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.

Last week, Isis Pharmaceuticals announced 2015 first quarter earnings results.  Key factors included a pro-forma operating income of $4M compared to a loss of $22.6M a year ago.  On a GAAP basis, this translated into a loss of fourteen cents per share on revenues of $62.6M.  Expectations were -0.21 EPS and $52.74M in Revenues.  This was a nice beat of expectations, with higher than expected income from increased milestone payments.  Additionally, they were able to maintain a strong cash position of %695.1M, which is down only $33.7M from the previous quarter.

In addition to the strong earnings results, the company followed up on its announcement of an agreement with Bayer for their anti-coagulant ISIS-FXI (Factor 11).  According to management, the deal is structured to take advantage of both short term and long term potential as they see this potentially being a blockbuster therapy.  Bayer intends to invest heavily into this with potential to apply the therapy on an accelerated plan for extreme conditions while also looking to maximize the benefits of the drug long-term as well.  This deal includes upfront payments of up to $375M in milestone payments ($155M in near term payments, consisting of $100M now and $55M upon advancement of the program past phase 2), as well as tiered royalty payments on future sales and success of the therapy in the low to high 20% on gross margins.  $85-$95M of the up front payment is expected to be realized in 2015 after regulatory clearances.  

Let's face it, these stocks are not easy for your average home Joe to analyze, and I'm certainly in that category.  The positive things I'm seeing are the fact that they're starting to make operating income, the cash position is being maintained, and they are continuing to make deals with major pharmaceutical companies.  This continues to give credence to the company's therapies and their pipeline is vast.  More drugs are entering into phase three analysis and wile I don't think any of them are expected to go to the FDA this year, the progress is certainly robust.  However, the risks include a death, a negative report, or these agreements just go up in smoke because they're suddenly not getting through the FDA or showing the return on investment that they have been over the last few years of the biotech boom.  Frankly, that's why I like this company and the size of its pipeline.  There are so many possibilities out there and some of them have the potential to be blockbusters.  This is a speculative stock for the long haul (multi-year most likely).  It's going to have ups and downs and you have to be prepared to handle them properly.

In terms of the stock, it's been pretty flat on the year.  It did provide an opportunity to pick up some more shares at a nice discount to my cost basis, but I was too busy and not prepared to pick up on it.  Purely my fault.  As interest rates are on the rise right now, this will be something to watch for.  It's likely we reach a point where the rates could cause a rotation away from biotech stocks.  This could pull the stocks back a bit, but with a stock like this one, it will still have potential to blossom on continued deals and eventual FDA approvals in the 2016-2018 range.  If you are holding this stock, that's what you should be playing on.  Yes, as a fast moving spec, you'll probably want to buy and sell around a position in the stock to maximize profits and limit risks, however, that should make this all the more interesting to be involved in along the way.  I maintain may rating of 2 and am looking for prices below $58 to increase my position, at this time.  Unfortunately, that's not the direction the stock has headed since its earnings release.  I still haven't set a price target as it's too hard for me to assess, yet, without earnings or new drug approvals soon.  I actually am not sure the stock will see its 52-week high again this year.  I feel it's caught up in a churn between $55 and $75 with current market conditions.