Trouble Strikes Ionis; Will It Get Bought Out? By Gilead?

| About: Ionis Pharmaceuticals, (IONS)

Summary

IONS shocked me and probably all analysts by divulging a second drug has caused a severe low platelet condition in a Phase 3 trial.

The stock has collapsed to $22, but downside risks remain.

Some first impressions based on the conference call held Thursday morning are provided, with thoughts on whether IONS can continue as an independent company.

If so, might GILD go back to its antisense roots and consider buying IONS?

General thoughts on biotech investing are also provided.

Background

Ionis Pharmaceuticals (NASDAQ:IONS), the RNA therapeutics (antisense and other technologies) company formerly known as Isis, has been a promising company and stock since the early 1990s. And things were looking up based on multiple pipeline drugs and blossoming alliances with the best pharma companies around.

Now it looks to me as though it may think about shopping itself, and that the former RNA-based company Gilead (NASDAQ:GILD), which shifted gears in the 1990s, might find the basic science at IONS interesting.

Here's a brief update of the situation and then several comments.

The latest bad news from IONS

IONS reported worrisome adverse events that have occurred recently with two of its major pipeline drug candidates.

One of these is discussed in the press release issued Thursday titled "Ionis Pharmaceuticals Provides Update on IONIS-TTR Rx Program."

This includes the following paragraph, discussing the program's Big Pharma partner GSK (NYSE:GSK):

GSK, which has an option to exclusively license IONIS-TTRRx, has decided not to initiate a Phase 3 outcome study, CARDIO-TTR, which was planned to evaluate IONIS-TTRRx in patients with TTR amyloid cardiomyopathy. As announced in April 2016, the U.S. Food and Drug Administration (FDA) had placed this study on clinical hold as a result of safety findings in the ongoing NEURO-TTR study. GSK will consider options for TTR amyloid cardiomyopathy once additional clinical data are available from the ongoing studies.

As discussed elsewhere in the press release, an investigator-sponsored study in TTR cardiomyopathy has been allowed to continue, but with enhanced monitoring for side effects. So with the FDA having allowed both the NEURO-TTR Phase 3 study for FAP (familial amyloid polyneuropathy) and the investigator-sponsored study for amyloid cardiomyopathy to continue, on the face of it this was not going to be a disastrous conference call held this morning to discuss GSK's decision.

However, and note I'm writing this from memory of the conference call that was completed just a few hours ago - so please listen to the call yourself before trading on anything I say here - apparently just yesterday or this week a different IONS Phase 3 drug, volanesorsen, was implicated in the same side effect - severely depressed platelets. Platelets are blood elements that are very important in preventing uncontrolled bleeding.

So now we have evidence of the class effect that IONS insisted there was no evidence of when it first reported the problem, last month.

On the Q&A today, the company refused to comment on whether there had been a death associated with any of these cases of low platelet counts (technically, thrombocytopenia).

In contrast, IONS insists that the safety profile of its other Phase 3 drug, nusinersen for spinal muscular atrophy in infants and children, has been pristine. That drug is given in low dose directly into the spinal cord area rather than subcutaneously, as with the TTR drug and volanesorsen. After given subcu, a drug enters the general circulation.

There are some additional clues the company has provided today that may guide investors and outside observers as to what's going on here.

One clue is that the dose of the TTR drug for amyloid was raised in Phase 3 to 300 mg, whereas apparently, if I heard correctly, much of the prior clinical experience had been at the 200 mg dose. So, the question of whether dose exposure is a problem is raised.

A second clue is that the company has now said that these few cases of thrombocytopenia occurred within months of beginning the drug, but that no cases have been seen if a patient was on the drug for, say, one year.

A third clue is that for now, the IONS competitor Alnylam (NASDAQ:ALNY) has not reported platelet problems with its patisiran, which is in Phase 3 as an IV treatment for the neuropathy disease. I believe that Dr. Crooke of IONS has said that this is given with steroid pretreatment because of side effects. If so, the steroid could potentially prevent adverse immunological reactions.

Putting it together, I wonder if the 300 mg dose, which is the dose needed with the current IONS technology, causes an immune reaction that leads to attacks on platelets in susceptible patients. If so, the question is whether enhanced monitoring, such as weekly platelet counts for, say, the first 6-12 months of treatment, will be adequate to allow the volanesorsen and FAP (TTR neuropathy) trials to proceed to completion.

However, this is onerous monitoring and a real negative for commercial sales of a drug.

The bigger problem is that this shows some of the downside of a one-technology company.

For example, IONS has licensed a Phase 2 drug, Ionis FXI Rx to Bayer (OTCPK:BAYRY). This is an anticoagulant, or blood thinner.

A blood thinner that needs monitoring because it can lower platelets severely is not something that I expect BAYRY is going to be interested in taking into a broad Phase 3 program, especially when much of its use is going to be for shorter-term uses or very sick patients who are not suitable for warfarin or the Xarelto class of drugs ( Factor Xa inhibitors).

So here are my first thoughts on IONS, written with the price at $22 and a market cap of $2.7 B.

Interim summary

My working assumption for the company is that nusinersen will continue its program, and now represents the main and almost only value driver for the stock.

