IDRSF - Idorsia: Someone Is Playing With Fire

Summary

• Q2 results are on the table and Idorsia could convince with encouraging developments in its pipeline and its initial commercial efforts with QUVIVIQ (Daridorexant) and PIVLAZ (Clazosentan).
• The Swiss and Canadian health authorities are supposed to give their feedback on QUVIVIQ very soon and the drug will be launched in the EU in the coming months.
• The recent Idorsia price action follows a common pattern, but this time other elements have to be considered, most of all the long-awaited catalyst related to the company’s financing capacity.
• Based on an even more cautious approach, Idorsia stock price is likely undervalued by 55%, and its fair value is seen at CHF23.59 or $24.42.

Investment thesis

Whoever reads my articles knows that my approach and my investment decisions are always based on both fundamental and technical aspects. I follow every trading session of Idorsia Ltd ( IDRSF ) very closely and have known the company since its very early days. I am very intrigued by the actual situation, which is, somehow paradoxically, less risky from both a fundamental and a technical point of view. Still, the market seems to ponder more possible risks instead of pricing in the achieved milestones and the huge opportunities of the company.

As the short interest reaches its record level in the stock traded in the U.S., and the recent price action demonstrated how methodically the price is driven by technicals, basically ignoring the recent fundamental developments, I decided to review my valuation model and give an even more conservative opinion, by valuing the stock at CHF 23.59 or $24.42, with still a 55% upside potential.

A quick look at the recent events

On July 26, 2022, Idorsia announced the financial results for the first half of the year. The company reported its first sales for QUVIVIQ, which were reportedly CHF 0.4M, significantly under the median consensus revenue of CHF 7.3M. Furthermore, the sales of PIVLAZ in the first half of 2022 were reported at CHF 11.4M, significantly above the median consensus sales of CHF 3M. Considering all income recognized in connection with collaboration agreements and milestone payments, the company reported revenues of CHF 22M in total. Operating expenses were reported at CHF 219M for Q2, up from CHF 188M the quarter before, mainly driven by the selling and promotional expenses in its commercial activities as the company recently turned to a commercial biotechnology company.

At the end of the first half of the year, Idorsia’s liquidity amounted to CHF 733M, down 22% from the quarter before, and down 38% from the beginning of 2022, when the total liquidity was reported at CHF 1.18B. The company confirmed its guidance for 2022 with a non-GAAP operating loss of approximately CHF 785M.

I value those results as being in the range of my expectations, based on the announced operating expenses of an estimated CHF 920M for the current year, and considering that QUVIVIQ was just launched in the U.S. on May 2, 2022, and the drug will hit some markets in the EU only later this year.

Valuation

Following the recent events and the continuous developments, I updated the street estimation set, my projections, as well as the respective valuation models.

The street consensus for 2026 was lowered by 11.85%, while the analysts kept the estimates more stable for the other years. Since my estimations were already significantly lower for that year and are still lower by $621M over the forecasted period, I don’t see this as a matter of concern. I adjusted slightly my estimation for this year for the sales of QUVIVIQ as I estimate that the commercial activities need some more time to scale up as I initially supposed. I also underscore that my revenue estimations include milestones and royalties payments, and for reducing the complexity of the modelization, I assume them to be spread over the years in a way that may not reflect the reality and this can lead to anticipated or postponed revenue streams over the years of my estimations.

I see QUVIVIQ having significant potential in Europe and I look forward to seeing how the market will adopt this much safer and more efficient drug when compared to the over 30 years old insomnia drugs, related to significant health concerns. Moreover, the product will likely soon be authorized by the Swiss and Canadian health authorities, two additional positive catalysts for the stock.

Bearing in mind the complexity of Idorsia’s pipeline with 11 compounds in different development stages as well as its partnership agreements, I chose to reduce this complexity and provide a Discounted Cash Flow ((DCF)) valuation based on very basic assumptions and avoid further distortions, considering the already low visibility.

To be even more cautious in my approach to valuing the company, compared to the method used in my last two articles, Idorsia Is Likely Set For A Short Squeeze and Idorsia: Positive Catalyst Coming Very Soon , I now consider the full potential issued shares as the base for the fair stock price calculation. I value different scenarios based on the estimated likelihood and the discount rate commonly applied in biotechnology or pharmaceutical DCF valuations for companies with mid-stage pipelines. I also assume zero perpetual growth rate as this is in my opinion more reasonable for Idorsia at this stage.

I proceed by substituting my forecasted estimations with the average market estimations in my valuation model by maintaining the same model assumptions.

