Idorsia Ltd (OTCPK:IDRSF) has a very interesting setup where the fundamental value continues to increase. The company now has two products on the market, with one being likely a blockbuster candidate, and a third product licensed to Johnson & Johnson (NYSE:JNJ) and commercialized in the U.S. and Europe. Its pipeline is filled with 11 compounds, among them at least another blockbuster candidate and many very promising compounds in different stages of development.
The company is owned by the majority and led by a highly skilled and competent couple, who sold their former company, Actelion Pharmaceuticals Ltd, to Johnson & Johnson in a deal valued at $30B. With over $900M in cash on its balance sheet, sales starting in the most important global markets, and strong and favorable partnership and licensing agreements, the company is expected to break even in 2025.
Despite this, the stock has been under constant pressure for months, with every tentative breakout systematically sold off. With a capitalization of only $2.72B, an estimated valuation with 78% upside potential, and a suspiciously highly extended short interest ratio, the stock is likely in a setup where a short squeeze could get triggered, considering the relatively low volume and the increased likelihood of the company’s success.
Let us have a quick look at what happened since my last article Idorsia: Positive Catalyst Coming Very Soon.
Conclusive studies results on Clazosentan were published in the Journal of Neurosurgery on April 1, 2022. They show that clazosentan significantly reduced the combined incidence of vasospasm-related morbidity and all-cause mortality post-aneurysmal subarachnoid hemorrhage (aSAH), with no unexpected safety findings. The compound was announced on April 20, to be available in Japan under the name of PIVLAZ, after the Japanese PMDA approved the drug in January 2022.
QUVIVIQ (Daridorexant) became Idorsia’s first commercial product in the U.S. on May 2, 2022, and shortly after, on May 3, was granted marketing authorization by the European Commission (EC), and became Europe’s first dual orexin receptor antagonist, while the European market didn’t see any innovation in insomnia drug treatments since more than 30 years. As declared by Idorsia, chronic insomnia disorder is one of the most prevalent sleep disorders in Europe, affecting between 6%-12% of the adult population, and impacting both physical and mental health.
Another very important milestone was set by the announcement of positive Phase 3 study results with Aprocitentan, which demonstrated statistically significant and clinically meaningful antihypertensive efficiency in the treatment of patients affected by resistant hypertension. According to a recent study, approximately 1.13B people are living with hypertension worldwide, a number that almost doubled from 594M people in 1975. It is estimated that by 2025, there could be approximately 10 million patients in the U.S. who could be classified as having resistant hypertension and a similar number of patients in Europe. Idorsia will now discuss the results with the relevant health authorities and successively intends to file the new drug application with the FDA by the end of 2022.
On the negative side, Idorsia reported disappointing Phase 2a study results for its compound ACT-539313, a selective orexin-1 receptor antagonist, which did not show an improvement over placebo in reducing the number of binge eating days per week in adult patients with moderate to severe binge eating disorder. The primary endpoint, determined as the change from baseline to Week 12 in the number of binge eating days per week, defined as a day with at least one confirmed binge eating episode, was not met.
On April 26, 2022, Idorsia announced the results for the first quarter that ended on March 31. The revenue stream originated from milestones payments recognized in connection with collaboration agreements, in particular, CHF 3M for Aprocitentan from Janssen Biotech, a subsidiary of Johnson & Johnson, CHF 1M for Daridorexant from Mochida Pharmaceutical Co., Ltd. (TYO:4534), and CHF 1M Neurocrine Biosciences (NASDAQ:NBIX) for the development and commercialization of ACT-709478.
As the company is now a growing commercial biopharmaceutical company, its operating cost will inevitably surge over the coming years. The management forecasted non-GAAP operating expenses of around CHF 920 million for 2022, which undeniably raises the question of how the company will manage to finance its operations until reaching the expected break-even in 2025.
Since its liquidity at the end of Q1 2022 was reported at CHF 940M. Without any additional financing activity and considering the company forecasted revenue of CHF 145M for this year, the remaining liquidity at the end of 2022 would reach approximately CHF 353M. The management declared favoring royalties monetization and out-licensing deals to raise cash, instead of increasing the liquidity through equity or convertible debt, especially when considering the actual low stock price.
Idorsia has a very interesting future ahead and besides Daridorexant and Clazosentan, which are now available in some important markets and will begin to generate revenue, the company has other very promising candidates. Back in November 2021, I found an article published in the Journal of Clinical Medicine, which described a study conducted with Selatogrel, and a possible novel advantage of this compound, the dissolution of pre-formed thrombi without the disintegration of hemostatic seals, suggesting a bipartite benefit of the early application of Selatogrel in patients with acute thrombosis. This study was in my opinion, not enough considered by the public to assess a possible further advantage of the product, and could be a future positive catalyst if the findings are effectively relevant and communicated openly by the company. Selatogrel has significant potential, which I estimated at approximately $400M yearly revenue in my first article Idorsia: Heading Towards Profitability Faster Than Expected, although this estimation is based on a relatively low unitary market price assumption.
I consider Aprocitentan to be another pillar for Idorsia’s future revenue stream. The positive data published recently is very promising and gives the further conviction that the product can significantly contribute to Idorsia’s cash flow in the coming years.
Ponesimod is also a promising candidate, which is now commercialized by Janssen Biotech. This is despite entering an already crowded market with strong competitors such as Novartis (NYSE:NVS), Bristol Myers Squibb (NYSE:BMY), Sanofi (NASDAQ:SNY) and Biogen (NASDAQ:BIIB). Ponvory (Ponesimod) has demonstrated to have some advantages over the alternatives, especially when compared in a head-to-head study with Sanofi’s blockbuster Aubagio, in which a daily dose of Ponvory cut annual relapses by 30.5% over Aubagio. The study also shows that after two years, 71% of patients who took Ponvory had no confirmed relapses, compared with 61% of those who got Aubagio. Ponvory also showed it was better in terms of visible disease activity as shown on MRI, and reported a benefit in preventing disability from worsening.
