Hi Jacob. Am responding to your post on IMNX following below. But first here is the big picture as I see it.
IMNX is one of relatively few companies that have successfully made the transition from unprofitable biotech research company to profitable biotech/pharma company. This is due to the success of Enbrel. In addition to Enbrel, they have a couple of other drugs that they've commercialized, and a pipeline of products under development mostly addressing immune system issues and cancer. Last year they had revenues of $862 million -- a significant figure.
Enbrel is a blockbuster drug. It is the best treatment available for rheumatoid arthritis (RA) and juvenile RA sufferers due to its greater effectiveness and relative lack of side effects. For many RA sufferers, it is a "miracle cure" which gives them back their mobility and arrests and even reverses symptoms of a crippling and debilitating disease. RA is a serious malady and its sufferers are highly motivated to secure effective treatment.
Enbrel has had one of the most successful launches of any biotech drug in history. In its first 24 months on the market, it has already become the fifth largest selling drug of any kind in U.S. history.
Enbrel's annual cost to RA patents is something upwards of $10,000. It is expensive. Also, it is a treatment, not a cure, meaning the patient population will generally continue treatment until the day when a more effective alternative is developed and brought to market.
Enbrel addresses a very large market -- the U.S. RA and JRA populations amount to roughly 1 million patients. According to IMNX' CEO Ed Fritzky, Enbrel is currently used by only seven percent of that population. There is therefore a lot of room to grow even in the patient population that has already been approved for the drug -- before considering expansion into new indications.
In addition to 1 million RA/JRA patients in the USA, the FDA is likely to approve expanded labeling of Enbrel for psoriatic arthritis. The company just announced favorable results for the phase III trials just completed, and announced its plans to seek FDA approval of expanded labelling this fall. Suchh approval is likely because of the demonstrated effectiveness and because Enbrel already has a reasonably well-known safety profile. Product launch for PA is likely for spring of 2002. The size of the PA market is 250,000 patients in the USA. This translates to a $2.5 billion market opportunity over and above that already existing for Enbrel in the RA/JRA population. There is no competing treatment for this PA market. This news was largely overshadowed or ignored by the market in last week's bloodbath.
Enbrel is still in the early innings of its lifecycle, and it still has an expanding market. IMNX' first strategic priority is to "expand the Enbrel franchise" and is aggressively investigating other uses for the drug. Applicability for psoriasis (as opposed to psoriatic arthritis) looks promising.
The company is investing heavily in manufacturing facilities and the new plant in Rhode Island is expected to be producing commercial product in the middle of next year. That plant will double current production. An additional plant is being planned in Ireland in conjunction with AHP.
I think the main idea regarding IMNX right now is Enbrel. They have other products in the pipeline, and many of those products look promising; but they are some years from the market. Enbrel is one of the most successful drugs in history, and is a multi-billion dollar drug. Its going to be the driver for the stock price for the immediate future I think.
Last weeks news regarding termination of the CHF study, and unsuccessful results regarding Nuvance was unquestionably bad for the stock. But in my view the stock was excessively punished and the street is ignoring the biggest aspect of the story, which is Enbrel, present and future.
Re the issues you raise in your post:
<<<<<1. valuation: today, it is at a P/S of 7, and a PE of 11.5/0.28 = 41, using trailing earnings. A PE based on forward earnings is probably useless, since that E is a big unknown. CSFB thinks they'll make 0.25 in 2001, and 0.20 in 2002. The longterm growth rate is given as 50%, but, obviously, they aren't going to do that in the next two years. Since EPS is likely to be flattish for the next 1-to-2 years, I think the PE and PS are (still) too high.>>>>
This is of course the big question -- how does one assign a value to the company, and how is the street going to assign a value going forward. I don't have any special insight on the question, but I can say two things. (1) I believe the earnings estimates for next year are too low. The company has always given conservative guidance, and they are doing so now. The analysts/lemmings are doing the same, using the production constraint issue to play it safe. By the way, the earnings figures I've seen for next year are in the area of .34, not .20. I think even .34 is too low. Second issue is P/E. I believe the market will assign a premium once we get past the CHF and Nuvance news, and once attention is re-focussed on Enbrel and the removal of the supply constraints. It had an absurdly high P/E a few months ago. I'm not suggesting it will get there again, but it will certainly rise from the nadir that it is at now, caused by the Nuvance & CHF news. The market never reacts rationally to strong news on either the positive or negative side. We've just had a very strong dose of bad news. The good news is coming and the market will inevitably overract to the other side.
