Why Isis Pharmaceuticals Continues to Impress

Over the past twelve months Isis Pharmaceuticals (NASDAQ: ISIS  ) has been on a tear both at the deal table and in the market. At $51, Isis is still up more than 230% over the past twelve months. The company reported fourth quarter 2013 earnings on February 28 before the market opened. The bottom line came in just $0.01 lower than estimates at a loss of $0.21 per share. On top, Isis reported revenue of $42.2 million, about $8 million above estimates.

Apparently the Street expected better and the stock finished the day down 9.5%. The biggest complaint was a lack of info concerning Kynamro sales and a fourth quarter loss that grew from $2.6 million in 2012, to $24.3 million last year.

While the widening loss in the fourth quarter might seem drastic, milestone payments and other irregular cash flows often result in erratic swings for this company. Smoothing the figures out over twelve months tells a different story. For the entire year of 2013, Isis lost just $60.6 million compared to $65.5 million in 2012.

The reason the company's annual loss shrank about 7.5% last year was an increase in revenue from partnerships, of which Isis has many. FDA approval of the company's lead program, Kynamro for the treatment of homozygous familial hypercholesterolemia (HoFH) in January 2013, went a long way to generate interest in the company's RNA antisense drug discovery platform.

Not a big seller
Unfortunately, Kynamro sales haven't added much to the company's top line in its first year on the market. The drug was developed and commercialized in partnership with Sanofi's (NYSE: SNY  ) subsidiary Genzyme. Despite the approval, revenue from the Genzyme agreement is shrinking. During 2013, 2012, and 2011, Isis earned revenue of $32.5 million, $67.6 million, and $72.3 million, respectively, from Genzyme. Isis reported overall revenue from licensing activities and royalties of $3.1 million for 2013, compared to $5.6 million for 2012.

Kynamro is approved for an extremely limited indication. The frequency of HoFH is a subject of heated debate, but it is low. Prior to the existence of an effective therapy the generally accepted frequency was about one person in 1,000,000. As is often the case with orphan diseases, the emergence of an effective treatment may bring patients out of the woodwork. Whatever the size of the US HoFH population, Isis and Genzyme are sharing it with Aegerion Pharmaceuticals (NASDAQ: AEGR  ) and its therapy, lomitapide. Aegerion reported 430 US patients on therapy at the end of 2013.

Genzyme and Isis will most likely not be competing with Aegerion for HoFH patients in the EU. The European Medicines Agency Committee for Medicinal Products for Human Use recommended against Kynamro's approval, twice. The agency cited a high rate of discontinuation due to side effects, and cardiovascular events.

An efficient discovery platform
Isis probably won't earn a great deal in royalties from its first approved product. That's hardly a reason to avoid the company. It finished 2013 with a staggering 31 compounds in development. The company is conducting more than 20 trials. With less than 400 employees, the company's pipeline is large enough to make a drug major jealous.

Lots of partners
Of course, Isis isn't developing all of these compounds on its own. The company is advancing most of its drugs through a series of partnerships. Last year the company earned about one fifth of its total revenue from a partnership with AstraZeneca (NYSE: AZN  ) , which is picking up the tab for most of the clinical development costs of several compounds. In return, Isis may receive more than $1.1 billion in milestone payments, plus double-digit royalties should any reach a commercial stage. Isis has also teamed up with Biogen Idec (NASDAQ: BIIB  )  in four separate partnerships. These partnerships span drugs for a variety of indications, including spinal muscular atrophy and myotonic dystrophy .

Final take
Kynamro might not be going anywhere fast, and that's fine. Isis' discovery platform has been very efficient at getting candidates into the clinic. Deep pocketed pharmaceutical heavyweights are lining up to assume the risk of developing many of them. This company has initiated more than 20 trials with its limited staff. Thinking ahead, imagine what it can accomplish with a Big Pharma-sized stable of researchers.

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