3 Reasons ISIS Pharmaceuticals Is a Buy

An enviable pipeline and a lower valuation make may now a good time to pick up shares in this RNA leader.

Brian Feroldi
Brian Feroldi
Oct 5, 2015 at 3:43PM
Health Care

Image source: ISIS Pharmaceuticals.

After years of providing investors with market-crushing returns, biotech stocks as a group have taken quite the beat-down recently. After reaching a brief peak in price over the summer months, iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), an exchange traded fund that holds a basket of 144 biotech stocks with market caps over $200 million, clearly shows the run-up and recent sell-off.

IBB Chart

When the market sells off a sector, some stocks fall harder than others, regardless of whether they deserve to or not. For example, ISIS Pharmaceuticals (NASDAQ:IONS), a mostly clinical-stage biopharmaceutical company focused on developing therapies utilizing its RNA-based antisense drug development platform, has been hit particularly hard and is down more than 30% since the start of the year.

When a stock with great prospects takes a fall like that, it can be a great time to revisit your thesis to see if the company may be worth buying.

Here are three reasons it might make sense to add a few shares of ISIS to your portfolio today.

1. A pipeline full of potential
In the long run, biotech stocks create value for their investors from their pipeline, which is why Wall Street pays so much attention to how developmental drugs are progressing. ISIS is a standout in the industry, as the company currently boasts 38 drugs in its pipeline that are aimed at treating a variety of diseases, and eight of those potential products are in phase three development.

ISIS has also been very active in finding partners for its compounds, and they all have been willing to pay up to share in the future revenue of ISIS' pipeline. Big Pharma companies like Sanofi, GlaxoSmithKline, BiogenRoche, Bayer, and more have already signed up.

Better yet, ISIS has also already proven that its technology is safe enough to make it to the finish line, as it received its first-ever FDA approval in January 2013 for Kynamro, an orphan drug used to treat an inherited cholesterol disorder, which bodes well for future approvals.

2. Positive cash-flow from operations
Despite having to share profits of Kynamro with its marketing partner Genzyme, the company has actually been successful at generating cash from its operations. How can that be? The company's development deals give it up-front cash infusions, which have helped keep the company's bank account moving in the right direction despite heavy spending. Since 2007, the company has received more than $1.4 billion in cash from these deals, which has helped to keep dilution of the company's shares down to a minimum.

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You can see this play out in the company's just-reported quarter. Despite heavy spending on research and development, ISIS' cash balance has actually grown since the start of the year, and it now sits at $754.9 million. How? It banked more than $165 million in payments from its partnerships during the second quarter alone.

Better yet, as the company moves its pipeline through clinical trials, it earns more milestone payments along the way. All told, the company could earn another $8.5 billion in future milestone payments from its current pipeline, and that doesn't include other revenue streams that the company's drugs could earn through profit sharing or royalty arrangements if they make their way to commercialization.

3. An appealing valuation 
As ISIS' stock price has fallen, so has its market capitalization, and the entire company is currently valued right now at a little over $5 billion.

ISIS Market Cap Chart

While that may be a high price to pay for a company that's still largely in the clinical stage, when compared to the $8.5 billion in future milestone payments that it still could receive, plus more potential upside if its drugs are successful, this valuation may look like a steal in hindsight. 

The Foolish bottom line
Without question, it's been a rough couple of months to be a biotech investor, but if you can keep your eyes focused on the long term and learn to ignore the market's short-term craziness, I think now could be a great time to open up a position in a few promising names. ISIS's business continues to hum along, and yet its stock price is going in the opposite direction. Taking a small position in ISIS now and adding to it over time could very well be a profitable long-term decision.