Stock Analysis: Isis Pharmaceuticals (ISIS)

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.

On Friday, Isis Pharmaceuticals announced their fourth quarter and fiscal year results for 2014.  The quarter was not only a beat, but an absolute crushing based on earnings and revenue for the fourth quarter.  Earnings came in at $0.25 on $84.9M in revenues.  While compared to the estimates these numbers are enough to boggle the mind, it's important that a very large majority of these results come from the sale of some shared of one of the subsidiaries which Isis is a partial owner of.  This sale was also a factor to the company having $150M more in cash on hand than they estimated going into 2014.  It is important to understand the company had a good year and a good quarter.  They now have 38 drugs in their pipeline with 6 drugs in phase 3 studies.  3 of those drugs are wholly owned by ISIS at this point.  They've formed a new subsidiary to focus specifically on drugs that address rare conditions or unmet needs related to lipids, to which that subsidiary made a discovery that could double the amount of patients the drug could be applied to.  The improvements to the antisense technologies which the company patents is also making nice progressions, with version 2.5 showing much more consistency in safety tests and less signs of a bodily reaction at the injection point.

The fact of the matter, right now, is that the company isn't making money.  They've set expectations for expenses in 2015 to be in line with what they were for 2014.  This is, in part, due to the number of drugs moving forward to larger, more complex tests, which cost more to execute.  Clearly, some of those costs are compensated through milestone payments on drugs which have been partnered.  Earnings for the company are extremely hard to predict on a month to month basis.  This is primarily due to the fact that we do not know when or how much milestone payments will be.  In 2014, those payments accounted for around half of their revenues and no drugs are expected to make it past phase three until 2016 or 2017.  Therefore, we can likely assume we will continue to see operating losses for the next couple years.  Catalysts that I do expect to see throughout the year will be in relation to the success/failure of their introduction of up to 10 drugs in the next year (5 partnered and 5 self-owned) as well as the multitude of reports regarding various phase 2 and 3 studies they have set as goals for the year.

When looking at the stock, I'm going to be the first to admit how much I struggle in determining an appropriate stock price.  The company is not making sales or profits at this time.  It's also safe to say this stock will be quite volatile over the coming months.  The reason I'm speculating on this stock is for its long-term potential.  I regard this potential to be both in the release of some phase 3 drugs in 2016/2017 as well as the continued growth and success of the antisense technology and the pipeline the company currently has.  Competition from other companies to come up with better ideas or bring solutions faster than ISIS and their partners is, by far, the biggest risk out there, outside of the FDA approval hurdle when we finally get to that point.  Providing the drugs actually make it to market, it'll be important to learn/understand what the royalty structure of partnered drugs look like as those will become a major source of "sales" for the time being.  Non-partnered drugs seem to be leaning towards being spun off into subsidiaries, which could get acquired, or provide a source of income as long as ISIS holds stock.  I could give a price target, but I'd just be tossing out a number and I don't want to do that.  I see the stock going both higher and lower than the current price.  As long as the long-term story stays intact, I believe you buy the stock during significant pullbacks - 10% or more - in small chunks.  If we do get presented with a crash-like pullback of 50% or more, it will be a time to take a more significant stake.  Just be aware as  you accumulate stock, it's going to have a wilder impact on the portfolio.  It might be a good idea to develop a trading strategy around the stock - build a core position, add more on top, and then sell some after large gains to soften a down turn where you can buy back shares.  At this price, I hold the stock at a 2.  I believe it should pull back a bit before considering buying more.