IDRSF - Idorsia: Restructuring In Place

2023-07-26 05:51:17 ET

Summary

• Idorsia announced a cost reduction target to reduce operating expenses by approximately 50%.
• Idorsia also sold its APAC (ex-China) license for CHF 400 million to extend its cash burn until 2024.
• We confirmed our Idorsia stock's neutral rating. Profitability targets and guidance were suspended.

Idorsia (IDRSF) just released its H1 results. There are many negative news to price in. In our latest publication , " Dilution Risk Causes Downgrade To Hold ," the company stock price declined by 10%. As a reminder, on a one-year time horizon, we reduced our target price and moved to a neutral rating due to lower sales (and profitability issues) and funding pressure. In the last few days, aside from the Q2 release, there were two additional pieces of news to report: 1) Idorsia's cost reduction initiative and 2) selling its APAC license to Sosei Heptares (excluding the China area).

Q2 results

Before commenting on the one-off activities, it is crucial to report the company's H1 release and Idorsia's guidance. Idorsia's top-line sales increased by 42% on a quarterly basis and by 231% compared to the last half-year results. It might seem a significant improvement; however, the company's quarterly cash burn is approximately CHF 200 million. The CEO confirmed this, who reported that “ making Idorsia profitable has been more challenging than I had hoped. Consequently, adaptations must be made to reduce our global cash burn ”. Looking at the revenue line, QUVIVIQ sales were lower than expected. Still, on the positive news, turnover is growing in Italy and Germany, and the company delivered its first solutions in Switzerland. Related to the US, QUVIVIQ is now covered by two of the most extensive insurance plans. This might support Idorsia’s revenue for the foreseeable future. Going down to the P&L, it seems that the company is already cutting some operating expenses. In detail, there were lower costs in R&D expenses that moved to CHF 172 million from CHF 192 million, but it also increased Idorsia's cost of sales mainly due to drug-free first trials. This lowered the P&L by approximately CHF 5 million. In addition, the company is also more levered, with higher financial expenses. As a result, H1 2023 net loss was higher than H1 2022 results.

Source: Idorsia Q2 results press release

Source: Idorsia Q2 results presentation

Key to our analysis is the changes in the company's outlook moving from Q1 " Profitability target: The company is committed to becoming profitable in 2025 with global revenue above CHF 1 billion " to Q2 release with these statements : " Profitability target: Suspended – target to be provided again during 2024. "

Adopting a new strategy

As already mentioned, last week, the company released two major news. On July 20, the company decided to sell its APAX license for a value of CHF 400 million, of which CHF 396 million were already paid. This transaction allows Idorsia to extend its cash runway until Q3 2023. Consequently, in our internal model, we remove PIVLAZ sales in Japan. In number, Idorsia reached CHF 32.4 million in H1 and will no longer report this turnover in the territories acquired by Sosei Heptares.

On July 21, the company also announced a complete restructuring with a cost reduction target of 50%. Looking at the press release, up to 500 positions could become redundant out of 1300 employees. This will be mainly related to the R&D team and support functions. This initiative will be effective in early 2024; however, we already see lower R&D costs. In our numbers, as it is, including the Sosei Heptares deal and insurance reimbursements, Idorsia has the financial resources to extend its cash runway until Q1 2024.

Changes in our estimates:

1. Given the Sosei transaction, we are not forecasting PIVLAZ (clazosentan) revenue line. Therefore, we are removing our sales peak of CHF 150 million (Fig 1 - point 1);
2. We reduced Quviviq sales to CHF 65 million from CHF 95 million in 2023. Considering a rump-up in the EU and also in the US, Idorsia 2023 revenue targets are not achievable;
3. We are reducing Idorsia's quarterly cash burn for Q3 and Q4 2023 by approximately CHF 25 million. We also might expect higher one-off negative charges. In 2024, we are not estimating a 50% cost reduction target as emphasized by the company, but a minus 40%. In number, Idorsia 2024 quarterly cash burn is estimated at CHF 120 million;
4. Last time, in our internal estimates, our profitability targets were safely set for 2026 (and not 2025, as the company previously indicated). However, today, our forecast cash burn profitability target is lower than initially estimated.

Conclusion and Valuation

Having analyzed Idorsia Q2 results and the latest relevant transaction, including lower pick-up in top-line sales with an estimated lower cost basis, we continue valuing the company with a neutral rating. Downside risks are equally important, and QUVIVIQ's commercial success is Idorsia's only key value driver. The company's financial debt is relevant and cannot go unnoticed.

On reverse engineering, to value the company at the current stock price, we should apply a generous 5/6x multiple on 2025 sales, and including Idorsia's total indebtedness, we arrive at CHF 7 per share. Dilution Risk is a negative catalyst, and QUVIVIQ's success is the only downside protection. Therefore, we suggest remaining neutral.

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