I will hope that the volanesorsen program continues with enhanced blood monitoring; the same for FAP with the TTR drug that's implicated in more than one thrombocytopenia case.

Then I have to wonder some big things. For investment purposes, I'm now going to assume that all other R&D programs that do not involve a next-generation drug, either the "2.5" program or a LICA program, with those drugs designated with an "L" in the pipeline page, are all that will go forward in development.

This is turn shrinks the pipeline list to a small number of projects, calls into question the ability of IONS or its Akcea subsidiary to finance them, and therefore raises the question of whether IONS can really continue as an independent entity.

So as happens so often, a speculative stock can look worse after a big decline than when the newsflow was good. In the case of IONS, it was growing its business relationships last year at a rapid pace, and now this potential disaster strikes, apparently out of nowhere.

I want to use this example to make some additional comments about biotech (NASDAQ:IBB) and general stock market (NYSEARCA:SPY) investing.

IONS as an example of risk in the financial markets

In December 2014, after the 5th consecutive year in which biotech stocks led the market, Seeking Alpha was kind enough to interview me about biotechs. This was the title of the interview, published in early January: DoctoRx Positions For 2015: I Have Cut Back On My Exposure To All Biotech Substantially.

After partially increasing my exposure to biotech and stocks, I made it clear both in the June-early August period and again in the fall that I thought that both the biotech sector and the stock market were unduly risky, and minimized my exposure to both. Unfortunately, a decent exposure to IONS remained, but much less than when it was maximal last year. I have now sold almost all of it, and despite some trading profits in it last year, my net on it is a loss.

I had kept meaningful positions in two junior, highly speculative biotech stocks, Portola (NASDAQ:PTLA) and IONS, but at reduced levels. The problems each company has faced recently exemplify why I have been so vocal about the Gilead strategy making sense. In a recent Barron's blog, Mr. Porges is quoted as saying (note the (emphasis added) bolded sentence):

The #1 question we are getting is what can Gilead buy: We note that in a recent interview, the CEO has noted interest in oncology, liver and inflammation space. The CEO also noted urgency which bodes well with the recent decision to slow-down on the buyback front. Acc. to the CEO for him the most important thing is cutting edge technology which could make a difference five years from now.

That's my point. A company like GILD experiences pipeline setbacks just as IONS and PTLA does, as all GILD-followers know. However, it has said for at least the past 2 years that I've been owning and following it very closely that its strength comes from taking early-stage projects, including pre-clinical compounds, and adding value to them. Of course, it has also purchased tuck-in products or compounds both for its HIV/AIDS franchise and for HCV. The GILD way of doing things is the traditional pharma model, where the risky and expensive clinical trials, which are money-losers at the time, are integrated into a profitable marketing company's strategy.

That means that the best R&D builds on existing profit centers, which while greatly overlooked within GILD, is something it has been doing brilliantly both within HIV/AIDS and HCV.

The future of IONS as an independent company is now imperiled, in my view. It may have a substantial profit center over time from nusinersen, but unless it were to sell its future revenues at an appropriate discount to Biogen (NASDAQ:BIIB), and given IONS has a notable debt load, no profit center is certain or even perhaps likely.

On the other hand, at a low enough price, GILD's interest in technologies that have long development timelines might dovetail well with the lower dose technologies that IONS has. (This would return GILD to its technological roots.) IONS has tried its best to match the safety and convenience parameters of its technologies to the rarity and neediness of the diseases it has targeted. It may again be that it has been overly optimistic, and that Big Pharma may come to believe that sooner rather than later. In other words, what might have to happen is that a powerhouse such as GILD with strong RNA chemistry capabilities might have to develop "2.5" generation or LICA generation technologies for the same diseases that IONS has been targeting with its current generation technology that requires 300 mg doses. The newer technologies require far less drug and thus may be safer. So perhaps we would see, if possible, a next-gen drug for the TTR amyloid diseases and others such as for Huntington's disease and angioedema.

In the hands of GILD or one of its biotech/biopharma peers, then an enhanced effort to optimize the technology could be done without the stringencies that a junior biotech labors under. But I just have no clarity as to how IONS is going to move its technology forward rapidly now, given the timelines and costs involved. It certainly might work out OK or even well, but why is the stock worth $2.7 B instead of, say, $1.5 B or less? Any new money thinking about entering this name is going to ask that sort of question.

The major action I'm going to take from this mess is to continue my overall caution and underweighting in risk assets such as the stock market. When valuations are high, then downside risks are elevated. So I continue in a "risk off" mode. I'll continue for now with a very small fraction of my former IONS position and follow along.

Summary

IONS has been blindsided by a serious, possibly fatal side effect in two products and therefore perhaps in its core technology platform - a big worry. Whether it can mitigate this is uncertain. Whether this side effect will apply to its much lower dose next generation technologies is also uncertain. It is possible in my view that its only important late stage program now is nusinersen, partnered with BIIB, for which IONS only receives modest percentage royalties on sales. Thus I question whether it's time for what has amounted to exciting science and clinical experiments to be subsumed in the larger, more sophisticated environment of a major biotech/biopharma company, such as GILD - if it or any of its peers are even interested.

Disclosure: I am/we are long IONS, GILD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Not investment advice. I am not an investment adviser.

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