Following the recent events and the continuous developments, I updated both estimation sets and the valuation models.
The street consensus was slightly lowered for the years between 2022-2025, while the analysts increased their revenue forecasts for the year 2026 by approximately 11%. I adjusted slightly my estimation for this year for the sales of PIVLAZ, and updated the estimated revenue stream from QUVIVIQ, which I now see standing approximately 18.50% higher over the projected years. Other than in the U.S., QUVIVIQ has real potential in Europe and is today, objectively, the best and safest product available in this market. Moreover, the product will likely soon be authorized by the Swiss and Canadian health authorities, which will add further revenue streams.
Although the adjustments are converging, my cumulative revenue estimation for the coming 5 years is still $846M lower than the average value estimated by the analysts.
Bearing in mind the complexity of Idorsia’s pipeline with 11 compounds in different development stages as well as its partnership agreements, I chose to reduce this complexity and provide a Discounted Cash Flow (DCF) valuation based on very basic assumptions and avoid further distortions, considering the already low visibility.
I value different scenarios based on the estimated likelihood and the discount rate commonly applied in biotechnology or pharmaceutical DCF valuations for companies with mid-stage pipelines. I also assume zero perpetual growth rate as this is in my opinion more reasonable for Idorsia at this stage.
I proceed by substituting my forecasted estimations with the average market estimations in my valuation model by maintaining the same model assumptions.
Based on the likelihood of the different scenarios, the valuation based on my estimations is still more conservative than the valuation based on the forecasted street consensus, however, both models underscore how significantly Idorsia’s stock price is undervalued, with a price target of CHF 26.54 or $27.42 for my estimation set, and of CHF 34.68 or $35.82 when using the data of the street consensus.
Since the main stock exchange for Idorsia is the SIX Swiss Exchange (SIX:IDIA), I consider this market for analyzing its price-action. The stock touched a new 52-weeks low at CHF 13.08, while sharply recovering soon after just a few days before the announcement concerning Aprocitentan, on May 23. Same behavior but different story, a few days before the announcement on May 3, concerning the authorization of QUVIVIQ in Europe, and no surprise the same pattern the weeks before the decision by the FDA, as well as a sharp recovery the days before the Japanese PMDA approval of PIVLAZ back in January 2022.
Every time after a positive announcement, the stock was successively sold off on heavy volume. Some may call it a coincidence, some “sell on good news,” and I consider it perfect market timing from the backstage. When analyzing the single daily transactions, one could observe the clear intention of those actors to avoid the stock breaking out on every single good news. The other way around, the stock was also heavily sold off a few days before the negative announcement concerning the Phase 2a study results for ACT-539313.
The ongoing broad sell-off on the stock markets is adding pressure on higher-risk stocks in the biotechnology industry, but in my opinion, there is more behind this constant pressure, which seems technically well-orchestrated and seems to systematically anticipate every important event. I analyzed the short interest in the stock listed in the U.S., since the SIX is not disclosing short positions, and could confirm my assumption that short-selling significantly increased since October 2021.
The actual short interest ratio in the U.S. stands at an unusually high level with over 1,400 days to cover. Since short-selling is mostly done where the volume is higher, it can be supposed that the short ratio for the stock listed on the SIX has also significantly increased in the past months.
Every outbreak over the EMA 200 has been consequently repelled and the stock reached new lows on increasing volume. Idorsia is now underperforming the NASDAQ Biotechnology Index (NBI), despite the recent flow of good news, which cleared many risks and should instead support the stock price, logically. Important levels other than the support at CHF 13.08 can be found at CHF 14.91, which is where the stock closed in the last session, and the next resistance level stands at CHF 17.02.
Fundamentally, there is no doubt in my opinion that at this price level Idorsia is a buy. While technically it looks like there could be a pivot point, the stock looks widely oversold, and the price could at least reach out the next resistance level or even retrace until the EMA 100 or EMA 200, which are both trailing resistances since the beginning of the downtrend. Under such conditions, a short squeeze could likely happen and project the stock even much higher.
I have followed Idorsia since its incorporation in 2017, and during my years on the stock market, I rarely saw a biotechnology company with such a general strong setup, substantial pipeline, robust moat, and a great team. Since I am not a buy-and-hold investor and my decisions to trade stock are not purely based on the fundamentals of the company, I observe other elements as well, which are now ringing a loud bell and I consider to be an opportunity.
That said, the global sell-off in the financial markets is likely not yet over, and as a company with intrinsic risks, Idorsia bears the risk to perform poorly as any other company in a risk-averse market environment. I see the company as considerably undervalued in fundamental terms, and my estimations are even significantly more conservative than compared to the street consensus.
With major risks now off the table, a steep short interest ratio, and possibly more positive catalysts coming during this year, the stock could be considered by both long-term investors as well as short-term traders, with my updated price target standing at CHF 26.54 or $27.42.
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Disclosure: I/we have a beneficial long position in the shares of IDIA either through stock ownership, options, or other derivatives. 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: All of my articles are a matter of opinion and must be treated as such. All opinions and estimates reflect my best judgment on selected aspects of a potential investment in securities of the mentioned companies, as of the date of publication. Any opinions or estimates are subject to change without notice. I am not acting in an investment adviser capacity, and this article is not financial advice. I invite every investor to do their research and due diligence before making any investment decisions. I take no responsibility for your investment decisions but wish you great success.