IONIS PHARMACEUTICALS: THE LITTLE BIG PHARMA?

What, exactly, separates a biotech company from a “Big Pharma” company? What are the attributes that make each kind of company attractive to certain kinds of investors? Most importantly, can a company only fit into one of these two categories? Can an investor capture the best of both worlds? 

By The Sick Economist 

Corporate giants like Pfizer and Johnson&Johnson are the stuff of legend. They have each existed and thrived for well more than a century, churning out thousands of drugs that have altered the very fabric of American culture (Eli Lilly’s insulin breakthroughs extended life for millions of Americans, and Pfizer’s Viagra may well have made those longer lives more pleasurable). 

Investments in these titans of commerce have also changed the financial lives of millions of Americans. $10,000 invested in Johnson&Johnson in 1995 would equal $161,000 today. 

But we are not in 1995. The criticism that a lot of these behemoths face is that they have grown so large, that perhaps their best days of growth are behind them. With dozens of medicines on the market, billions and billions in revenue, and a very high Wall Street profile, some investors might question whether the next thirty years will produce the same kind of growth that the last thirty years produced. 

But what if I told you that it is possible to identify TOMORROW’s Eli Lilly, TODAY? 

What if you could buy the equivalent of today’s Eli Lilly back around 1900 when it was just getting started? What might be your long term growth prospects then? 

Ionis pharmaceuticals just might be that opportunity. Although today the company fits firmly into the category of “biotech,” there are indications that the company could evolve into a stalwart of the pharmaceutical market at an advanced pace. 

Before we label Ionis as “tomorow’s Big Pharma” let’s examine exactly what determines which label a company wears. What makes a company either a “biotech” or a “Big Pharma” company, and what are the pros and cons of each? 

BIOTECH, DEFINED 

Both Big Pharma and Biotech companies deal in science based products and services that aim to improve human health. But that is typically where the similarities end. 

A biotech is typically small. There are hundreds of publicly traded biotech companies with a market capitalization below $1 billion dollars. While that certainly may not seem small to your average investor, in the corporate world, that kind of company would be considered a minnow. In fact, any company with a market capitalization less than $20 billion dollars could actually be considered a biotech company, rather than an established pharmaceutical firm. For the sake of comparison, Eli Lilly, the biggest of the big, is currently valued at an eye popping $700 billion dollars. 

I used the phrase “could be considered” because the market capitalization of a company is only one consideration. There is another critical distinction between Big Pharma and Biotech. Big Pharma companies have very steady revenue, and can be relied upon to churn out profits, positive cash flow, and dividends, year after year, decade after decade. Of course, nothing is fool proof, and there are examples of large, established pharmaceutical firms floundering financially, but in those cases, management was promptly shown the door. Investors expect that names like Pfizer, Eli Lilly, and J&J will always be profitable with a high degree of cash flow. 

Investors in biotech often expect the opposite. Many of the companies with sub $1 billion valuations are so new, they don’t even have revenue, let alone profit. And many of the “more established” biotech companies with higher market valuations do have revenue from viable active products, but the company still may not yet be profitable. 

The difference comes down to different cultures and different management decisions. Biotech companies are expected to be cradles of innovation, and new medicines created with new science takes lots of capital and many years to gestate. Because this new science is so expensive in money and time, many biotechs only have one or two new agents; either these agents work, and the value of the business sky rockets, or they fail, and formerly valuable stock can be worth nothing. Plainly stated, biotech firms are in the risky business of innovation, and its winner take all. 

Big Pharma firms are much more cautious. They typically have dozens of different products across different stages of development with another dozen products actively being sold on the market. This diversification makes them much safer. Rather than betting everying on innovation, Big Pharma companies typically return some portion of profits to sharehiolders in the form of reliable dividends and stock buybacks. As we stated above, this approach is a tried and true method of producing impressive long term financial returns for shareholders….but the whole process is like watching paint dry. Johnson and Johnson may have generated a 1,600% return for investors over thirty years, but it was a long, slow, process. Biotech moves much faster, and a company can double in price overnight, or, (often) the exact opposite.

