IDRSF - Idorsia: It's Time To Be Greedy (Technical Analysis)

Summary

• Idorsia’s stock is testing its most important overhead resistance and is trying to break out from its long-term downtrend, a rare situation that could lead to significant upside potential.
• The company has recently reported strong phase 3 results from one of the most important candidates in its substantial pipeline, while institutional investors seem to build up their interest.
• In this technical article, I show important price levels and metrics that could be considered by investors to gain an edge on the stock’s likely price action.
• The short interest on IDRSF has reached new record levels, while the management is expected to announce the company’s financing plan in the coming weeks.

An update on the most recent developments

Since my last article Idorsia: Someone Is Playing With Fire , Idorsia ( IDRSF ) reported its Q3 results with a mixed picture among lower than expected sales from its most important product QUVIVIQ, but strong revenue growth in Japan for PIVLAZ, resulting in overall CHF 21M revenue for the quarter. Regarding QUVIVIQ investors should consider that the company is still negotiating a broad commercial coverage in the US, and the reported sales do not reflect the demand or volume in prescriptions dispensed at this stage, as Idorsia is offering a comprehensive co-pay program, including a free 30-day prescription for new patients, as part of its launching campaign. The company is expecting two regulatory approvals for QUVIVIQ in the coming months, as it is under review with Swissmedic and Health Canada, while the drug will be launched in Germany and Italy in the coming weeks as the first and only dual orexin receptor antagonist available in Europe.

On November 10, 2022, Idorsia announced that approximately 9.1 million people among active and retired US military personnel and their families, will have improved access to QUVIVIQ through the healthcare program TRICARE. Sleep issues experienced by military personnel and their families are notoriously relatively higher when compared in general society.

The company could also attract a new prominent institutional investor, as Capital Group announced the participation of 3.09% on October 26, 2022.

Most importantly, Idorsia reported positive results from its PRECISION Phase 3 study on Aprocitentan. Both the primary key objective, demonstrating the blood pressure lowering effect of Aprocitentan in patients with confirmed resistant hypertension, as well as the secondary key endpoint, demonstrating that the effect of Aprocitentan on blood pressure is durable in those patients, could be confirmed, leading to the conclusion that Aprocitentan has significant and sustained efficacy after 4 weeks and over 48 weeks of treatment, while reporting mostly clinically manageable edema/fluid retention within the first week of treatment as an emergent adverse effect.

The question will now be, whether those achieved results are sufficient for Aprocitentant to become a blockbuster drug as expected, while also considering the adverse effects if the product ever reaches the market. In this article on Idorsia, I already considered a significantly lower target for the drug's yearly revenue compared to the street average. I, therefore, still feel comfortable with the assumptions in my recently adjusted valuation model, despite some analysts may adjust their estimations.

A quick look at the big picture

The healthcare sector in the US has been overall performing better than other groups in the economy in the past year, with some industries giving signs of strength in the past few weeks. The sector's recent recovery is led by pharmaceutical retailers, general drug manufacturers, and diagnostics and research companies, while biotechnology companies still struggle to recover more significantly, the industry sporadically reported some strength in the past 12 months.

Looking at more specific groups of the industry, the NASDAQ Biotechnology Index (NBI) which marked its All-Time-High ((ATH)) on August 9, 2021, has entered a significant downtrend during October 2021 and has since substantially corrected, losing about 40% until bottoming on June 17, 2022, where it immediately reverted and broke out over its most important moving averages on a daily and weekly basis, as well as from its downward trend channel. Despite this recent reversal, the industry reference is still relatively weak, when compared to the broader healthcare sector, tracked by the Health Care Select Sector SPDR ( XLV ), and after some consolidation, it is now facing crucial price levels that will most likely determine the trend in the coming weeks.

Where are we now?

Since the main stock exchange for Idorsia is the SIX Swiss Exchange under the ticker IDIA, I consider this market for analyzing its price action. Idorsia reached its ATH on January 24, 2020, and has since performed sideways on higher volatility, before decisively entering its long-term downtrend on a weekly scale at the end of July 2021. The stock has since been rejected each time it attempted to overcome its EMA50 on a weekly time frame or its EMA200 on a daily scale, in fact, as I wrote already in my former articles, IDRSF, and as reported many times also by IHS Markit now part of S&P Global ( SPGI ), not only the stock in the US but also the main listing at the Swiss Exchange SIX, are notoriously significantly sold short, which is not surprising, given the behavior of the stock's price action.

