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Ionis Down Big on Analyst Miss

By Todd Campbell - Oct 31, 2017 at 2:29PM

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Spinraza's U.S. sales missed analyst expectations by more than a bit, but this could be a buying opportunity for long-term investors.

This week, Biogen (BIIB -0.27%) reported earnings, and Ionis Pharmaceuticals(IONS -0.37%) stock sold off significantly on the news that its drug Spinraza, which Biogen helps commercialize, really missed the mark on its U.S. sales. Confused? Don't worry, you're not alone -- even industry watchers have trouble making sense of Ionis' business.

In this week's episode of Industry Focus: Healthcare, analysts Kristine Harjes and Todd Campbell break down what really happened with Spinraza this quarter, and why this dip in Ionis' market cap could be a buying opportunity for long-term investors. Also, the hosts look at Gilead Sciences' (GILD 0.29%) exciting new CAR-T approval for Yescarta, what's behind Celgene's (CELG) $10 billion sell-off last week, and more.

A full transcript follows the video.

This video was recorded on Oct. 25, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Wednesday, October 25th. I'm your host, Kristine Harjes, and I'm joined today by Todd Campbell, who's calling in from New Hampshire. Todd, how's everything going?

Todd Campbell: Kristine, how are you? I'm doing pretty good. I spent the week getting the house ready for the pending trick-or-treaters coming up here on Halloween. I'm getting a little excited about it, maybe eating too much candy myself.

Harjes: Isn't that always the case, where you buy the candy, and you know you're doing it, but you buy it too early, a week goes by, and there's still two weeks to go until Halloween and suddenly there's no more candy left?

Campbell: Yeah, you put it in a bowl, and as you're walking by you pick one up ... [laughs] yeah, absolutely. But we have fun with it here. We put up gravestones, and we do a little fog machine. We have a good time.

Harjes: Very nice. I unfortunately didn't decorate my apartment at all this year, but I'm looking forward to seeing what they do here at HQ in Alexandria.

Campbell: Oh, there you go. You can get your trick or treat on there.

Harjes: Exactly, yeah. We usually have a bunch of kids come into the office. It's always a good time. Anyway. For the show today, many of you that are keeping tabs on the CAR-T space and one of our favorite stocks, Gilead Sciences, might be anticipating a show about Gilead Sciences and their very exciting CAR-T approval. That's actually not what we're doing the show about. [laughs] But just to make sure that we've got you covered on the news, really quickly, Gilead's drug Yescarta was approved on October 18th for advanced diffuse large b-cell lymphoma, which is the most common type of NHL in adults. This was, of course, Kite Pharma's Axi-cel, was the drug name, and then Gilead acquired Kite to try to establish itself as a major force in oncology. And with this approval, that strategy appears to be working fairly well for now. The stock was relatively flat on the news because this approval was largely expected. If anything, the interesting part of it was that they released the price, which is $375,000. Sounds, kind of ridiculous, but that's actually fairly in line with expectations as well. If you compare it to the other approved CAR-T drug from Novartis, Kymriah, that costs $475,000. So, that seems to just be how the CAR-T market is playing out right now.

Campbell: As a quick follow-up to that, Kristine, if you want to do a little bit of back-of-the-napkin math, people at home, probably about 4,000 patients can be treated based on current production capacity for CAR-T for Yescarta. So, 4,000 patients times $375,000, and discount off something for negotiations, that probably gets you $1 billion run rate or so in the next year, year and a half.

Harjes: Yeah. So, nothing terribly novel and exciting to report. Obviously, this is a landmark for all of the patients that are in this patient population, and it's a big step forward for CAR-T, but this is widely expected, so we're not going to dwell on it too much on this show. Instead, we're going to talk about some big biotechs whose market caps have materially changed based on recent news. We're calling this "Big Biotech Goes On Sale." The first item from the discount bin is one that listeners will recognize from our Pitch A Stock week last week, and that one is Celgene. One week ago, Vince Shen and I discussed Keith's pitch on the show. If you bought in right after that, you're probably not terribly happy with us right now, because in the short-term, in the next week or so afterwards, Celgene lost about 11% of its market cap -- which, for a company that big, that's about $10 billion. So, very sizable decline. We wanted to update our listeners about what's going on with the stock, what caused the decline, and particularly, should you hold on to those shares that you might have bought right after that show, or maybe even expand on the position size. First off, Todd, do you want to share what the news was?

