by Hilary Kramer | March 26, 2014 12:00 pm
The market continues to face resistance, due in part to the lingering unease in Ukraine and the possible delay or interruption of energy supplies in the region, and the disappointing economic data out of China. Those are tough overhangs to battle, and resulting profit-taking has sent stocks lower. We talked about the latest geopolitical issues and our exposure to them in last week’s update.
If you missed it, I encourage you to read it here.
Volatility continues to be the name of the game going forward, but I believe I’m positioned to weather the market storms. In fact, I have a new biotech name for today that has held its own despite the downward movement and looks able to maintain that momentum. Let’s take a look at it now.
InterMune (ITMN) has surged more than 100% so far in what can charitably be called a lackluster 2014 for the rest of the market. Almost all of that run up has occurred in the last month, when the stock vaulted onto investors’ radar screens with clinical trial news that put its drug on the path to approval. I don’t blame you if you’re scratching your head, wondering why I’m recommending ITMN now.
Let me explain.
I fully believe that this is just the beginning for InterMune and expect the momentum to stay strong. The stock has plenty of room left to run, thanks to a raft of good news as a tailwind and more expected to come. There is a lot to like about this high-flying and innovative biotech, and I want us to jump on this uptrend for the potential growth ahead.
InterMune is a $2.9 billion market cap company focused on developing drugs for pulmonology and orphan-status fibrotic diseases. Much like former GameChanger winner Intercept Pharmaceuticals (ICPT), ITMN develops drugs to treat a rare disease, which means that it targets a small domestic or global population.
InterMune’s lone drug, pirfenidone (also known as Esbriet), treats patients with idiopathic pulmonary fibrosis (IPF), which is an irreversible and fatal scarring of the lungs. There is no known cause of the disease, which afflicts around 70,000 (by InterMune’s estimates) to 200,000 Americans (according to the Pulmonary Fibrosis Association) annually and leads to death within two to five years after diagnosis. As of yet, there is no cure. But InterMune’s drug does help slow the inevitable decline of a patient’s lung function.
Esbriet has been on the market in Europe, Canada and Japan for the past few years. It is not currently sold in the United States, but that looks more likely to change.
The drug was initially up for approval in 2010, but was denied by the Food and Drug Administration (FDA) based in part on two studies that showed conflicting effectiveness results. But late last month, the game changed. Data from a new trial showed a number of positive results that could set the stage for U.S. approval, and also further inroads abroad, which in turn bodes well for InterMune’s sales moving forward.
The study, which involved more than 550 patients in the United States and eight other nations, measured lung function and put Esbriet up against a placebo. According to the Phase III study, 22.7% of patients who took the drug saw no decline in lung function – significantly better than the 9.7% of the patients who got a placebo. Furthermore, 16.5% of patients who got the drug had a decline of 10% or more in lung function or died. That compares favorably with the 32% via placebo that showed similar declines or fatalities.
When the news hit the Street on February 25, ITMN more than doubled to the $30 range on excitement that the drug appeared on track for U.S. approval. Investors were also cheered by the fact that InterMune’s announcement of the positive data came a bit earlier than many had expected, as management had said they would be releasing the Phase III results during the second quarter of 2014.
Profit-taking has pulled the shares from a high of $38.73 back down to the current $31 per share range, which is giving us an attractive entry point ahead of market expansion or even a possible takeout that could see the stock soar 45% (or possibly more in the event of a buyout) over the next 12 months.
Because there are no other drugs or therapies approved for IPF, InterMune has a virtually clear runway for treating the condition. Adoption has been quick in the markets currently served, and the company has steadily grown sales from $5 million in 2011, to $26 million in 2012 to $70 million in 2013.
That top line is expected to grow to $137 million in 2014, and perhaps as much as $316 million in 2015. While that would represent a heady jump from previous estimates of about $225 million in annual sales, it’s fair to say that not all sell-side analysts have fully updated their models to reflect the eventual growth here and abroad, since U.S. approval has not yet happened.
Plus, final details from Phase III data will likely be submitted at an industry conference in May and then resubmitted to the FDA later in the year. As a result, those backend 2014 and 2015 revenue estimates could be revised significantly upward. (Boehringer Ingelheim will also present its own clinical data at the May conference for a competing potential IPF drug, but some analysts note that their drug is less positive than what has been seen with InterMune.)
Although management has not publicly stated what the price tag for Esbriet will be domestically, some analysts have speculated that ITMN will be able to charge more than it has abroad, where patients spend about $30,000 annually, and could perhaps charge as much as double that price or higher thanks to the strong data and relatively early launch. With as much as $200 million in sales from Europe and the U.S. in 2015, total revenues could top $400 million.
For now, valuation must be dependent on sales metrics, as InterMune, like many of its early-stage drug development peers, spends a lot of money to generate sales and new drugs. For the current year, management guided for $320-$345 million in operating expenses, a large chunk of which will be devoted to research and selling-related activities.
This means that InterMune will continue to generate net losses this year and next. Hardly resting on its current IPF laurels, InterMune may also be looking to expand into another orphan lung disease related to sclerosis. With about $190 million in cash on the balance sheet, alongside a relatively strong 6x quick ratio, InterMune should be able to weather any development costs quite well. Also, the company just said after the close that it would offer 7.5 million shares to help raise more cash for marketing and commercialization efforts. Shares pulled back in after hour trading, reflecting dilution on the order of about 8% for existing holders, but that gives us an even more attractive entry point.
As I mentioned, the stock has also been named as a potential takeout target. In the past few years, biotech deals have been done in a range of 7x sales to as much as 15x sales. If ITMN is indeed acquired, perhaps by a rival looking to “bolt on” IPF treatments to its existing portfolio, that type of multiple is not farfetched for a company that has been growing its top line by several hundred percentage points.
Taking the midpoint of that range, 11x 2015 sales, and the stock could be worth $49 in a year, for a 45% upside from current prices.
Please be aware that I am giving the stock an Aggressive risk rating, as clinical data can make or break a biotech, and the company has a critical May up ahead. But with solid data already behind it, I like the stock’s potential to continue climbing.
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