Business Week Online, 9/1/2000 on Immunex
Thanks to psychobear from Raging Bull, Saturday, 2 Sep 2000 at 2:29 AM EDT, Post # of 1396
BUSINESS WEEK ONLINE
September 1, 2000
STREET WISE by David Shook
Pricey Immunex May Be a Biotech Bargain
It has a p-e of 231. But it also has a broad and deep pipeline that promises future riches
It's the kind of predicament that most execs can only dream about: In a largely vacant pharmaceutical plant in West Greenwich, R.I., Seattle-based Immunex (IMNX) is scrambling to outfit machinery for the production of Enbrel, the first and only biological drug approved specifically for treating rheumatoid arthritis. Immunex can't make the drug fast enough to meet demand.
That's a problem few drugmakers face these days. Enbrel is a blockbuster protein being studied for treating more than a dozen other diseases, from congestive heart failure to multiple sclerosis. Approved for sale two years ago, it already accounts for 80% of Immunex's sales. Merrill Lynch estimates that Enbrel could hit $5 billion in annual revenues in several years. And all that makes Immunex just about the most expensive stock among the large, well-established biotech companies.
Too expensive?
Not really. If you're looking for a long-term play in biotech, this stock may be well worth considering.
"POWERHOUSE." Immunex has been the subject of investor skepticism for some time. Even the most bullish biotech analysts have said it's overvalued. Its shares trade at around $50, following a March stock split -- the latest of three splits since spring, 1999. Merrill Lynch analyst Eric Hecht, whose firm has banking ties to Immunex, has only an accumulate rating on Immunex. The price-to-earnings ratio is a mammoth 231, higher than that of any other major, profitable biotech.
So what's to like? Immunex remains among the strongest-positioned companies in biotech, that's what. "Immunex is transforming itself into a scientific powerhouse," says Hecht, despite his resistance to giving the stock a higher rating. Indeed, some pros argue that the stock doesn't seem so overvalued if you consider the company's commitment to licensing new products, its strong R&D pipeline -- and the promise of Enbrel.
And a buying opportunity is at hand. The company is preparing a public offering of 70 million shares in the next few weeks -- 20 million new shares plus 50 million that belong to American Home Products. That's right, AHP. The majority shareholder in Immunex, it is mired in product-liability lawsuits and is perhaps cashing in on Immunex's high valuation. After the offering, AHP's stake in Immunex will drop from 54% to 43%, which may solve a problem Immunex has had with liquidity.
A LITTLE DILUTION. Investors have had a difficult time trading the stock largely because AHP has owned so much of it, says Elise Wang of PaineWebber. "Immunex and Genentech continue to be the two large biotechs with the best research," says Wang, who has a neutral rating on Immunex. "But there's definitely a bit of an overhang on Immunex attributed to the offering." Wang estimates that it represents about a 7% dilution in Immunex's earnings per share. Still, for investors who don't play the momentum game and instead invest in biotech for the long haul, Wang says, "Immunex is among the companies with the best science."
The company's strength isn't just Enbrel, whose sales are expected to climb 10% to 15% per quarter for several years. (It generated $155 million in second-quarter revenues, up from $87 million a year earlier.) Immunex also has a promising cancer drug, Trail, in early-stage testing, as well as Nuvance, which falls into the same category of immune-system protein as Enbrel. Nuvance is in testing for the treatment of asthma, which currently is predominantly treated with steroid-based drugs that can have long-term harmful side effects. Nuvance will have a significant future, if the company can turn it into a marketable drug.
Immunex also has what many biotech observers say is an in-depth understanding and commitment to genomics -- which is considered the Holy Grail of drug development (see BW, 6/12/00, "The Genome Gold Rush"). "Though it's not what most would consider a cheap stock, overall we really like Immunex, and we hold a core position in the stock," says Camilo Martinez, a biotech analyst for Dresdner RCM, a mutual-fund company that specializes in biotech investing. "We believe that Immunex posseses an extremely sophisticated understanding of the potential of genomics." Among other ventures, Immunex is collaborating with Celera Genomics (CRA) to combine that company's gene database and bioinformatics with its own biological expertise, Martinez says.
NO DROP IN SIGHT. The deals don't stop there. In July, Immunex signed a joint venture with Abgenix (ABGX) to develop a human antibody created by Abgenix that's being tested for several types of cancer. And Immunex officials say privately that other such deals should be expected over the next few years.
If the 231 p-e ratio for Immunex seems high -- Amgen's is 68 and Biogen's 33 -- Bear Stearns analyst Akthar Samad suggests that investors look at different measures, such as the company's market capitalization over revenues estimated for 2001. Using that ratio, Immunex has one of the highest valuations -- perhaps second only to MedImmune (MEDI), which develops monoclonal antibodies for cancer, infectious diseases, and immune-system regulation.
"Don't expect Immunex to drop anytime soon from its pedestal as one of most expensive large biotech stocks," says Samad, who doesn't have a rating on Immunex. "At the end of the day, for a company this strong and in some cases insufficiently recognized for its pipeline, one can realistically envision [Immuniex] sustaining higher valuations."
So yes, you're going to pay a hefty premium if you buy Immunex now. But it may be worth it over the long haul because its pipeline is so promising. Comparable biotechs such as Amgen (AMGN) and Biogen (BGEN) are often called "one-hit wonders" because of their reliance on a single drug. With the current biotech market taking investors on a wild ride, it may be wise to pick a biotech that offers breadth as well as depth.
Shook is a staff reporter for Business Week Online
EDITED BY DOUGLAS HARBRECHT
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