Ionis - Akcea Therapeutics = 22% upside

Akcea Therapeutics, a wholly-owned subsidiary of Ionis Pharmaceutical (IONS), is a $6.54 billion market cap firm that is expected to IPO on June 30.  Akcea Therapeutics recently initiated a strategic partnership with Novartis Pharmaceuticals (NVS) and has begun receiving related payments. Although an investment in Akcea does not come without risk, we are constructive on the company and believe the IPO carve-out will highlight the “sum-of-the-parts” value in Ionis (the parent). Since the IPO was announced on March 27, 2017, Ionis has shot up nearly 35%. 

Akcea Therapeutics (AKCA) intends to sell 9,620,000 shares of its stock at a price range of $12 to $14. Company insiders are planning to purchase $25 million worth of shares at the IPO price. Assuming the company prices at the mid-point of its price range, it would have a fully diluted market cap of $657 million. 

Akcea Therapeutics is a biopharmaceutical company that is in the late clinical stages of developing drugs to treat metabolic diseases caused by lipid tissue disorders. The company founded operations in 2015 as a wholly owned subsidiary of Ionis Pharmaceuticals; its purpose was to develop and commercialize Ionis’ drugs to treat lipid disorders. Akcea is developing four new drugs that are based on antisense technology. Its most advanced drug has completed a Phase 3 clinical trial for treating familial chylomicronemia syndrome, or FCS, and it is beginning a Phase 3 clinical trial for treating familial partial lipodystrophy (FPL).

Both diseases are rare genetic disorders that cause very high levels of triglycerides. The company has a strategic partnership with Novartis to commercialize its drugs and received a payment of $75 million from the company upfront. Novartis paid $15 million to Ionis for its sublicensing fee. If Novartis exercises its right to commercialize the drugs, it will pay Akcea a $150 million licensing fee for each drug that it licenses and sells. Currently, all of its product candidates are pre-commercial sale. Akcea products have generated significant interest, and a strategic partnership with Novartis bodes well for its continued growth and development.

Ionis Pharmaceuticals develops drugs based on its antisense technology, in which drugs attach themselves to strands of RNA to prevent them from producing disease-causing proteins. The hoped-for end result is a therapy that fights disease without harming healthy cells. Ionis has nearly 40 pipeline drugs under development in areas including cardiovascular, metabolic and severe and rare diseases (including cancer and neurological disorders). Its lead product is the cholesterol-lowering drug Kynamro, which Ionis has licensed to Genzyme. Post IPO, Ionis will continue to own 73.4% of Akcea. The ownership ratio will be 0.30 post IPO. This suggests that each share of Ionis has about $3.90 of Akcea value embedded in each IONS share based on the midpoint IPO range of $13 per share. 

We value Ionis and Akcea separating using a discounted cash flow methodology.  Our fair value estimate of IONS is $65 per share, implying a potential upside of 22% from the current market price of $53.17, as of June 27. Our fair value estimate for AKCA is $18 per share versus an IPO marketing range of $12-$14. 

Yum China update

In the April Spin-Off department we highlighted the Yum China (YUMC) spin-off from YUM! Brands (YUM), which occurred on Oct. 31, 2016. We valued YUMC at $35, a 25% increase from its value at the time, which it reached by early May. YUMC has continued to shine, rallying an additional $7 by early June. 

On July 5, 2017, Yum China Holdings, Inc. (YUMC), trading at $37.32 with a market cap of $14.3 billion, declared Q2 2017 results. Total revenue was partially increased year-over-year to $1.6 billion, 0.5% below street estimates. Total system sales were up 7% year-over-year, driven by 8% growth at KFC and 7% growth at Pizza Hut on annual basis, excluding foreign exchange impact. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) increased 15% year-over-year to $259 million, 1.8% above street estimates. The increase in adjusted EBITDA led to margin expansion of 202 basis points to 16.2%. Net income increased 39% year-over-year to $107 million or 27¢ per share on diluted basis, but missed consensus estimates.

Yum China kept its 2017 guidance same as announced after Q1 earnings. We raise our target price on YUMC to $42 per share (previously $36.00), implying a 13% upside from current levels. We expect the stock to be re-rated, given its high top-line and margin growth prospects. We reiterate our “buy” rating on the stock. YUMC met our initial profit target early, so we are going back for seconds.