Campbell: In honor of the fact, in the intro, we were talking about getting ready for Halloween, and I suppose, to make things even scarier for Celgene investors, if you go back to the beginning of October, Kristine, you've now lost about $20 billion in market cap. So, leading up to the bad news, you lost about $10 billion, and then you lost another $10 billion or so, between friends, when the news came out. The news specifically that we're talking about is, Celgene decided to shutter development on a drug called GED-301. GED-301 was in phase 3 trials for use in Crohn's disease, a multibillion-dollar indication. Celgene had spent a lot of money acquiring the rights to this drug. It quickly moved it into phase 3. However, when independent monitors got to look at the interim data and ran their futility analysis, they determined it's just not going to pan out. As a result, Celgene now has to stop development in Crohn's disease to save themselves any future money that they would have to pay out, and take a charge in the fourth quarter that they think could be as high as $500 million.

Harjes: On this news, which was that they decided to stop both the phase 3 RESOLVE trial and also the SUSTAIN extension trail that patients could move into from RESOLVE, they also cancelled plans for another phase 3 trial, DEFINE, in the same indication. But something that's important to note here is it's because of efficacy issues and not because of safety. Why I want to point that out is because this drug is still being tested in phase 2 for a different disease called ulcerative colitis, it's another inflammatory disease. The lack of safety flags with the drug is a very good thing, because maybe this drug will work in that indication, maybe it won't, but if there are safety concerns, then that would be a much more devastating piece of news for this drug.

Campbell: Kristine, I wouldn't hold out a lot of hope if I'm an investor that GED-301 is going to put up great numbers in this. I wouldn't even model for it. And that way, if it ends up happening, wonderful. If it doesn't, no big deal, because one of the other things we're going to talk about throughout the course of this segment is talking about how Celgene has other irons in the fire, not only in Crohn's disease but also in ulcerative colitis. And those other irons could very well pan out or have a higher likelihood of success than GED-301. I think investors looking at this are probably saying, "Oh my God, we lost $10 billion in market cap, how much was this drug really factored into the long-term outlook for Celgene? I'm a long-term investor, this must be a huge big deal!" No. It's not. As a matter of fact, I think if you poll most industry watchers, they had very low expectations for GED-301. The majority of the recent enthusiasm for Celgene has to do with other drugs and other opportunities, not GED-301. And, not to bury the lead, but that could be creating a buying opportunity here for investors.

Harjes: Absolutely. One drug in particular that I want to point out is Ozanimod, which has been referred to as the crown jewel for Celgene. It's being studied right now in phase 3 for ulcerative colitis and it also just reported positive phase 2 data in Crohn's disease. This is a much more promising drug that you could see come into these autoimmune disease indications and end up mattering quite a bit more. There's an industry watching firm called EvaluatePharma, and they like to run the numbers and come up with a present value for these different drugs based on how they're currently doing, how far along they are in their trials. Back in May, before we had the data on GED-301, EvaluatePharma calculated a net present value of $3.3 billion for this drug. But, if you look at what they've calculated for Ozanimod, they peg that drug's net present value at $8.2 billion. That's quite a bit more, and Ozanimod also has other opportunities, for example, in multiple sclerosis. The point is, GED-301 is not a huge part of the value proposition for Celgene, especially not anymore, but there are plenty of other drugs going on with Celgene both in these indications and in other indications that should more than make up for this one failure. And before we even move on to some of those drugs, I want to point out that this is not any fault of Celgene's. A ton of phase 3 trials fail all the time. That's kind of just how it goes. If you listen to this show regularly, you know that. So, I'm not going to hate Celgene's management or anything because of this failure. It's kind of just the way biotech works.

Campbell: Kristine, just to tag along on that comment with all of the activity that you have going on in Celgene, both internally and through its collaborations, it's kind of surprising that we don't hear about more failures.

Harjes: Yeah. You mentioned their strategy of partnering with other companies. I actually want to commend Celgene's management for the way that they approach this. They initially purchased this for $710 million from Nogra Pharma, which is a private company, back in April 2014. This was right after its phase 2 trials. This is very much in line with Celgene's strategy, which is to pay for some drugs that are a little bit earlier stage, they're not yet on the market, and it's a little bit riskier, but it also allows them to get it for a lot cheaper of a price tag. In this failure, Celgene avoided having to pay $815 million in milestones, which seems like a pretty smart thing. There are $710 million, but it could have been a lot worse.

Campbell: Yeah. You figure, $710 million, and then you have phase 3 costs, maybe you're in a few hundred million, give or take, from there. I think, the failure of Ozanimod would be worth $10-20 billion in market cap. But not GED-301. We were talking about the different collaborations they had going on. They have a ton of stuff going on. You and I talked on the show back in June about bb2121, which is bluebird bio's promising drug for multiple myeloma. That's partnered up with Celgene. In heavily pretreated patients, on average seven prior treatments, there was a 100% response rate. Now, that won't hold true as trials get bigger, but it just shows the promise of that particular drug. And they're also working with Juno Therapeutics on a next generation CAR-T therapy that could end up competing with Gilead as early as late 2018, early 2019, in non-Hodgkin lymphoma. I think there's a lot of things that can still go right for this company, and I think viewing it in the short-term just based on GED-301, probably not the right move, especially since, let's face it, Celgene has a lot of pricing power, and they're not afraid to use that pricing power to be able to eke out more and more money from the current lineup of drugs.

