Is This The Biggest Threat to Isis Pharmaceuticals Stock?

With biotech stocks continuing to push higher again this year, the Street is buzzing with the possibility that a bubble is forming within the industry. And with top companies like Isis Pharmaceuticals trading at over 40 times 12-month, trailing revenues, there is a fair bit of evidence that valuations are indeed getting stretched, perhaps to the breaking point.

Investors in this antisense drugmaker, for instance, are clearly placing a heavy premium on the company's clinical pipeline, especially its rare disease drug candidates such as the severely high triglyceride therapy ISIS-APOCIIIRx.

Specifically, Isis' flagship drug Kynamro forhomozygous FH, or HoFH,has had an excruciatingly slow commercial uptake, with analysts now suggesting that peak sales could top out at a mere $300 million and the drug's marketing partner, Sanofi, will gobble up most of this revenue, per its agreement with Isis. In short, Kynamro will probably never be much of a revenue driver for Isis, making its pipeline the main focus of investors' attention going forward.


But is the market being too optimistic about Isis' clinical pipeline? While it's true that Isis has one of the broadest and deepest clinical pipelines in the industry, the company's main focus in rare diseases -- especially in the area of genetically-based severe lipid disorders -- is attracting a host of would-be competitors. So let's consider if looming competition is indeed the biggest threat to Isis' lofty valuation.

Stand-alone lipid franchisesubsidiaryUnlike most of its more advanced clinical candidates, Isis appears content on retaining the commercial rights to some of its highly prized cholesterol drugs, especially ISIS-APOCIIIRx. To do so, the relatively tiny drugmaker launched wholly owned subsidiaryAkcea Therapeutics as a means to complete their clinical testing, regulatory submissions, and hopefully their ultimate commercialization.

As Isis stated at a recent conference, Akcea's lipid franchise represents a multibillion dollar opportunity for investors. And, if true, that would more than validate the company's staggering 100% plus rise in share price over the last few months:

Competition to treat rare lipid disordersA scientific conference held last year on trends in the management of hypertriglyceridemia, however, highlighted seven different experimental drugs -- including ISIS-APOCIIIRx -- presently in development for rare indications such as familial chylomicromenia syndrome (FCS). And according to a report from Research and Markets, there were a total of 19 drugs in development for rare cholesterol disorders late last year, meaning that this could quickly become a crowded playing field.

In Isis' various quarterly and annual reports, the company names two specific compounds as potential rivals to ISIS-APOCIIIRx -- those being Novartis AG's late-stage candidatepradigastat sodiumand Catabasis Pharmaceuticals' midstage drug CAT-2003.

Given that pradigastat successfully completed a late-stage trial as a potential front-line treatment for FCS last year, the pharma giant plans on filing regulatory applications sometime in 2015. Unfortunately for Isis investors, ISIS-APOCIIIRx is probably at least a year away from a regulatory filing for this orphan indication.

Should investors be concerned?Kynamro hasn't lived up to expectations because of competing drugs like Aegerion Pharmaceuticals' Juxtapid, as well as the fact that identifying patients with ultra rare diseases isn't always easy. And the news that a major pharma player could enter the market soon for ISIS-APOCIIIRx's most advanced indication suggests that a similar scenario might play out in the years to come.

All told, this is a major threat to Isis' sky high valuation worth keeping tabs on moving forward, especially since ISIS-APOCIIIRx is projected to be a key revenue driver for the company down the road.

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George Budwell owns shares of Isis Pharmaceuticals. The Motley Fool recommends Isis Pharmaceuticals. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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