Questioning Ionis Pharmaceuticals' Spinoff Announcement

By Motley Fool Staff Markets Fool.com

Ionis Pharmaceuticals (NASDAQ: IONS) is spinning off some of its lipid-disorder drugs. The new company, Akcea, will raise $100 million from its IPO, and collaboration partner Novartis (NYSE: NVS) will acquire an additional $50 million in shares concurrently. While the influx of funding will help fuel development of these drugs, it reduces Ionis Pharmaceuticals' ability to profit from them. Does this decision make sense?

Continue Reading Below

In this video clip from the Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and Todd Campbell discuss the decision to spin off Akcea and what might be in store for Akcea once it's a stand-alone company.

A full transcript follows the video.

10 stocks we like better than Ionis Pharmaceuticals
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Ionis Pharmaceuticals wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

Continue Reading Below

*Stock Advisor returns as of February 6, 2017

This video was recorded on March 29, 2017.

Kristine Harjes: So, onto Ionis. They recently announced earlier this week that they are spinning off their lipid disorder subsidiary.

Todd Campbell: Yeah, Akcea is going to be the name of the new company. It's going to IPO. So, individual investors will be able to go out and buy stocks specifically in this company that's going to be working on drugs that can, again, improve cardiovascular outcomes. They're focusing on rare lipid disorders, so they have a couple of interesting compounds. This is a weird decision, in my view. If you think about it, it's not like Ionis needs the money by IPO-ing this company to be able to facilitate commercialization of their drugs or research on these drugs. They're spinning it out, and lumping all of these lipid disorder drugs together. I'm not entirely sure why they're doing this, to tell you the honest truth.

Harjes: Especially because they will keep some stake in Akcea. This is so frustrating to me. In the S-1, which is the IPO documentation, there are literal blank spots in it when it comes to some of the specifics and the numbers involved in this IPO. Such as: What sort of stake Ionis is going to keep in the new spin-off.

Campbell: [laughs] Right. It says somewhere in there that -- I think, the language, if you read it, it looks like they're going to split whatever they collect in money, both in milestones from Novartis, because there's a deal that goes alongside that Akcea is going to end up having a collaboration deal with Novartison a couple of these drugs, and I think they're going to end up splitting a lot of the money with Ionis. Ionis is giving up 50%, let's say, of its exposure to these drugs to launch this separate entity, and they're collecting $100 million in IPO raise? It's a weird situation to me, on why they're doing it this way, rather than just owning the drugs 100% outright and doing the collaboration themselves with Novartis.

Harjes: Yeah. Something that Ionis is very good at is pursuing collaborations. Novartis is, already, fully partnered here. Now that they're doing the spin off, Novartis has agreed to a $50 million funding commitment of that $100 million IPO.

Campbell: Actually, it's going to be concurrent, so it's going to need additional, you can get up to $150 [million] gross of fees and stuff that they'll have to pay out to the brokers to get this done. But, that's not going to be enough money. By their own account, in the S-1, it says, "Even taking into consideration the IPO and the money from Novartis, we're still going to need to raise money to commercialize our lead drug," which is volanesorsen -- I can't say this. This is alphabet soup. Volanesorsen is their lead candidate. It just put up good -- we'll call it good -- phase 3 numbers for a rare condition that affects up to 5,000 people globally called FCS -- again, alphabet soup, I'll just break out the abbreviation. I think investors just need to know that it's a relatively small indication without a lot of different treatment options, and of course, that could obviously begin generating out revenue for this company as soon as next year. But it's not a slam dunk that's it's going to pass through the FDA, because there were some safety concerns related to platelet counts. Maybe that's why they're spinning this out, they want to insulate themselves against this drug running into a stumble.

Harjes: Yeah, I totally agree. Lots of unanswered questions here. I know personally, I will definitely be looking in Ionis' next conference call to see some of the details behind this. It drives me nuts to see those literal blank spaces in the S-1. So, it will be interesting to watch both that and more data coming out of the four different trials that this IPO money will fund.

Campbell: Yeah, and the other thing that investors should know is, let's assume, best-case scenario, that volanesorsen gets the FDA nod and hits the market for this small patient population of 3,000 to 5,000 people globally. Good news. They go out and start marketing this drug. A, there's no guarantee that this drug, depending on how they priced it, is going to get prescribed and become a commercial hit of any magnitude. Also, B, you have to recognize that one of the drugs that's partnered up with Novartis actually has the same mechanism action, same target and everything, it's just a little bit more advanced. If that drug is successful, why would doctors still end up prescribing volanersorsen instead of this other drug down the road?

Harjes: Exactly. And you do see, frequently, companies cannibalize their own drugs by making even better versions. But when the new version is a partnered drug versus the older version, which was wholly owned, that's not good financially.

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ionis Pharmaceuticals. The Motley Fool has a disclosure policy.