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 Tuesday, Isis Pharmaceuticals announced second quarter results of $0.29 in earnings on $120.4M in revenues.  The quarter was basically in line with analyst expectations, while cash guidance appeared to be better than expected.  The big announcement (or discussion point at least) was the latest partnering between Isis and Astra Zeneca to collaborate in a number of cardiovascular therapies, many of which are focused around the kidney areas.  This deal does have the potential to be huge for the company, as there are opportunities for up to $4B in milestone payments over the course of a number of years, but I also believe that sounds bigger on paper than the reality of it will be - especially when it could get spread out so widely over time.  The company does continue to make progress with its Akcea subsidiary as well as three drugs that are progressing in phase three right now.  Likewise, though, this is also increasing their expenses as they take actions on their part of preparing for the commercialization of their products.  Some of the big wins they've received are helping pay for those expenses nicely, but if they don't continue to keep their cash levels where they're at, there will be a need for a secondary offering, which could reduce share prices further.

The stock, itself, climbed the day of and day after the announcement, though, I can't say I'm convinced it was because of the results.  Since then, the stock went crashing down (when a stock falls over 10% in 2 days, I think the word "crash" is viable).  While I do like the stock long-term, I'm actually concerned about it right now.  The stock is well below my $50-$51 range and I haven't bought another position yet.  It moved down way too quickly for me to justify trying to pick up some shares just yet.  We'll see how the market performs and I'll react accordingly based on that.  If I do buy another position, it might be a small one right now.  I don't have confidence the stock will hold this $50 area.  I actually see it potentially falling to $45 and possibly down to around $40 or a little lower right now.  Part of the reason for this is that the technical charts simply look that weak.  Sure, there are some signs of the stock being oversold, but it can stay that way for a while, too.  Additionally, the overall market seems to be going into a correction itself.  Since biotechs aren't acting like a safe-haven, it's not likely we're going to see a lot of support in the sector.  The IBB, which is the index for all biotech stocks is also suffering as it's fallen through the 20, 50, and 100 day averages.  There's some distance to fall until it reaches the 200 day and this might be where stocks start to find a floor.  Another thing that could create a floor to bounce off of is if there is any M&A activity.  Right now, that has cooled off considerably and I have to agree with the Piper Jaffray analyst I recently read stating that with all these partnerships Isis has with so many different companies, it becomes very difficult for them to get bought out.  Finally, there's the lack of a catalyst.  I mentioned three key drugs in phase 3 and the subsidiary, which is also getting ready for commercialization.  These are great things, this is true.  However, phase 3 results and FDA reviews aren't expected until late 2016 or early 2017.  That's a long time out right now.  Without anything that can provide a significant pop in earnings on a fairly regular basis, we are caught in the hum-drum of the day to day efforts.  The company gets milestone and license payments.  We're used to that and I'd say the stock is priced, if not over priced for that typical activity.  So what else could move the needle and help drive new revenues - maybe even make the company profitable?  Right now, I'm not seeing much.

I reiterate that I have confidence and conviction that this company can generate some strong earnings in the future with therapies they are working on.  My problem is that I have to wait a year before I could start to see something for that, potentially.  I will still rank this stock as a 1, however, with the caveat that I'm not out there buying hand over fist.  While I believe there is more upside potential than down, I believe we're going down first.  I don't want to waste my powder until I believe I'm at, or past the bottom of the fall.  I remain troubled to provide a price target for a company with no earnings, however, I'm currently in the mindset that current conditions cap the stock in the low 60s.  Play this one carefully, folks.  You have plenty of time to work with and a market that isn't acting favorably.