<<<<2. In addition to flat earnings, those earnings are of poor quality. In 2001, about half of the earnings are likely to be from interest on their 1.6B in cash. And that cash was not generated from cash flow from their business, but, rather, from issuing shares. At least they chose a good time to dilute their shares (good for the company, not the new shareholders). >>>>>>
I don't follow you here. Could you please provide something to back this up? They had $862 million in sales last year. They probably would have had half again as much were it not for the Enbrel supply constraints. During this time they have expended heavily launching Enbrel, building research and production facilities, and developing new drugs. The secondary raised money to finance those efforts, not to sit in a bank. Where is the poor quality of earnings?
<<<<<3. That pile of cash is a big positive for the company (as long as you ignore where they got it from). It means that, going into an environment where credit from debt or equity offerings is likely to be impossible to raise, they are in good shape, compared to other biotechs.>>>>>>
They have $1.7 Billion in cash/equivalents. They also have some big costs associated with the RI construction, construction of the new research facility in Seattle, launching Enbrel for psoriatic arthritis and of course their active and on-going R&D efforts. So this is not dead money or some kind of rainy day cushion. They are using it to expand their business.
Why should we ignore where they got it from by the way? There are only a limited number of ways you can raise this kind of cash, and doing the secondary was quite reasonable if you ask me.
<<<<<<4. Like a lot of pharms and biotechs, they are a one-product company. This makes forecasts of future earnings and sales numbers extremely uncertain. A bad trial result, a bad regulatory decision, and any drug company can have a day like IMNX had today. This means that diversification is crucial in this sector. I would never let any pharm/biotech/medical equip get to more than 5% of my portfolio.>>>>>>
Yes, it's presently a one-product company for all practical purposes. They have two other commercial products -- Leukine and Novantrone which produce about $50 million @ year. Clearly Enbrel is the driver. But then its quite a product, and if you're going to be a one product company, Enbrel isn't a bad one to have, considering they'll soon be selling $2.5 billon or so of it per year. They are working hard to not only expand the enbrel franchise, but use it to leverage the development of other products in the pipeline. Enbrel is pretty much past the risk you mention, except for studies re new indications/label expansion. There are no competitors that I know of that pose any near-term threat to the product.
<<<<<5. Given that demand for their one product is growing, it reflects badly on management's competence, that they are unable to meet demand. Management should have no higher priority than meeting demand for Enbrel, and should be moving heaven and earth to do this. There are no acceptable excuses.>>>>>>>>
This statement reflects a lack of understanding of the production/supply issue. This issue has been thoroughly addressed in the press and already written about on this thread. I suggest you take a look there, but in a nutshell it comes down to the fact that neither IMNX or any other company can risk a multi-billion dollar investment in very complicated and specialized production facilities until it has a reasonable assurance that the product will be allowed on the market. Management IMO has done a very good job of addressing this issue both in terms of explaining it to the public, and in remediating the supply/demand imbalance. Moreover, CEO Fritsky and his management team are widely recognized as being one of the best teams in the industry.
<<<<<6. In my experience, patient acceptance of injectable drugs is very poor. Unfortunately, biotech drugs, by their nature, usually can't be taken by mouth. I don't think the biotech industry is really going to take off, until someone finds a way to give the drugs in pill form. Even for severe illnesses like RA, patients hate giving themselves all those injections.>>>>>
I'm astonished that you would believe such a thing. Diseases like RA and JRA are serious debilitating illnesses. They make the most basic activities impossible -- things that you and I might take for granted, like cooking dinner or going to work. Enbrel is able to restore function to RA and JRA sufferers. People describe it as a miracle. No reasonable person likes to inject themselves with anything. But the downside of the injection is insignificant compared to the debilitation and suffering that is alleviated by the medication. I have some familiarity with this issue because I have a family member with multiple sclerosis. She injects herself every week with Avonex -- another "miracle" drug. But if you don't believe me, just go ask any RA sufferer, or the parents of a child with JRA. Or the 70,000 people currently taking Enbrel or any of the people who've signed up on the waiting list.