It's interesting to note how the stock declined until its most important Fibonacci extensions, measured from two distinct rallies that tried to keep the stock out of the mud, while its short-term moving averages have shown their persistence in being its trailing resistances during most of the decline. The stock reported significant relative weakness since June 2020, when compared to the industry's benchmark tracked by the NASDAQ Biotechnology Index (NBI), and looks now particularly extended, while the selling pressure measured by its weekly volume, has seemingly dropped in the past few weeks.

On its daily chart, IDIA is facing its long-term EMA200, a resistance that the stock hasn't consistently overcome since July 2020. On the other side, the stock seems to keep the level of the EMA50, an important support the stock has recently often tested on increasing buy-side volume, while the recent pullback underscored again some relative weakness. The stock finally broke out of its downward trend channel and is seemingly tracing along a strong new upward trendline. Overall this is the strongest setup noticed since the beginning of the decline, which will be very interesting to observe in the coming trading sessions, as this could lead the stock out of its long-term downtrend.

Since my last article, published on August 24, the short volume on IDRSF increased sharply by over 17%, standing at 9,127,600 shares sold short, for a total of $134.27M, at the end of October. This is quite a risky bet, considering that even if the traded volume has increased, the short interest ratio still stood at 3,969 days to cover, and the recent very positive developments, as well as the onboarding of new prominent institutional investors, while existing stockholder Lazard Asset Management reportedly increased its exposure by 241% at the end of September, are all elements that could lead to a substantial upward momentum and trigger a short squeeze.

What is coming next?

Despite at this stage, I would certainly be very careful, this stock may offer an interesting contrarian entry point, for more risk-tolerant investors. As we have seen on its weekly chart, the stock is now extremely extended and could attempt to retrace part of its losses. I expect the stock to continue trying to overcome its EMA200, while we would need to see a progressive increase in the buy-side volume when testing its overhead resistance, and declining sell-side volume when approaching its EMA50, until the stock consistently overcomes its EMA200. This could likely trigger a strong upward movement that could even lead to a short-squeeze, as the short exposure in the US has reached new record levels. This scenario could lead the stock to break out from its strong resistance level at CHF 15.80, with the next targets seen at CHF 16.50 and further at CHF 18, translating into over 21% upward potential.

In my opinion, a consolidation was due, and the recent positive news may have led some momentum-focused investors to take some profits off the table. Despite this, the risk of seeing the stock pulling back further is still high, and I would certainly follow a strict contingency plan in order to avoid significant losses. For less risk-tolerant investors, the EMA50 may offer the right protection in terms of stop-loss, but since this level could be repeatedly tested even in a possible continuation of the recent uptrend, I would set my stop loss with enough deviation, giving the stock more air, which could now be set under CHF 13.50 (or around $13.60), and further adjusted if the stock moves upwards.

The next most important catalyst, besides possible developments in the pipeline and positive feedback from the ongoing approval processes, is certainly related to the financing of the company. I am confident that the management will find a suitable solution in the coming weeks and this would re-frame the risk profile of the company while giving more clarity on its future developments and achievable opportunities.

Long-term-oriented investors who believe in this company could consider sizing their entry points according to the stock's strength in case of a consistent breakout from the discussed overhead resistance, as the actual situation may offer an opportunity not seen since 2019.

The bottom line

Technical analysis is not an absolute instrument, but a way to increase investors' success probabilities and a tool allowing them to be oriented in any security. One would not drive towards an unknown destination without consulting a map or using a GPS. I believe the same should be true when making investment decisions. I consider techniques based on the Elliott Wave Theory, as well as likely outcomes based on Fibonacci's principles, by confirming the likelihood of an outcome contingent on time-based probabilities. The purpose of my technical analysis is to confirm or reject an entry point in the stock, by observing its sector and industry, and most of all its price action. I then analyze the situation of that stock and calculate likely outcomes based on the mentioned theories.

Idorsia is a company I have followed since its spin-off from Actelion, and despite my belief in the long-term success of the company, I also regularly trade with the stock on the SIX Swiss Exchange by sizing my positions according to the situation. The actual setup may bear its risks of seeing the stock pulling back further, but it also offers a unique chance to take advantage of a likely breakout from its most important overhead resistance, possibly leading to massive upside potential. Investors could structure a contingency plan based on their risk tolerance and strictly execute it, by limiting the downside risk accordingly, while considering the recent events and the further likely positive catalysts.

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