Ionis Pharmaceuticals (NASDAQ: IONS) reported third-quarter financials that were better than hoped on Tuesday, but the worry of slowing U.S. sales of Spinraza, a rare disease drug that's licensed to Biogen (NASDAQ: BIIB), caused a short-term tumble in its share price. Investors used the sell-off as an opportunity to buy. Should you, too?
Ionis Pharmaceuticals sales grew 9% year over year to $120.9 million, and that outpaced industry analyst estimates by $4 million; however, third-quarter earnings per share of $0.00 missed Wall Street forecasts by a penny. Sales through the first nine months of 2017 totaled $335.4 million, up from $186.3 million last year.
The revenue growth so far this year came from a variety of sources. Ionis Pharmaceuticals collected $60 million in Spinraza royalty revenue and $105 million from Biogen related to milestones for Spinraza and a clinical-stage project. It also received $67 million from Bayer AG, and it recognized $86 million from its ongoing amortization of upfront fees that its received from its partners in the past.
Offsetting revenue growth was an increase in R&D and selling, general, and administrative expenses. Operating expenses were $107 million and $309.1 million in the third quarter and through the first nine months, respectively. That was up from $85.5 million and $245.5 million, respectively, in 2016.
The spending increase was driven by preparations associated with the filing and potential approval of inotersen, a drug for the treatment of hereditary TTR amyloidosis. Management filed for EU and FDA approval recently, and an FDA decision is anticipated in 2018. Preparation for a 2018 launch of volanesorsen, a lipid drug, also caused spending to climb.
Volanesorsen was included in Ionis Pharmaceuticals' spin-off of Akcea (NASDAQ: AKCA) earlier this year, but because Ionis Pharmaceuticals owns 68% of Akcea, it continues to maintain overall control of Akcea through its voting interest. As a result, Ionis Pharmaceuticals reflects the assets, liabilities, and results of operations of Akcea in its consolidated financial statements.
Shifting to the bottom-line results, Ionis Pharmaceuticals' quarterly GAAP operating income during the quarter was $13.9 million, down from $16.1 million last year. However, its operating income was $26.2 million through the first nine months of 2017, up from an operating loss of $87.5 million in the same period of 2016.
Additionally, Ionis Pharmaceuticals reported that on a pro-forma basis, its operating income was $35.4 million last quarter, and it's $89.9 million this year. In 2016, those figures were $33.7 million in Q3 and negative $30.5 million, respectively.
What's the deal?
Ionis Pharmaceuticals has dozens of drugs in pre-clinical and clinical-stage trials, and its collaborations span biopharma. The diversification is good because it insulates the company against potential trial failures; however, it's also bad because it dilutes the benefit of trial successes, and that can increase volatility. For example, Ionis Pharmaceuticals' investors have been on a roller-coaster ride this past week in large part because of third-quarter sales of Spinraza.
Spinraza is used to treat spinal muscular atrophy (SMA), a rare life-threatening disease. It's the only FDA-approved SMA drug on the market, and its sales have grown rapidly since winning FDA approval in December. Sales were $47 million in the first quarter, $203 million in the second quarter, and $271 million in the third quarter.
On the surface, rapid quarterly growth should be good news for Ionis Pharmaceuticals' stock price. However, Spinraza's U.S. sales made little headway from the second quarter in the third quarter, and that has resulted in confusion over how to model for its future sales.
Spinraza's third-quarter U.S. sales were $197.6 million, but industry-watchers' estimates were for $242 million. The gap is staggering at first glance, but a closer look suggests it's Spinraza's complicated dosing schedule that's to blame for the anemic quarter-over-quarter performance, not a drop-off in patient demand.
Rather than being taken daily, monthly, or quarterly, patients receive four loading doses of Spinraza, and then only one maintenance dose every four months. Since the every four-month dosing schedule doesn't coincide with any particular calendar year quarter, quarter-to-quarter sales will depend on when patients begin treatment and the proportion of patients who are on the maintenance dosing schedule.
If the dosing schedule is to blame for the U.S. sales miss, then it's going to be hard to accurately predict royalty income to Ionis Pharmaceuticals in any given quarter until prescription volume gets big enough to smooth out the impact.
Recent data on inotersen and Alnylam's (NASDAQ: ALNY) competing drug, patisiran, has also been fueling volatility. Both of these drugs improved patient quality of life in trials; however, each is dosed differently and has safety concerns. Until the FDA weighs in with approval decisions on these drugs, it will difficult to determine which company will capture the bulk of this blockbuster opportunity.
Spinraza and inotersen question marks make it easy to understand why Ionis Pharmaceuticals investors are struggling to figure out what to do with their shares, but I think buying makes more sense than selling.
As more payers globally agree to reimburse for Spinraza, more patients will translate into more royalty revenue and diminish the quarter-to-quarter volatility associated with the dosing schedule.
I also think Ionis Pharmaceuticals' inotersen opportunity outweighs its risk. Ionis Pharmaceuticals' has beaten Alnylam in the race to file for approval, and that should give it a first-to-market advantage. Inotersen can be dosed in an outpatient setting instead of an infusion facility, and that offers it an advantage, too. If Ionis Pharmaceutical goes it alone, it could wind up with a top seller, but even if it licenses it to a commercialization partner, it should still benefit from upfront and milestone payments, plus future royalty income. Marketing expenses would benefit from a partner, too.
Overall, I expect Ionis Pharmaceuticals' pro-forma income to grow thanks to Spinraza, and given potential catalysts from an FDA OK of inotersen and volanesorsen next year, I think the bias will be for a higher share prices over time, not lower.
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