Ionis Looks Attractive After A 25% Correction

Ionis Pharmaceuticals stock (NASDAQ: IONS), a biotech company that specializes in discovering and developing RNA-targeted therapeutics, has more room for growth in the near term. IONS stock is up just 12% off the recent bottom significantly underperforming the S&P which moved 64% since its March lows, with the resumption of economic activities as lockdowns are gradually lifted. This can be attributed to the company’s lower than expected revenue growth in Q2 and Q3, resulting in a stock price decline from levels of $63 seen in mid-July to $47 currently. We believe the selling in the stock is overdone, and it now appears attractive.

IONS stock is also down 7% from levels seen in early 2018, over two years ago. The 7% drop of the last 2 years can purely be attributed to a decline in P/S multiple, while the company’s revenue per share (RPS) actually grew 95% from $4.15 in 2017 to $8.09 in 2019, led by revenue growth of 118% from $0.5 billion to $1.1 billion over the same period, partly offset by a 12% growth in total shares outstanding, due to share issuances. Now why would the P/S multiple decline if the RPS saw solid growth? The reason is the expected decline in RPS in 2020, as we discuss in the section below. We believe the stock is likely to see upside after the recent correction and despite the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove -7% Change In Ionis Pharmaceuticals Stock between 2017 and now?‘, has the underlying numbers.

Ionis’ P/S multiple contracted from 12x in 2017 to 7x in 2019. While the company’s P/S is 6x now (based on trailing RPS), there is a potential upside given the expected growth in RPS over the coming years, as well as comparing the P/S multiple to that over the recent years, P/S of around 12x in 2017 and 2018.

So what’s the likely trigger and timing for upside?

Given the challenging current environment and a tough comparison from the prior year, which benefited from Novartis’ pelacarsen licensing among other factors, Ionis reported a sales decline of 30% in the first nine months of 2020. Its bottom line plunged from a profit of $0.81 per share to a loss of $0.80 per share over the same period.

The company is seeing market share gains for its drugs – Tegsedi and Waylivra – which has resulted in a 7% growth in the company’s commercial revenues during the nine month period ending September 2020. The overall decline in total revenues was due to lower R&D revenues, which plunged 55% to $170 million. R&D revenues fluctuate based on events and milestones. For instance, 2019 sales included a  $150 million licensing fee from Novartis for pelacarsen, a cardiovascular drug. The overall sales growth in Q2 and Q3 were below the street estimates and it resulted in a 25% correction in the stock price. After the recent correction, IONS stock looks attractive going by the valuation. At levels of around $46, IONS stock is trading at 9x its 2020 expected RPS of $5.10. This compares with P/S of over 12x seen in 2017 and 2018, making IONS stock currently appear attractive for upside potential.

Looking at the broader economy, the actual recovery and its timing hinge on the containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.

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