Idorsia: Disappointing Detour On The Road To Revenue (Rating Downgrade)
Summary
- Downgrade to Sell: Due to lower-than-expected sales of Quviviq and clazosentan (Pivlaz), high cash burn, and a short cash runway, we are downgrading our rating on Idorsia stock to Sell.
- Disappointing Q1 2023 Results: Idorsia's Q1 performance fell short of expectations, with flat Quviviq sales and Pivlaz sales plateauing, signaling limited upside potential for revenue growth.
- Imminent Need for Capital: Idorsia's net debt of CHF1.1bn and a cash balance of CHF212m indicate an urgent need for capital, with the possibility of a dilutive equity raise.
- Risks and Bottom Line: Key risks include sales underperformance, high cash burn, short cash runway, potential dilutive equity raise, and lack of near-term clinical catalysts, all contributing to our decision to downgrade Idorsia's rating to Sell.
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Thesis update
As we highlighted our concerns around sales ramp and cash runway in our previous initiation article (hold rating), Idorsia's stock has dropped ~37% since we published our initiation article.
In light of a challenging Q1 2023 for Idorsia (OTC:IDRSF) (IDIA), marked by lower-than-expected sales of Quviviq and clazosentan (Pivlaz), high cash burn, and a short cash runway, we are downgrading our rating on the stock to Sell. The company's Q1 performance and the need to raise capital through a dilutive equity issuance in the near term have led us to re-evaluate our outlook on the stock.
Idorsia's Q1 2023 results were disappointing, with Quviviq and clazosentan sales falling short of expectations. Quviviq sales came in at CHF 4.3 m, almost flat compared to Q4 2022 (CHF 4.2 m), and Pivlaz sales were at CHF 13.5 m, down compared to Q4 2022. Pivlaz print was a surprise to us as since it launched in Japan in April 2022; it showed a remarkable sales ramp reaching ~25% of the total aSAH patients back in Q4 2022. The management gave a few reasons for slowing sales, such as a) FX headwinds (JPY down 5%), b) patient bolus exhaustion from investigators (PIs), and c) wholesaler inventory management-related cyclicality. However, considering that Pivlaz has already reached >95% of the target neurosurgeons and patient bolus has been exhausted, we do not believe there is too much upside in terms of the ramp in the near future, and we expect to plateau the Pivlaz sales during the next few quarters, maybe adding ~2-3% market share per quarter.
Furthermore, we highlight that the company dropped its CHF230m revenue guidance, maintained its CHF -650m core EBITA guidance, and had no update on funding. This is concerning because currently, Idorsia's net debt stands at CHF1.1bn, and a cash balance of CHF212m. This indicates an imminent need for capital. Furthermore, during the earnings call, the management hinted that a potential equity raise might be on the table potentially (if non-dilutive funding does not take place soon), adding more downward pressure to the already depressed stock price. Despite the company's concerted efforts (during the last few quarters) to explore alternative non-dilutive funding options (which didn't materialize), as time passes, the possibility of a dilutive equity raise is becoming more probable, which could negatively impact shareholders.
Risks
Sales Underperformance: Quviviq and clazosentan (Pivlaz) have demonstrated weaker-than-anticipated sales, raising concerns about the company's ability to generate sustainable revenue growth.
High Cash Burn & Short Runway: Idorsia's current financial position, characterized by high cash burn and a limited cash runway, increases the likelihood of the company requiring additional capital in the near term, posing risks to current shareholders.
Dilutive Equity Raise: The potential for a dilutive equity issuance to secure additional funding could negatively impact shareholder value by increasing the number of outstanding shares and consequently reducing earnings per share.
Lack of Near-term Catalysts: The absence of significant near-term clinical catalysts may limit the company's potential for positive news flow and stock price appreciation, contributing to a less favorable risk-reward profile for investors.
Bottom Line
We downgrade Idorsia's rating to a sell rating from a hold rating based on a) equity raise overhang and dangerously short cash runway, b) lack of near-term clinical catalyst, and c) struggling Quviviq launch and slowing down Pivlaz launch.
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