In the financial market, investors often focus on stocks with particularly positive price movements. The current chart of Idorsia is no less interesting, even if the curve of the Swiss second-tier stock is pointing in the opposite direction. As 2021 draws to a close, the stock is down 36%. In the past three months alone, the share price has fallen by more than a fifth.
But before we take a closer look at the chart, the question is: What happened? After a strong first half, the biotech company seems to have run into operational trouble in the second half of the year. The company, which has no products on the market itself yet, reported an operating loss of CHF 252 million as of June 30, which was less than analysts had on the books. Expenses were also lower than expected in the first six months at CHF 265 million. In addition, CEO Jean-Paul Clozel stoked confidence, citing the product pipeline - particularly for the approval process for the sleep aid "Daridorexant". "We are focused on preparing for the expected launch of Daridorexant in the U.S. and Europe. as well as Clazosentan in Japan," Clozel said in late October, when presenting third-quarter figures.
So far, so good. So while Idorsia's first drugs are close to launch, the development of "Lucerastat" suffered a research setback. The drug failed to meet its primary goal of alleviating neuropathic pain in Fabry disease patients in Phase III. Stockbrokers reacted rather huffily to this news. However, the days of Lucerastat are not yet completely numbered; Idorsia still wants to review interim data and only then decide how to proceed with the drug.
On the other hand, the active substance "Cenerimod" for the rare autoimmune disease Systemic Lupus Erythematosus (SLE) is doing better. Following positive results from the Phase IIb study, Idorsia announced that patients with the chronic inflammatory connective tissue disease showed a clinically significant improvement. As a result, the drug is now entering a Phase III trial. Even though the development might still take some time, this is good news. Although experts do not expect a market launch until 2027 at the earliest, they also see a sales potential of CHF 200 million.
Even if Idorsia is still burning through a lot of cash, as mentioned at the outset, it has a fat cushion to be able to implement the development of new drugs as well as the implementation of the ambitious launch plans for already finished drugs. After nine months, cash stood at CHF 1.4 billion, driven by a new CHF 600 million issue of a seven-year convertible bond. "We will start 2022 with a strong balance sheet," CFO André C. Muller is therefore confident, adding: "The success of the new therapies is the best condition for our company to be able to generate sustainable profitability in the medium term."
Back to the chart: the dynamic price decline caused Idorsia shares to dip below the support area between CHF 23 and 20. However, the stock is now attempting to form a bottom in the current area of CHF 16. Idorsia is being helped by long-term horizontal support dating back to 2017 and 2019. In addition, the Relative Strength Index (RSI), a price-following indicator, is just in oversold territory. Meanwhile, the MACD (Moving-Average Convergence-Divergence), which measures the difference between the shorter and longer weighted moving averages, recently sent a buy signal. So from a technical perspective, Idorsia stock could at least move sideways at the reduced level.
With this scenario in mind, a Barrier Reverse Convertible could be a prime choice. With this product, investors have the right to receive a coupon regardless of the performance of the underlying. Even setbacks to just below the barrier have no consequences. As long as the barrier is not breached during the term, the promising product mechanism remains in place. The terms of the Softcallable BRC on Idorsia are as follows: The coupon is an above-average 11.00% p.a., while the risk buffer is a comfortable 41%. This means that the underlying would have to slide to an all-time low in order to touch the barrier. A sideways movement is quite sufficient to generate this double-digit percentage return.
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