Analyst Note 04/24/13
We are maintaining our $25 per share fair value estimate after reviewing InterMune's ITMN first-quarter results, which reflect continued growth for idiopathic pulmonary fibrosis drug Esbriet in Europe. We are reiterating our no-moat rating, given the firm's limited drug lineup. However, we continue to think that InterMune's shares, which are currently trading around our worst-case scenario (that factors in only European approval for Esbriet), represent an attractive risk/reward tradeoff, given the firm's blockbuster sales potential.
InterMune reported Esbriet revenue of $10.5 million during first quarter, compared to $8.2 million in the fourth quarter and $4.9 million in the first quarter of last year. Higher operating expenses to support Esbriet's development and launch caused the firm's net loss to widen to $49.9 million, compared to $46.6 million a year ago. Earnings were also affected by the firm's settlement with Shionogi (which markets the product in Japan), which requires the firm to pay a 4.25% royalty on sales in Europe (but frees InterMune of paying any royalties in the U.S. unless Shionogi's data is used for FDA approval). InterMune ended the first quarter with $441.9 million in cash and securities, which benefited from the firm's offering of common stock and convertible notes in January.
Investment Thesis 03/18/13
InterMune is a biopharmaceutical firm focused on developing therapies for the treatment of lung and liver disorders. Sustainable profitability for this emerging biotech is still several years away, and hinges on the regulatory and commercial success of its new lead product, Esbriet. We think this orphan drug could eventually reach blockbuster status once it makes it to market worldwide.
InterMune's history has centered around finding therapies--to varying degrees of success--to treat idiopathic pulmonary fibrosis. The disease causes fatal lung scarring in more than 100,000 patients in the U.S. and currently has no Food & Drug Administration-approved treatment. The firm eventually threw in the towel on IPF label expansion (and was slapped with a hefty fine in 2003 by regulators following an investigation of illegal marketing practices) for its former flagship product Actimmune after the rare disease drug failed clinical trials. Esbriet, the company's lead product candidate awaiting approval from the FDA, may be the key to unlocking the IPF market for InterMune. Esbriet has been shown to positively affect lung function and slow disease progression in patients with IPF.
However, despite landing a favorable advisory panel vote, InterMune received a complete response letter from the FDA in 2011. As a result, Esbriet's future in the U.S. has been clouded with uncertainty, and the firm must now conduct another trial to prove Esbriet's efficacy for U.S. regulators. On the bright side, Esbriet received approval from European regulators, and we think approval abroad will increase pressure on the FDA to expeditiously approve a treatment for this debilitating disease. We think Esbriet could ultimately glean significant sales from the idiopathic pulmonary fibrosis market, especially considering the favorable reimbursement environment thus far and the lack of other treatment options.
Putting all of its eggs into Esbriet's basket, InterMune has divested Actimmune and decided to sell its only remaining pipeline candidate, hepatitis C protease inhibitor danoprevir (ITMN-191), to partner Roche in exchange for $175 million in cash. Danoprevir's divestment will save InterMune roughly $50 million-$60 million annually in shared development expenses, which the company will sorely need as it continues to grapple with the FDA over its troubled lead product candidate. Esbriet's troubles have substantially limited InterMune's financial flexibility, and we think these cost savings and the cash infusion are necessary to allow the firm to pursue near-term revenue opportunities without significantly diluting current shareholders.
Economic Moat 03/18/13
InterMune is very far off from earning an economic moat. The divestiture of Actimmune and sale of danoprevir have significantly depleted the firm's portfolio. We think the firm will be unable to generate returns in excess of its cost of capital for the foreseeable future, given its meager product revenue and high operating expenses. While orphan drug Esbriet could see blockbuster sales, an enormous amount of uncertainty surrounds the company's ability to bring the drug to market in the U.S. following a complete response letter from the FDA. Even if Esbriet sees widespread approval, we would be hesitant to award the firm a moat based on the prospects of one drug alone.
Valuation 03/18/13
We are maintaining our fair value estimate of $25 per share. InterMune started selling Esbriet to the top five European markets beginning in late 2011, and we expect sales to accelerate following U.S. approval. Considering the lack of approved therapies for IPF and the severe unmet need among patients, we think Esbriet could garner more than $1 billion in peak sales worldwide. However, the FDA's request for a new trial should substantially raise InterMune's development spending requirements in the near term. With data expected to read out in second-quarter 2014, we think Esbriet will likely hit the market in early 2015. We still think there is a very high chance the drug will gain U.S. approval, potentially propelling the firm to profitability the following year. Given Esbriet's high expected price tag and relatively limited sales force requirements, operating margins could approach 50% within the next decade, in our opinion.
Risk 03/18/13
Given its past regulatory failures, Esbriet's limited approval in Europe, and a long history of operating losses, uncertainty around the company remains very high. European regulators have raised concerns regarding the drug's nebulous efficacy benefit, which may limit the authorities' willingness to grant favorable reimbursement and pricing terms. Further, following the receipt of a complete response letter from the FDA, the firm will need to conduct additional costly trials for its sole pipeline candidate, Esbriet. Furthermore, InterMune's product concentration risk was heightened after the company sold off rights to its only remaining clinical candidate, ITMN-191, to raise funds. The company also has a history of aggressive drug-selling tactics, prompting regulatory headaches and a series of lawsuits against the firm.
Management 03/18/13
We award InterMune standard marks for stewardship, as past illegal sales practices occurred under a previous guard, and we don't think this reflects on current management. CEO and chairman Daniel Welch has led the company since 2003 and seems to have adequate experience in the biotech sphere. Welch joined the company just as the Department of Justice began its probe of InterMune's illegal marketing practices for Actimmune. Despite discontinuing two trials after finding out more patients taking its drug died than patients taking the placebo, InterMune did not warn doctors about the dangers of off-label prescribing. Although InterMune has settled with the government, it was exposed to hefty penalties and numerous lawsuits.
Overview
Profile:
InterMune is a biopharmaceutical firm focused on developing therapies for the treatment of lung and liver disorders. The firm's lead orphan drug, Esbriet, is approved in Europe and awaiting U.S. approval for idiopathic pulmonary fibrosis, or IPF.