Harjes: Which is, for better or for worse, this is an issue you read about all the time in the news, people are really unhappy with the way that drugs are priced, particularly in the United States, and Celgene seems to be bucking the trend by being almost egregious with their price hikes. You've seen a lot of companies come out and say, "We're not going to increase prices on our drugs by any more than 10% per year," and Celgene is not following by that loose guideline at all.

Campbell: Yeah. A little bit of backstory, if you look at, from 2010 to 2017, prices for Revlimid have almost doubled. On average, from 2010 to 2016, prices went up a little bit less than 8% per year. This year, Kristine, including the 9% increase they just did a few weeks ago, or very recently, the price has gone up 19.8% from 2016.

Harjes: And this is for Revlimid.

Campbell: Yeah, Revlimid, which is their best selling drug. To put that in perspective for you, $8 billion run rate in sales out of that drug coming out of the second quarter. We'll get third quarter's numbers tomorrow. If you listen to this and the third quarter numbers have come out, bear that in mind. But, $8 billion run rate drug, and the price is increasing substantially. I'm working on a story that I'm putting on relatively soon here, Kristine, walking people through the impact of that price increase. And I think one of the things people have to realize it is, price increases are cumulative. There's cumulative impact on future prices, because future price increases now come on this higher base. If you look out to 2020, just the price increase they did this year, arguably worth $1 billion in additional revenue to the company in 2020. Maybe not coincidentally, that's probably what you could have got per year out of GED-301.

Harjes: Folks listening, if you want to read Todd's article, I'm going to pull a Michael Douglass and say, please write in to, I'll be happy to send that along as soon as Todd has it out on the site. Todd, I'll also look forward to reading it.

We have one more big biotech that we want to talk about today. This is a biotech whose shares were down 12% just yesterday, Tuesday, October 24th, because one of their main drugs, Spinraza missed its sales expectations.

Campbell: Yeah. Another scary drop in market cap. They lost more than $1 billion in market cap, but it wasn't because of anything that Ionis said. It was because of what Biogen said. And Biogen is Ionis' commercialization partner on this drug, Spinraza. This is one of the crazy things about biotech, right, Kristine? The devil is in the details. Despite the fact that Spinraza's quarter to quarter sales grew 34%, investors knocked down Ionis by more than $1 billion in market cap.

Harjes: Yeah, people were really upset about the specific U.S. sales of this drug. As you mentioned, it was Biogen that reported. Biogen commercializes this drug, and Ionis gets a royalty in the teens of all sales globally. But, the investors and analysts on the call were extremely concerned with the U.S. sales in particular for this drug, which is fairly new. It was just approved in December. We're looking at the first few quarters of data, which, on one hand, are important, because you want to see there's an uptake of this drug, and the real-life efficacy and the doctor outreach are everything that you expected. But on the other hand, you're working with a pretty small patient population, especially because this is for a very rare disease. There's just 9,000 SMA patients in the United States. So, you get pretty lumpy data, and that seems to be what's going on in this case.

Campbell: Yeah. Let's unpack that data, Kristine. First of all, let's get a feeling for how this drug's sales growth has been trending over the course of this year. Remember, it won approval in December. First sales occurred in Q1. It did $47 million in sales according to Biogen. In Q2, went from $47 million to $203 million. In Q3, after winning some approvals overseas in ex-U.S. markets, sales jumped to $271 million. So, you're from $47 million in Q1 all the way up to $271 million in Q3. Sounds awesome, but again, like we said, the problem is with the U.S. sales. If you look at the U.S. sales, they came in at about $198 million of this $271 million. That was below industry watchers' forecasts of $242 million. What? That's a huge gap. And Kristine, I think maybe you'll agree with me on this, if I were going to pick one of the most confusing and complicated biotech companies for an individual investor to go out and research and learn about and track, it's got to be Ionis. This just shows how complicated and how confusing this company is to track. Industry watchers are obviously modeling completely incorrectly for its sales.

Harjes: And you could even see on the Biogen earnings call, there was so much confusion. The analysts were all over the place. They kept coming back to the same confusing questions about these U.S. sales. It almost seems like no one really gets what's going on with Ionis and with this drug and the part of Biogen that's related to all of this.

Campbell: Yeah. If there's a failure, it's in failing to adequately educate industry watchers so that they can model for this drug correctly. It's certainly not a failure in growth. Kristine, there were a few different things that went wrong with the quarter, or the impact of the quarter, that really fed into that $197 million number that was below what people hoped. You had dosing schedule, that we have to discuss. We had an inventory build that happened in the second quarter that's also important to discuss. So, there are some caveats that people obviously weren't factoring in correctly.