Based on the likelihood of the different scenarios, the valuation based on my estimations is still significantly more conservative than the valuation based on the forecasted street consensus, however, both models underscore how significantly Idorsia’s stock price is undervalued, with a price target of CHF 23.59 or $24.42 for my estimation set, and of CHF 28.20 or $29.20 when using the data of the analyst’s consensus. This valuation is pricing in the full dilution of the share price through the exercise of equity derivatives and equity instruments reported at the end of the last quarter, which is, in my opinion, rather unlikely, but gives an insight into an even more conservative approach in terms of fair valuation of the stock price, compared to my former modelization, in which I used the total shares outstanding.

Market Timing

My investment decisions are always, without exception, considering both fundamental and technical aspects of a stock. Idorsia, like many other biotechnology companies and stocks with a relatively lower volume when compared to highly traded stocks, is mostly driven by technicals. Since the main stock exchange for Idorsia is the SIX Swiss Exchange, I consider this market for analyzing its price action.

In this daily chart, it’s very interesting to observe how the stock repeatedly bounces in its descending trend channel, which I tend to define through a pitchfork. The recent rally was overdue, as the price showed some significant negative extension but as we could see in the last months, many risk factors were recently eliminated and the company could report significant positive developments.

The stock tried repeatedly to break out of this channel, without success until now. Only time will tell us if the stock will now fall back to its support levels and even continue its descent, or if the moment has come for it to extend this recent rally and finally show progressively positive price action. Based on my time-based probability estimations, the next critical moment for the stock could be reached at the beginning of September, as the stock is still performing worse than the Nasdaq Biotechnology Index but is showing some attempts of relative strength, and crossed many important short and medium-term resistance levels, as its EMA50 is progressively inverting and its EMA200 flattening.

The Nasdaq Biotechnology Index (IBBQ) has performed well compared to the NASDAQ Composite Index, showing some significant relative strength since the beginning of April 2022, while recently recording a pullback, which was very likely, as the index attempted to overcome its long-term negative tendency.

The short interest in the stock listed in the U.S. has doubled since the time of my last analysis on May 27, 2022, exponentially increasing over the past two months.

The actual short interest ratio in the U.S. stands at a record level with spectacular 8,458 days to cover. Since short-selling is mostly done where the volume is higher, it can be supposed that the short ratio for the stock listed on the SIX has also significantly increased in the past months, despite no major changes in the shareholder structure having been announced until today and naked short-selling is not allowed .

Given those elements, I see the stock likely hovering around the actual levels, with the tendency of falling back to its next support levels, which right now are around CHF 14.15, CHF 13.50. As the latest short interest readings are still not published, it’s difficult to say if the selling pressure is decreasing and if the recent rally was, at least partially, caused by short coverages. But if the stock can confirm its actual level, and this time break out of its negative tendency, the next likely resistance level is at CHF 16.50 with successive targets at 17.80 and around CHF 19.50, while at those levels I still see a short squeeze as likely if buying pressure increases over the next weeks.

I'm really confident that we'll raise a significant amount of cash, putting us in a very strong position starting 2023.

André Muller, CFO Idorsia Pharmaceuticals

Looking at the behavior of the stock’s price action, and the averaging volume, I presume we are still not at the point where significant buy-side volume from institutions is reflected in the share price. Rather, technical-driven traders seem to have control over the stock. The most awaited catalyst is undeniably related to how the company intends to finance the coming years of commercial growth and clinical development, as the management confirmed non-equity financing as to be their preferred choice, and in particular royalty monetization or royalty-related deals, structured debt, and out-licensing.

The bottom line

Idorsia is progressing very well with its clinical developments and has now the chance to prove its ability to build a successful commercial structure, while its first two products QUVIVIQ and PIVLAZ begin to hit the market. Browsing through some consumer reviews , as far as they can be held as reliable, the general idea is that QUVIVIQ needs effectively one week to deploy its effect and even if some side effects are reported, Merck’s ( MRK ) Belsomra or Eisai’s ( ESALF , ESALY ) Dayvigo are apparently considered to be inferior from those consumer experiences.

The recent price action is nothing new for Idorsia’s stock, and the price hit once again the upper limit of the descending channel, but what is different this time, is the record level of short interest in the U.S., and the significantly reduced risk factors related to the company’s success and important milestones. These are, in my opinion, not priced in at this price level.

As we all know, the longer you play with fire, the more likely you can get burned. I revisited my valuation model and followed an even more conservative approach, while I still consider the stock as significantly undervalued by 55%, with a price target at CHF 23.59 or $24.42.

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