&D expenses increased 33.8% year over year to $61.1 million. G&A expenses increased 30.3% year over year to $4.5 million. The company continues to progress with its pipeline. Isis Pharma initiated a phase III study on ISIS- APOCIIIRx in patients suffering from familial chylomicronemia syndrome (FCS) and expects to commence a second phase III study in patients with triglycerides higher than 880 milligrams per deciliter. Isis Pharma has partnered programs with Biogen Idec Inc. and Roche among others. Under its collaboration with Biogen, Isis Pharma initiated a phase III study (ENDEAR) on ISIS-SMNRx for the treatment of spinal muscular atrophy (SMA) in infants. The company remains on track to commence a phase III study evaluating ISIS-SMNRx in children with SMA later this year. VALUATION Isis third quarter 2014 loss of $0.23 per share was wider than the year-ago loss of $0.21 per share and the Zacks Consensus Estimate of a loss of $0.20 per share. Equity Research Page 5

6 Third quarter revenues grew 86.9% from the year-ago quarter to $44.1 million. We are positive on Isis agreements with Glaxo, AstraZeneca, Roche and Biogen, which not only validate its antisense technology but also provide Isis with funds in the form of upfront, milestone and other payments. We are also encouraged by the approval of Kynamro in the U.S. in Jan Moreover, Isis has several pipeline events coming up which could act as catalysts. While impressed with Isis pipeline, we remain concerned about Kynamro s sales ramp up which could remain slow due to the reimbursement process and the process of finding eligible patients. We remain Neutral on the stock and await more visibility on Kynamro s performance. Our price target of $72 corresponds to a P/B multiple of Key Indicators Isis Pharmaceuticals, Inc. (ISIS) P/E F1 P/E F2 Est. 5-Yr EPS Gr% P/CF P/S P/E 5-Yr High P/E 5-Yr Low Industry Average S&P Horizon Pharma, Inc. (HZNP) China Biologic Products, Inc. (CBPO) Sequenom Inc. (SQNM) Genmab A/S (GNMSF) TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Isis Pharmaceuticals, Inc. (ISIS) Industry Average S&P Equity Research Page 6

7 Earnings Surprise and Estimate Revision History Equity Research Page 7

8 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of ISIS. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1117 companies covered: Outperform %, Neutral %, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Last Updated By QCA & Lead Analyst Reason for Update Arpita Dutt Arpita Dutt Arpita Dutt Q314 Equity Research Page 8