Why the Ionis Spinoff Will Be a Win for Long-Term Investors

By Jim Crumly Markets Fool.com

Last month's announcement by Ionis Pharmaceuticals (NASDAQ: IONS) that the company was spinning off its Akcea subsidiary had some investors scratching their heads. Why was the company seemingly giving up so much for so little gain? It turns out that management has its focus squarely on the future, and long-term investors should be happy about the move.

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What happened

As of today, we can understand the structure of the deal, but not the details, since key numbers haven't been made public yet. What we do know is that Akcea, a wholly owned subsidiary set up to commercialize Ionis' blood lipid drugs, will be spun off as a separate, publicly traded company.

It will raise about $150 million, $50 million of which will come from a private placement with partner Novartis (NYSE; NVS), and the rest will come from the initial public offering. Ionis will retain some ownership in the new company, and wording in the S-1 indicates that its share may be over 50% when all is said and done.

Image source: Ionis Pharmaceuticals.

Akcea will have access to Ionis technology and resources (for a price) and will wholly own four drugs from the Ionis pipeline: volanesorsen, a drug for rare and life-threatening diseasesthat cause extremely high levels of triglycerides in the blood, and three other drugs that also address abnormally high lipid levels. Volanesorsen is nearing commercialization and will be submitted soon to regulatory agencies, with a launch expected in 2018. The other three drugs, two of which are partnered with Novartis, are in phase 2 testing, so they're probably at least two years away from commercialization.

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Akcea: A late-stage biopharma company with a specialized sales force

The new company will be focused on bringing to market drugs for lipid disorders. The initial indications for volanesorsen are for rare diseases for which no treatment currently exists, so Ionis' commercialization strategy has been to set up a field organization specifically to call on lipid specialists. The vision is that the team will have case managers to connect with both patients and specialists, providingreimbursement assistance, partnerships with specialty pharmacies, injection training, routine platelet monitoring, and dietary counseling.

It's difficult to understand the need for a separate company to commercialize Ionis' lipid drugs without appreciating the implications of this high-touch go-to-market strategy. In the last Ionis conference call, the Akcea CEO said that the field team necessary to commercialize volanesorsen will require 75 to 100 people. On the high end of that estimate, the Akcea sales force would have amounted to about one quarter of Ionis' total employees --all for only four out of 39 drugs in the pipeline.

Structuring Akcea as a separate, public company also opens up the possibility of raising additional capital with less dilution to Ionis shareholders, as well as the freedom to acquire drugs from other sources.

The role of Novartis

The ambition for these lipid drugs is that they would not be limited to treating rare diseases, but that they would be used for the much broader indication of cardiovascular patients who are at risk due to elevated levels of dangerous forms of lipoproteins. These indications would not be a fit for Akcea's specialized sales force, so that's where Novartis comes in.

Ionis and Akcea announced a deal in January in which Novartis will pay for the final development of the two drugs in the pipeline, as well as their commercialization. The purpose is to be able to advance to phase 3 testing for cardiovascular outcomes more quickly than Ionis/Akcea could have alone. And given Novartis' strategic focus on cardiovascular drugs, Ionis views its global commercialization resources as essential for addressing that huge market and as a complement to Akcea's specialized sales force.

The deal has a potential value of over $1.6 billion plus royalties "in the low 20% range." Certainly, Ionis is giving up significant economic value of these two drugs to Novartis and future Akcea shareholders, but it's potentially getting faster access to the biggest market it has ever reached before, all the while maintaining a very lean cost structure. The deal with Akcea is that Ionis will receive 50% of all license fees, milestone payments, and royalties received from Novartis.

Value for the patient investor

The spinoff involves Ionis sharing the wealth from its blood lipid drugs, but that's very consistent with the business model Ionis has built for years. As with other biotechs, the value of Ionis' business lies in three elements: the income from the currently shipping portfolio, the value of the pipeline of drugs in development, and the ability of the company to discover new drugs to feed growth of the pipeline.

This latter aspect can be underappreciated by investors focused on the short term, or can be completely missing in some companies without a significant drug-discovery capability. In the case of Ionis, the platform for developing new drug candidates is the main point.

The RNA antisense technology that Ionis has pioneered is highly efficient as a drug-discovery platform. It's much less costly and time-consuming in the early stages of discovery and development as compared with small molecule drugs or monoclonal antibodies.

Ionis has already built a pipeline of 39 drugs and expects to add four to six new drugs every year. The approach can target a wide range of disease-causing proteins, and the company already has in its pipeline drugs aimed at cancer, clotting disorders, viral disease, diabetes, NASH, ocular disease, neurodegenerative disease, cystic fibrosis, beta thalassemia, and GI autoimmune disease.

Further development of the antisense platform is the most potentially lucrative investment Ionis can make. Not only is the company advancing the drugs in its pipeline and finding new ones, it's also making improvements to drug chemistry, which yields better potency and specificity that can be applied across all its RNA antisense drugs. The end result is a lot of potential future royalty streams from a relatively frugal investment of research and development dollars -- only $344 million last year.

Ionis' RNA antisense platform is not totally proven out yet, and doubts about safety and efficacy have held back the stock price. But the recent launch of Spinraza and the trial success of volanesorsen are big steps in validating the approach.

Investors should regard the Akcea spinoff as a continuation of Ionis' strategy of maintaining a lean cost structure, building its pipeline, and partnering for expensive late-stage development and commercialization. In the long term, those royalty streams should fall right to the bottom line and reward investors nicely.

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Jim Crumly owns shares of Ionis Pharmaceuticals. The Motley Fool owns shares of and recommends Ionis Pharmaceuticals. The Motley Fool has a disclosure policy.