Intermune Is Biotech's New Battleground
By Adam Feuerstein
Senior Writer
09/03/2002 07:37 AM EDT
Biotech hedge funds tend to run in a pack. They might not buy and sell exactly the same stocks, but they do generally have a lockstep view of the biotech world. When one fund manager smells blood -- a great short, for instance -- you can bet that before long, his competitors have happily sniffed it out too.
That's what makes last week's goings-on with Intermune (ITMN:Nasdaq - news - commentary - research - analysis) and its drug Actimmune so interesting. Instead of coming to consensus over the drug's test results, biotech hedge funds are sharply divided. One side is placing long bets on Intermune, believing that the Actimmune data have got doctors really excited about the drug, which in turn will light a fire under sales growth.
The other side, of course, is going short. Intermune is playing fast and loose with the Actimmune data, making it appear better than it really is, they say. When the truth comes out, the enthusiasm generated last week will vanish.
Who's right? Oh, we wish we knew. So far, the bulls are goring the shorts. Intermune is up 40% since the Actimmune data was released last Wednesday. But rest assured, the Intermune fight isn't over yet, which still gives investors who haven't yet made up their minds a chance to place their bets. Intermune closed Friday at $24.87.
Last week, Intermune released test results on Actimmune that it says proves the drug to be the first and only successful treatment for patients who suffer from idiopathic pulmonary fibrosis, a disorder that causes lungs to fill with scar tissue. IPF is a debilitating and fatal disease with no known cause. Current treatments are ineffective.
The study actually failed to meet its primary endpoint -- the ability to slow the progression of the disease. That's bad news. But Intermune looked through the data and found a significant subset of patients -- those with milder forms of the disease -- who lived longer after taking Actimmune, compared to similar patients who took a placebo.
Finding a so-called survival benefit is the holy grail of drug development, trumping all other outcomes. Last week, Intermune downplayed the negative results in its Actimmune study, choosing instead to talk up the surprise survival benefit. Investors bit, but with good cause.
As Long as It Works
Doctors who treat IPF patients say they don't care whether the Actimmune study failed, technically, to meet its clinical endpoint. Instead, they're focusing on the fact that for the first time, a drug has shown an ability to prolong the lives of terminally ill patients.
"No drug that we currently use shows any survival advantage or improvement in lung mechanics, so if the [Actimmune] data holds true, the results will be very profound," says Dr. Robert Strieter, chief of pulmonary and critical care medicine at UCLA Medical Center. "We'll be medically obligated to treat all IPF patients with" Actimmune. Strieter has no financial ties to Intermune and doesn't own its stock.
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Last week, health care research firm MedaCorp held a conference call with nine doctors to discuss the Actimmune results. All viewed the study as positive, and several said their use of the drug would increase. Investment bank SunTrust Robinson Humphrey conducted its own conference call with two doctors, including Strieter, and the opinions were the same.
This bullish view is why Intermune's stock price soared last week. Because Actimmune is already commercially available (it's approved for two rare congenital disorders), doctors can prescribe it off-label to their IPF patients. In other words, while an FDA approval for the drug as a certified IPF treatment would certainly help, it's not necessary.
Before the test results were known, Intermune was expected to book about $100 million in Actimmune sales this year. The company believes results from the study support peak sales of $400 million to $500 million annually. That's in the ballpark of most Wall Street analyst estimates, forecasting peak sales in the range of $300 million to $600 million.
And if these sales projections are right, Intermune's stock has room to run on the upside. At its current $785 million market valuation, the company is trading at less than eight times current year sales projections, and about four times 2003 sales estimates of about $200 million. Keep in mind, too, that the company's market value includes about $200 million in net cash.
"I don't see why Intermune shouldn't be given a multiple along the lines of Scios (SCIO:Nasdaq - news - commentary - research - analysis), Icos (ICOS:Nasdaq - news - commentary - research - analysis) or Transkaryotic Therapies (TKTX:Nasdaq - news - commentary - research - analysis)," said one hedge fund manager, who started playing Intermune long after the Actimmune data were released. "All those companies have billion-dollar valuations."
Scios, with a $1.1 billion market valuation, is currently trading at nearly 12 times its $95 million, current-year sales forecast for the heart drug Natrecor.
Hedge funds playing Intermune short disagree, of course, with this rosy outlook. While short-sellers concede that they're on the hot seat right now because of the initial positive reaction from doctors, many are betting that the Actimmune trial results will look less robust once all the data are scrutinized. Doctors who love Actimmune now will be less enamored later, they say, and that will keep sales growth flat, or only slightly positive.
Short-sellers are focusing their skepticism on the apparent survival benefit uncovered in the study for patients with mild-to-moderate forms of IPF. Simply put, shorts claim that Intermune altered the rules for statistical analysis of the study after it was completed.
The company, in essence, sliced and diced data from the study to find a subset of patients with a positive outcome that they could trumpet to the medical community and the press, they say. This kind of retrospective statistical analysis -- one short derisively called it "data dredging" -- is usually a no-no, and a big red flag that the outcome wouldn't hold up if put through the rigor of another clinical trial.
Intermune CEO Scott Harkonen acknowledges that the company did make some changes, after the fact, to the way it conducted its survival benefit analysis of mild-to-moderate IPF patients, but he says the changes were made at the request of doctors who thought the study needed to reflect more "real-life" perspective. Intermune is scheduled to present a fuller account of its study at a medical meeting starting Sept. 15 in Stockholm. Harkonen insists that when doctors and Wall Street get a chance to scrutinize the data there, they will see that the results stand up.
Having It Both Ways?
Shorts are also perplexed by the study's overall results: How can Actimmune demonstrate no ability to slow the progression of disease, but still help patients live longer?
UCLA's Strieter acknowledges that this apparent paradox is not yet fully understood, but he theorizes that Actimmune actually plays a role in either helping patients fend off infections, or by boosting the immune system so they can fight off infections before they turn deadly.
"I think we have to take another look at how people with IPF really die," he says, adding that infections in the lungs, like pneumonia, account for far more deaths than the medical community currently realizes. "Actimmune may help prevent or fight the infections that are really killing patients, so that explains why there would be no change in disease progression, but an increase in survival." Strieter is in charge of another Actimmune study that strives to understand how the drug really works. Results are expected by the end of the year.
While one short-seller acknowledges that this theory might be correct, he remains skeptical. "If Actimmune is such a potent immune booster, maybe we should be giving it to everyone," he says. "The bottom line is that before this study, Intermune was telling us that Actimmune worked by slowing the progression of IPF. Now they tell us that it doesn't, but that it doesn't matter. You can't have it both ways."
There are other questions that neither bulls nor bears can yet answer, but that will certainly play a role in determining Intermune's future. Will insurance companies make it harder or easier to reimburse Actimmune treatment, which can cost more than $52,000 per year, especially if the FDA doesn't approve the drug? Will doctors continue to give Actimmune to patients with more severe forms of IPF, given that the drug doesn't seem to help them as much, if at all? And how many of the 50,000 IPF patients in the U.S. are really classified as mild to moderate?
One thing's for sure, though. After a rather boring summer with little or no news, Intermune has gotten everyone in the biotech world humming again.
"This is shaping up to become one of the great battles of the biotech hedge funds," says one hedge fund manager, who is long Intermune. "We all respect each other, but we're really split over Intermune." |