If your point is that less invasive treatments like pills are preferable to injections, then of course that is obviously true. Small molecule, orally or topically -administered drugs are the holy grail of biotech. Companies are working on such products for RA. But they are at best several years away from FDA approval and market availability, if indeed they make it there at all. I sincerely hope they do make it.
<<<<<7. All the big pharms ..... it's the Mercks and AHPs that are going to be the big winners in biotech.>>>>>>>
IMNX in particular seems to have survived its relationship with AHP. AHP was the majority shareholder until the recent secondary offering. Now it holds 41% -- so it is obviously not a "majority" holder. It tried but failed to buy IMNX outright some years ago. IMNX now seems quite large enough to survive and compete on its own. Without debating the merits of the past relationship with AHP or re big pharma/small bio in general, the pertinent question seems to be how will the AHP relationship affect IMNX going forward. All things being equal I agree with you that it would be better not to have such a large piece controlled by a single entity. But I don't think its a major factor in evaluating the company. After all, IMNX valuation is important to AHP's own valuation, and they will hardly want to kill the golden goose.
<<<<<<<<<8. TA: The stock was in a horizontal range from 1991, through 12/96. Then, the stock went from 6 to 83 (3/00 peak). Since then, they have seen some severe valuation compression, as have all other triple-digit-PE stocks. That downtrend, IMO, is not over. The only support I see on the chart, is a return to the very-longterm trendline that they vaulted out of in 12/96.>>>>>>>>>>
TA is not my thing, so I'll leave this one alone. But I think its worth considering that this is a volatile biotech stock in which material changes to the business happen happen relatively frequently, and they provide very strong upward/downward pressure on the stock. These changes are not always fortold by TA...certainly not TA comparisons going back before Enbrel approval and the company's transition to profitability. I don't expect it will be any less volatile going forward.
<<<<<<<9. I would expect IMNX to rebound soon, then resume the downtrend. I doubt 11.5 is the bottom. At some point, they will stop going down. Then, they will form a horizontal range, and stay there for a year or two. Then, maybe sometime in 2002 or 2003 or 2004, another uptrend could begin. I wouldn't buy LEAPs, as the bottoming formation could go on for years. The way to make money in this stock is: 1) play the short-term bounces, or 2) wait till a bottom forms, a price at which it bounces over a period of many months, and then buy with limit orders at that price. Then, be prepared to wait a few years.>>>>>>>>>>
I don't have your degree of courage for making such detailed predictions. For my part I just try to get the major idea/trend right. I think the market's punishment over CHF and Nuvance results has been overdone, that it discounts Enbrel's market position and future revenue growth, and that it ignores the good news on psoriatic arthritis. It completely discounts the remaining possibilities re Nuvance and the other products in the pipeline. I believe that IMNX revenues will double next year, and that its earnings will increase significantly more than is projected by the analyst/lemmings. I'm reasonably certain that the analysts will be falling all over eachother to sing IMNX' praises before the year is out, and that both earnings and P/E will expand significantly, giving the stock a multiple-bagger from this level within 18 - 24 months. That's my investment proposition anyway, and is why I'm still long the stock. What it does between now and then is anybody's guess, but I don't see it going a whole lot lower from here. I think this is one of those opportunities that the market periodically gives investors who are willing to depend on their own vision. In other words, IMNX at 11 is absurdly cheap, but I'm not complaining.
Well this has been a whole lot longer of a ramble than I planned on when I sat down to respond to your post. I figure I've earned at least one beer and will go get one accordingly! Please understand that all of the above is nothing more than my understanding of the facts and my opinion; any or all of which might very well be wrong. There is certainly plenty more to the story that's not addressed here. If you or anyone else is interested in IMNX they obviously need to do their own DD and check things out for themselves. I'd suggest the IMNX website as a first stop, followed by a search of newspaper and trade pubs. IMNX has been pretty well covered.
FWIW.
Andy |