Enter, Ionis: The Little Big Pharma 

In this context, Ionis pharmaceuticals really stands out as a small biotech with big ambitions. The company is currently valued around $6 billion dollars, which puts it firmly in the “middle of the pack,” in the world of biotech. 

Additionally, the company boasts robust revenue from several products that are already actively sold on the commercial market. (Spinraza is the most well known). What the company DOES NOT feature is profit. Despite almost ¾ of a billion dollars in revenue, the business posted an operating loss of $270 million. 

$700 million in sales, somehow producing a quarter of a billion dollars in losses? Well, that certainly would not sound appealing to your average Big Pharma investor. In fact, it might not sound appealing to any investor. But the appeal of Ionis comes down to two words: “Pipeline” and “Cash.” 

You may remember, that one of the defining characteristics of a biotech company, as highlighted above, is an over reliance on just one or two potential products. Ionis is the dead opposite. The company is currently hemorrhaging money because management is going “pedal to the metal,” creating an impressive pipeline of inventive new treatments. 

Leveraging breakthroughs in RNA based medicine the company has created a monster pipeline with no less than SEVENTEEN medicines in either phase II or phase III testing. These medicines fall into a wide array of diseases, addressing crippling, nightmarish diseases like ALS, Alzheimer’s and rare diseases. 

The latest good news to come out of Ionis is a recent phase III triumph for its investigational drug Olezarsen. The trial was conducted in patients afflicted with familial chylomicronemia syndrome, a rare but deadly disease that creates abnormal triglyceride levels. With this data in hand, its very likely that the drug with be approved to treat this rare disease, but a much larger market beckons for millions of Americans who struggle to control their triglycerides, which can be critical for heart health. If Ionis were able to broaden the approval over time to included general treatment for high triglycerides, the company’s valuation could easily double or triple. 

In short, Ionis is currently losing money because it is investing hundreds of millions of dollars to advance its robust pipeline. Management is not worried about making money today; rather they are investing to make much more money tomorrow. If they are successful in advancing just half of their 17 advanced stage drugs, just a few years from now they will have a very diverse and profitable world of revenue streams, just like the far larger Eli Lilly or Pfizer. Effectively, they will be a small Big Pharma. 

Even with though management’s master plan is clear, it still takes a strong stomach to shake off losing more than $270,000,000 in a year. After all, one of the other hallmarks of a Big Pharma company is financial stability. Lilly or JNJ may have a bad year, or even couple of bad years, but investors sleep soundly knowing that they have plenty of cash and credit to back them up. 

Amazingly, so does Ionis. They currently have more than $2 billion of cash in the bank. So, Ionis can afford to just keep building out their pipeline without worrying about keeping the lights on today. It will be many years before the firm has a hard time paying the bills. Ionis is an opportunity for patient investors to buy into a company churning out scientific discovery, without going through the heartburn typical of this field. 

Evolution at Warp Speed

In the biotech world, one of two things typically happen to companies as their new drug pipelines move from theoretical to commercially viable. The most common, is that the owners sell the company to a Big Pharma; the patents and technology remain, but the formerly hard charging, experimental entity ceases to exist. Or, less commonly, formerly “one trick ponies” slowly diversify into more and more new areas, and over a period of decades they evolve into new Big Pharmas. The original biotech legends such as Amgen and Gilead are good examples of this phenomenon. Vertex Pharmaceuticals may be going through this process, right now. 

Ionis may represent a rare opportunity to leapfrog this entire slow process in favor of radical transformation at warp speed. Right now, Ionis has just a few commercial products on the market. But with her latest phase III success, and much, much more in the advanced pipeline, Ionis could triple or quadruple revenue in just a few years. According to research published by the NYU Stern School of Business, companies in this sector often trade for 6.5 times revenue. So, if Ionis were able to triple it’s revenue by launching many new products, the company could easily leap in value to $13.5 billion, representing a share price gain of almost 150%. This would all be achieved by forging a durable, diverse pipeline with multiple growing revenue streams. 

Many investors long for the growth of the biotech sector, but they can’t stomach the “all or nothing” nature of the game. Ionis sports an advanced, widely diversified pipeline and a strong cash position. This could mean a whole lot of upside, with less risk. Finally, a bet that seems appealing to both Biotech and Big Pharma investors.