Wednesday, January 21, 2015

On the shopping list: Isis Pharmaceuticals

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

As I stated when the sale of NPS Pharma was closed, I have been looking for a new speculative stock to get myself into.The stock that most interests me at this time is Isis Pharmaceuticals.  Isis is a small biotech company (market cap of ) whose focus is discover and develop antisense drugs with a primary focus on rare and severe conditions.  That's a bit of a mouthful so, to clarify, antisense therapies are those that take advantage of the human genome sequencing that has been done.  It takes certain genetic sequences that are known to cause conditions or be related to problematic cellular activities, and then uses that knowledge to create part of the nucleic acid (part of the DNA, RNA, or other components in the nucleus) that will connect to messenger RNA (mRNA).  When this happens, it inhibits actions that the particular gene was supposed to perform - stopping the conditions.  These are fairly new and promising therapies for conditions like various cancers, heart disease and other rare conditions.  As a therapy, it's very specified and, so far, side effects are better predicted and prevented as this therapy really attacks a specific set of cells and genes.  The nice thing about companies providing antisense therapies is the fact that they usually run on a platform - a set of technologies and processes that allow them to find causes to problems and then develop a solution using the above processes.  This allows them to find potential solutions for an unknown number of conditions and turn results around faster than the traditional methods.  It means they may be able to have a much broader pipeline of potential drugs and any of them could be a block buster.  Compare this to a more traditional biotech, like NPS Pharma, where they have one or two key drugs currently ready for market.

Isis isn't the only company out there providing antisense therapy.  They do have a lot of patents regarding antisense therapy using RNA, though.  Additionally, they have over a dozen drugs in phase 2 or 3 and a number more farther behind that.  This provides for a lot of "shots on goal" or opportunities to get some big wins along the way.  The company also doesn't get paid specifically on their drugs.  Many of the drugs in the pipeline are already partnered with other firms.  The firms pay for research and solution creations, bonuses are also paid for reaching certain milestones (in many cases, these are successful completions of the varying phases of drug production), and then drugs that make it to market can also pay them a royalty fee for use of their technologies.  This method provides other companies to help pay for their research and allows them to stay as a relatively small company - allowing them to really focus and excel on their research and therapies. Many of these agreements are struck early on - prior to phase 2 or 3.  However, there are some drugs and therapies that Isis will keep to their own until late in the game when they need to leverage a larger, experienced company to deal with all of the distribution logistics.  While no drugs have fallen into this category yet, there are some potential solutions coming up - particularly an anticoagulant - which reduces risk of too much blood clotting without risk of too little blood clotting and bleed-out.

As a company with an $8B market cap, as of this writing, it's clearly not totally lost on investors the opportunities that lie ahead.  That being said, even if people do know what is possible, there's a fair amount of short interest in the stock and with so many drugs in the pipeline, the stock clearly could still be undervalued based upon earnings a few years from now - and that's what makes this a speculative stock.  The company has no earnings right now, but the potential is huge.  The company needs to work to making profits and get many of these drugs proven, approved, and to market before the competitors.  It'll need to be one of the best therapies to really have value as well.  Those are the future risks.  While having companies fund your research and help deal with the distributions so you can focus on staying small and researching, you're also held to the will of said companies.  They may stop selling your product, paying for research, or having interest in projects at any time.  With a technology that appears to be rather leading edge, I feel this is a smaller risk right now compared to the benefit of creating drugs that are very specific to how it attacks problems within the body.  All of this said, though, it's very tough for me to get an accurate assessment of what's fair value for the company now, much less 2 or 3 years from now as price targets are usually managed.  I'll have to work myself up on this over time.  

What I can say is that this stock is currently overpriced in my mind.  It's up over 17% in under 4 weeks and has been up as much as 28%.  While there has been some positive announcements over that time for an agreement on a drug collaboration with Johnson & Johnson, as well as a $7M payment for meeting a milestone on another drug, I still feel this has moved too far, too fast.  I would like to see the stock pull back to near $65 before I'd start dipping my toes in things.  I do want to note, though, that I think it will be wise to have at least a small position in place before the company announces 2014 earnings in late February or very early March.  Unless there's a big run-up in stock price prior, I have a feeling the stock will jump on earnings.  I also believe this stock will find a point in time where it will, again, see a significant pull back (20% or more) or even a crash (50% or more).  This happened last year, around this time, but it had a catalyst - US 10-year interest rates were booming quickly as well as a hot IPO market was forcing investors to liquidate and raise cash to buy into the IPOs.  I don't foresee such a catalyst at this time.  My biggest desire is to see this story intact and be able to pick up a large part of my position in the mid-40s to low 50s range, but I believe this will be more of a pipe dream than a reality.  If the price gets back that low again, there are odds against me that this thesis is intact.  Just keep in mind, this is a speculative stock - it will swing wildly at random times - both positively and negatively.  I need to learn from my holding of NPS Pharma and sell a portion of my position when things are euphoric and I'm feeling giddy - even at the risk of missing more upside - so I can grab profits when I have them.  Odds are way too favorable that the market will throw a sale for some reason and I can pick the shares back up when everything looks and feels gloomy.