ICN: Treasurehouse of Unlocked Profits
Tell us what you think in ICN's Board
individualinvestor.com
Research Analyst: Christopher Conry (2/14/01)
In January, ICN Pharmaceuticals (NYSE: ICN - Quotes, News, Boards) reported that fourth-quarter results would be compromised due to lower-than-expected royalties from ribavirin, the standard for treating hepatitis C. The company now expects full year 2000 ribavirin royalties of $150 million to $155 million, and earnings per share of $1.25 to $1.30.
That's down from previous analysts' estimates of about $1.70 a share for the year and royalties of $175 million. The announcement implies that ribavirin royalties, which account for more than 20% of total revenues, will approximate $25 million for the fourth quarter, just half of what was expected. Management also suggested 2001 ribavirin royalties of $190 million, about $50 million below expectations.
Is this a warning sign that ribavirin may be losing its hold in the marketplace? It certainly doesn't appear that way.
Anecdotal evidence suggests that physicians are "warehousing" patients, as they wait for the opportunity to prescribe Rebetol, ICN's branded monotherapy treatment, in combination with PEG-Intron. The latter is a new combination of Schering-Plough's (NYSE: SGP - Quotes, News, Boards) Intron-A product and Enzon's PEG (polyethylene glycol) technology, which allows the drug to stay in the body longer and requires fewer injections.
Despite ICN's recent warning, it looks like all of the pieces are in place for ribavirin royalties to accelerate beyond 2001. Last month, Schering received FDA approval for PEG Intron as monotherapy for the treatment of hepatitis C. ICN is awaiting similar approval for Rebetol's monotherapeutic use, which should come no later than April 7. At that time, physicians could begin to prescribe the use of both products, a scenario that is expected to unleash substantial demand for combined use.
The real boon for ICN may depend on the timing of Schering's push to market the combotherapy of PEG-Intron and Rebetol. Just last week, Schering filed its application with the FDA, requesting priority review status that would require a response within 180 days. If Schering is ultimately granted approval, the combination will likely be offered sometime early in 2002.
A successful Schering combination offering is expected to eventually grab at least 60% of the market. The British drug giant's marketing mettle is especially important here, as Roche is expected to soon launch Pegasys, a competing alternative to PEG-Intron.
The royalty potential of ribavirin beyond this year is tremendous. ICN could generate upwards of $250 million in ribavirin royalties alone if events unfold favorably. Each million in royalty revenue equates to about a cent per share on ICN's bottom line.
Meanwhile, the ICN restructuring effort is moving forward. First announced last June, the plan calls for the company to ultimately split into three separate, publicly traded companies. The existing company would retain its pharmaceutical operations in North America and Latin America, while IPOs are in the works for its Europe/Pacific group, and for its research and development activities.
The moves are seen by most analysts as a positive step in unlocking the full value of this chronically undervalued stock. Ribapharm, the planned name for its R&D biotechnology spin-off, has already piqued the interest of at least one influential investor. Roche, which currently owns 3.97 million shares of ICN, has agreed to exchange its ownership for an 8.7% stake in Ribapharm. The company also has the option to increase its interest to 17.5% by converting additional ICN common shares into shares of Ribapharm.
At $25.57, ICN stock trades at a mere 17 times this year's expected earnings of $1.50 per share, according to the First Call/Thomson Financial analyst consensus. That also represents a discount to the company's projected long-term growth rate of 20%, and the peer group average multiple of approximately 34 times.
Bottom Line
Although the stock carries risk, based on the uncertain outcome of the Rebetol combination therapy approval process, the discount would surely narrow if the events unfold as described above. Given the large potential upside, we rate this stock a "buy."
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