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Ionis Pharmaceuticals Tumbles on Biogen's Miss: Buy or Sell?

By Todd Campbell - Oct 24, 2017 at 9:00PM

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It might not make sense to sell Ionis Pharmaceutical's shares because of weaker-than-expected U.S. Spinraza sales.

Ionis Pharmaceuticals (IONS 2.81%) lost 11% of its market value after commercialization partner Biogen (BIIB 3.28%) reported third-quarter sales of its drug, Spinraza, that failed to match industry watchers' forecasts. Is Ionis Pharmaceuticals' tumble a sign that investors should sell, or a buying opportunity?

What's the deal?

Ionis Pharmaceuticals and Biogen are collaboration partners on Spinraza, a drug used to treat spinal muscular atrophy (SMA), a rare life-threatening disease.

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Spinraza became the first FDA-approved SMA treatment when it won approval in December, and while there are only about 9,000 SMA patients in the U.S., Spinraza launched with premium pricing that has industry watchers expecting it to become a multibillion-dollar drug. Spinraza's list price is $750,000 during the first year of treatment, then its price drops to $375,000 per year from then on.

Since its launch earlier this year, sales have increased rapidly. Spinraza's revenue was $47 million in the first quarter, $203 million in the second quarter, and $271 million in the third quarter.

Yet investors are disappointed with the third-quarter performance because they were expecting even better growth in the U.S. than Biogen delivered. Spinraza's global revenue was above the $249 million they expected, but U.S. sales of $197.6 million were shy of the $242 million they anticipated.

That's a pretty big miss on the U.S. forecast, but investors might not want to overreact and give the miss too much weight. SMA is a chronic and life-threatening disease caused by inadequate levels of a protein called SMN that's important to the survival of motor neurons. Spinraza tinkers with the gene responsible for creating SMN to boost its production, thereby improving patient motor activity. It's not a cure, but it helps, and since SMA can lead to paralysis and potentially death, patients who start taking Spinraza are likely to remain on it throughout their lifetime.

As a result, I don't think we'll see a drop-off in prescription volume in the U.S. or elsewhere. I expect Spinraza sales to grow, not shrink, as more countries agree to pay for it and more patients gain access to it worldwide.

In fact, that already happening.

In the U.S., 85% of people with commercial insurance now have access to Spinraza, up from 80% in Q2, 2017, and 80% of Medicaid patients also have access to it, up from 65% in Q2, 2017.  As a result, there were 75% more Spinraza patients in the U.S. exiting Q3, 2017 than exiting Q2, 2017.

So, why did U.S. sales fail to hit industry watchers' forecasts if more patients are being prescribed it? In Biogen's third-quarter conference call, it walked investors through the disconnect, citing lumpiness associated with the dosing schedule as the key reason for the slower-than-hoped quarter-over-quarter growth.

Spinraza patients are given four loading doses, then maintenance doses once every four months. Because of the timing of patient starts, there will be peaks and valleys associated with the timing of the various doses until patient volume hits its stride.

The company also pointed out that about 20% of U.S. patients received Spinraza through Biogen's free drug program, and that inventory building added $30 million to U.S. sales in Q2. If we back out that inventory building, then adjusted U.S. sales would've increased 20% quarter-over-quarter in Q3. Instead, U.S. sales inched up 1% quarter-over-quarter because of the Q2 inventory increase.

In short, it appears industry watchers are having a tough time modeling for the impact of the dosing schedule, and that's the big reason behind the U.S. miss. Investors shouldn't forget, however, that flattening U.S. sales last quarter were more than offset by rapid growth elsewhere.

Spinraza's won approvals in Canada, Brazil, Japan, and Europe. Since Ionis Pharmaceuticals nets a royalty on Spinraza revenue regardless of where it originates, investors should probably focus less on the U.S. breakout of sales and more on global revenue growth. Spinraza's non-U.S. sales totaled $73 million in Q3, up 804% from Q2, 2017, and its $271 million in global sales in Q3 reflects 34% quarter-over-quarter growth.

All eyes ahead

Ionis Pharmaceuticals is heading into its third-quarter financial report, having already boosted its operating income guidance for the year based on receiving $27.6 million in Spinraza royalties in the first six months of 2017. Given Spinraza's global sales climbed 34% quarter-over-quarter in Q3, Spinraza should still be a tailwind for Ionis Pharmaceuticals.

The company's also got other irons in the fire that makes it an intriguing stock to buy. It's developing dozens of drugs with deep-pocketed companies like Biogen, and a steady stream of collaboration revenue provides a nice companion to rising royalty revenue from Spinraza. Earlier this year, Ionis Pharmaceuticals spun off Akcea Therapeutics to commercialize volanesorsen, a triglyceride-reducing drug. Akcea filed for FDA approval of it in August and, if approved, it could benefit Ionis Pharmaceuticals' financials as soon as next year. 

Ionis Pharmaceuticals also plans to file for an FDA approval of its hereditary TTR amyloidosis drug, inotersen. GlaxoSmithKline opted out of inotersen earlier this year as part of a restructuring away from rare diseases, and while there are some safety concerns associated with inotersen that could pose risks, an approval next year could also provide a nice tailwind for investors.

Overall, the fact that Spinraza's U.S. sales were essentially flat in the past quarter shouldn't be altogether ignored, but given its strength in other markets, the lack of competition in this indication, and the significant importance of this drug to patients, investors might want to consider using weakness as a buying opportunity, not a reason to sell.


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Stocks Mentioned

Ionis Pharmaceuticals, Inc. Stock Quote
Ionis Pharmaceuticals, Inc.
$38.06 (2.81%) $1.04
GSK Stock Quote
$43.75 (0.51%) $0.22
Biogen Inc. Stock Quote
Biogen Inc.
$210.63 (3.28%) $6.69
Akcea Therapeutics, Inc. Stock Quote
Akcea Therapeutics, Inc.

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