Update: Isis Pharmaceuticals - Flying High

We feel an update on ISIS is appropriate given the significant run-up in the stock and convertible bond prices since the new convertible deal was announced on November 10, 2014.  The stock is up 43% since that date and the 1% convertible notes due 2021 are trading at 120 versus $68. 

The stock was on a very nice upward trajectory before this week driven by the upward movement in the market and good Phase 2 results for ISIS-FXI Rx, an anticoagulant for the treatment of thrombosis in patients undergoing total knee replacement surgery.  The Phase 2 results were announced on December 7th and the stock was up 8% the following day. 

On January 5th management announced the company had entered into a global collaboration agreement with Janssen Biotech, a unit of J&J, to develop drugs to treat autoimmune disorders of the gastrointestinal (GI) tract.  ISIS received a $35 million upfront payment and can receive up to an additional $800 million of milestone payments and license fees.  The company would also receive tiered royalties on any product that is successfully commercialized.  The stock was up 8% that day on the news. 

This latest announcement is a positive contribution to the company in three ways: ISIS has another large (very large) pharmaceutical partner; the company is expanding into a new treatment area with the addition of GI tract drugs; and cash is bolstered further with the potential for large additional payments in the future.

The HOCS slash line on the 1% convertible notes due 2021 at issuance was 68 overall /78 growth /49 safety.  We wrote a more in-depth piece on ISIS in the December 8th edition of Hybrid Vigor, because it was a consistent member of the HOCS 20 and the slash line wasn't much different.  Since then, with the significant increase in the stock and convertible bond prices, the convertible bond has fallen off of the HOCS 20.  Today the slash line is 60 / 80 / 19, with the bond trading at 120 versus 68 on the common.  This is still a pretty good score overall, but while growth has picked up a couple points on the positive news, the safety score has retreated significantly on the higher bond price.  If you’re wondering about the bond making the Ugly 20, it’s still a pretty good ways away because of the huge volatility in the underlying shares. In other words, this name deserves the premium it carries, and perhaps even more.