Harjes: Yeah, absolutely. I'll start with the inventory building, and let's not forget to come back to dosing schedules. Inventory building accounted for $30 billion of sales in the United States in the second quarter. So, if you back that out, what looks like 1% quarter-over-quarter growth in the U.S. was actually 20% when you take out the effect of this inventory building. Again, these are maybe accounting gimmicks, if you want to look at it that way, but it does help to smooth out these numbers quite a bit.

Campbell: With a fast-growing drug like this, Kristine, you're more interested in patient starts, how many patients are on the therapy here. You're less interested in the quarter to quarter machinations of distributors and how much inventory they have on hand ahead of time.

Harjes: Exactly. And the patient numbers are growing. One other thing I want to talk about with this drug is the interesting dosing schedule. This seems like a good time to talk about the price of the drug, too. When you first take the drug, in your first year, it's $750,000. After that, it's $375,000. Again, rare disease drug, so you get these ridiculous six-figure prices. But when you first take it, you get a lot more doses of it, whereas afterwards, the maintenance dose is only once every four months. So, combine that with a small number of patients and the once-every-four-months maintenance dosing as opposed to the four doses in a row that you get initially, and you're going to see what you're getting right now, which is lumpiness.

Campbell: Right. Everybody who came on it in the first quarter or second quarter has now migrated to a maintenance schedule. So, yeah, most of the revenue in the third quarter is therefore going to come from new patient starts. Of course, that was exasperated by the fact that you had new approvals overseas, and launches going very well in Germany. They added a lot of sales growth from the overseas markets. The dosing schedule, the way it is is, every 14 days for the first three doses, the fourth dose is given 30 days after the third dose. After that, it's every four months, not every three months. So you're not going to get that quarterly benefit every quarter, it's going to depend on when patients started taking therapy. Now, at some point, we're going to get to flying altitude, and the seasonality will work its way through and it'll be fine and you won't really notice as much lumpiness. But until we get to that point, you're going to have some quarters that are much bigger than other quarters. And I think that's going to be hard to model. Rather than looking at quarter-to-quarter performance, you can look at the top line and say, yeah, it's still growing, that's great, but maybe look at it over a rolling four quarter period to see what's really happening for sales of this drug.

Harjes: It's funny when you see a stock move so much because analysts were wrong. Because really, that's what's happening here. It's not that the drug was failing or the company was terrible. It's that analysts modeled incorrectly. And to me, that's kind of a shrug. This is still the same company it always was. The drug is doing perfectly fine. If anything, I think this presents a pretty intriguing buying opportunity for a company that has an enormous pipeline with a lot of very interesting drugs in it.

Campbell: 39 drugs in its pipeline, Kristine. Now, Ionis is a little bit of a weird company because they tend to partner up mostly with other companies on drugs that they're developing, so they don't get 100% of the benefit if they ever get commercialized. They only collect these royalty streams. And that can make valuing it a little bit more difficult. But with this many irons in the fire, this many drugs that they've been working on, they're finally at a point now where some of these are heading toward the FDA. And as more and more of these drugs win their way through regulators, you're going to see royalty revenues steadily climb. And as it is already heading into the third quarter, Ionis was already thinking they were going to be positive for pro forma earnings this year. And that's a pretty remarkable accomplishment for a company that has as much going on, is spending as much money as it is, in R&D.

Harjes: And yet, it's still just a $6.8 billion company, which is pretty incredible. I want to wrap up this episode by talking for a second higher-level about the mentality of, when stocks go down, seeing them as a discount, seeing them as getting them on sale. That's so central to The Foolish philosophy. When you see a big swing in a company, particularly a midsize or large size company, and you go in and take a look and it seems like an overreaction, as a shareholder, panicking is the last thing you want to do. You don't want to sell off just because of this. But, if anything, these could be really good opportunities to buy some high-quality companies at discount prices.

Campbell: 100% applaud that. You're not going to just buy anything that drops 10% in a given day. But if you've got a story, and I didn't know neither of these stocks based on the thing that supposedly went wrong, if you have a story that you believe in and that story remains unchanged by the news, then why wouldn't you want to assume it's at a discount and you can buy it on sale, right?

Harjes: Yeah. And that's just one more reason to keep an investing journal, and talk about why it is that you bought into a company, so that you can, when these drops happen, go back, revisit that thesis, and maybe say, hey, time to scoop up some more shares. Alright, Todd, we're out of time, but thank you so much for joining me today. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!

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Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$62.39 (0.29%) $0.18
Celgene Corporation Stock Quote
Celgene Corporation
Ionis Pharmaceuticals, Inc. Stock Quote
Ionis Pharmaceuticals, Inc.
$37.83 (-0.37%) $0.14
Biogen Inc. Stock Quote
Biogen Inc.
$201.97 (-0.27%) $0.54

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