Partnerships, Broad Pipeline Are Long-Term Boons for Isis Pharmaceuticals

Biogen Idec (BIIB) and Isis Pharmaceuticals (ISIS) announced another partnership deal on Monday, the third in the last year, for the discovery and development of neuromuscular and neurological treatments using Isis’ antisense technology. Targeting what, specifically, has yet to be revealed. The two companies announced an agreement that has Biogen Idec paying $30M in upfront fees to Isis, with the opportunity for $200M in milestone payments for each of “three undisclosed targets to treat neurological or neuromuscular disorders.” The deal also allows for royalty payments to Isis in the double digits if the products reach commercialization. Isis is responsible for discovery and development through the initial Phase II trial of any potential treatment, and Biogen has exclusive rights to license the candidates following the first Phase II. The deal is a lucrative one for Isis, and the partnership illustrates a growing link between the two companies and a strong confidence in Isis’ antisense discovery platform.

Partnerships before commercialization minimizes execution risks. Isis focuses on the development of drug candidates using its proprietary antisense technology, but generally out-licenses these candidates at pivotal inflection points, i.e. before Phase III trials or marketing. Antisense therapies specifically target disorder-causing genes, and can essentially turn a gene “off.” The development approach minimizes SG&A expenses, allows for a focus on drug discovery and development, while allowing larger companies to take on the risks and expenses associated with full-scale commercialization campaigns. In 2011, the company spent just $12.8M on SG&A while R&D expenses topped $157.4M for the development of 27 product candidates, 22 of which are in Phase I trials or beyond. Isis also brought in $99M in collaborative R&D, licensing, and royalty revenue in 2011, and with BIIB’s addition today, has generated $110M so far in 2012. The company has inked partnership agreements with major pharmaceuticals and biotech alike; Genzyme (SNY) Biogen Idec (BIIB), Bristol-Myers Squibb (BMY), and GlaxoSmithKline (GSK) to name a few. Broad acceptance from the pharmaceutical industry demonstrates a level of confidence in a single company’s platform technology that is uncommon in the biotech segment.

Shares under pressure following Kynamro vote. Analysts have largely been focused on the company’s lead candidate Kynamro, which received a mediocre review from the Endocrinologic and Metabolic Drugs Advisory Committee in October, although it was ultimately recommended for approval. Kynamro is a treatment for Homozygous Familial Hypercholesterolemia (HoFH), a genetic disorder in which patients cannot clear “bad” cholesterol from the bloodstream. Patients are at a high risk for cardiovascular problems, particularly at a young age, as the body simply can’t cope with the cholesterol buildup; standard cholesterol-lowering therapies usually don’t have sufficient effect in patients with HoFH. The FDA advisory committee voted 9-6 in favor of the drug, but noted concerns for the growth of neoplasms (tumors) in patients taking Kynamro. Additionally, a competing product, Aegerion’s (AEGR) Juxtapid (lomitapide), received a 13-2 vote in favor of its approval for the same indication, lending fuel to the Isis sell-off that followed. After the less-than-stellar outcome of the advisory board, Isis traded off 40% to $7.67, and has remained near those lows since. While it appears that the neoplasia may not have been related to Kynamro, it remains to be seen exactly how the FDA will label the drug (some concerns with liver problems) if approved. The agency set a January 29th PDUFA, and the company expects to launch shortly thereafter with commercialization partner Genzyme.

Regardless, Isis’ extensive pipeline offers more opportunity than its valuation suggests. The company has more than 25 products in clinical development, some of which target unmet medical needs, and its numerous partnerships demonstrate confidence in the drugs. While the pipeline is too broad to address in one article, we do note ISIS-SMNRx, a potential treatment for spinal muscular atrophy that has already received Orphan Drug status from the FDA, is being developed under a licensing option with Biogen Idec, and entered its first Phase II trial in October. Additionally, ISIS-TTRRx is a potential treatment for Transthyretin-related amyloidosis that is being developed in partnership with GlaxoSmithKline, and should enter a Phase 2/3 study by year’s end. As we’ve seen with companies like Alexion (ALXN), drugs that reach unmet populations can be highly lucrative for developers. The company currently trades at $9.38, with a $953M market capitalization, and share price is supported by roughly $3.70 per share in cash and equivalents. For a company with such a broad pipeline – given, much of it is unproven – we see the opportunity for significant upside as products prove out and move from development to commercialization in the next few years.

Although the company hasn’t reached a break-even point yet, it appears to have sufficient capital to take it through 2013. Kynamro’s approval domestically, as well as in the EU, are the closest value-driving event for investors; US approval will result in a $25M milestone payment from Genzyme. But with the expanse of ongoing clinical trials, Isis will be reporting pipeline progress throughout 2013 as well. Depending how much of the market Kynamro can capture, Isis may approach break-even as sales ramp up. Analysts are split on the drug’s potential, some citing the marketing muscle of Genzyme as a boon, while others note the efficacy and simpler oral dosing of Juxtapid. Success from Kynamro could offer surprise upside, as analysts have drastically lowered expectations for the drug. With the stock’s recent dip, however, we see the potential for gains based on ISIS’ burgeoning pipeline, research-focused approach, and numerous, lucrative partnerships.