O.K. here is the great Eisinger article on ahp & Immunex. Feel bad about posting it. Not for moral reasons, as I myself used to beg and grovel to get Xerox copies of something that cost about $500 per year and came out less than twice a month, but because a subscription to TSC is so cheap there is no cost benefit to stealing an article. <g> BTW I think posting stuff from sites that don't charge is just fine.
With the
likelihood of
approval, the real
debate is how big
and how
profitable Enbrel
will be
Top Stories: Immunex's Big Day
By Jesse Eisinger
Senior Writer
9/15/98 1:37 PM ET
Immunex's (IMNX:Nasdaq) big moment at the Food and Drug
Administration comes tomorrow, when an advisory panel will rule on
Enbrel, the anti-inflammatory drug.
Few, if any, investors think the drug won't get the nod for rheumatoid arthritis
(RA), a disease in which a patient's own immune system attacks itself, leading to
debilitating pain and swelling. Enbrel is a receptor that floats freely in the body
soaking up a protein called Tumor Necrosis Factor. TNF is a necessary immune
system cytokine that is overproduced by RA patients.
Doctors who treat RA have few options, and the FDA is inclined to approve new
treatments. The likely panel okay will probably lead to approval from the agency,
which doesn't have to take the panel's advice, but usually does. There are
roughly 500,000 RA patients who have failed current treatment in the U.S.,
which is Immunex's initial target market.
So it's fair to ask why 1.9 million shares of Seattle-based Immunex shares have
been shorted. That's 4.8% of the 39.9 million shares outstanding for the $2.4
billion market cap biotech, a high number.
The answer is that the company has little room for error and the critics are
awaiting dirt to come out on the drug. FDA panels always beat up on new
products and make them look less impressive than the company would have
investors and patients believe.
With the likelihood of approval, the real debate is how big and how profitable
the drug will be for Immunex. Immunex signed a marketing deal with American
Home Products (AHP:NYSE), which owns a majority stake in the biotech,
and Salomon Smith Barney analyst Meirav Chovav, who rates Immunex a
buy, estimates that the company will have 35% to 45% of Enbrel sales fall to its
pretax income line.
Chovav thinks Enbrel will have sales of $125 million next year, $360 million in
2000 and $600 million in 2001. She estimates that the company will have net
income of $19 million, or 45 cents a share, in 1999, $109.8 million, or $2.50 a
share, in 2000 and $188.6 million, or $4.10 a share, in 2001. Solly hasn't done
banking for Immunex.
Other analysts think that because of Immunex's manufacturing costs, the drug
will be far less profitable. NationsBanc Montgomery analyst Scott Sacane
says that the profitability of Enbrel is reduced by the large size of the Enbrel
dose, and multiple royalty payments to patent holders and former partners. As a
result, the margins to Immunex on Enbrel will be a fraction of what they are to
other biotech companies that sell proteins. "It's a very low profit margin back to
Immunex at the end of the day," he says. He estimates the gross margin is 16%
to 18%, contrasted with, for instance, Idec's (IDPH:Nasdaq) roughly 35% for
cancer drug Rituxan, which is partnered with Genentech (GNE:NYSE).
CIBC Oppenheimer analyst Matt Geller currently estimates that the drug, if it
garners timely approval (which he puts at a 65% likelihood), will have sales of
$218.8 million in 1999 and $437.5 million in 2000. (He may change those
estimates based on the panel's reception of the drug.) With his current
estimates, Geller thinks that will mean net income in 1999 of $12.4 million, or 30
cents a share, and $54.6 million, or $1.30 a share, in 2000.
In early August, Sacane wrote in a bold and rare sell report that the company
faces 10 major impediments to that goal. It's one top-10 list that Immunex fans
don't find funny.
Immunex, which had sales of $149.7 million last year but lost $15.7 million, or
40 cents a share, has only conducted one pivotal trial of Enbrel. Sacane
criticizes the size of that trial -- only 234 patients treated for six months in one
randomized, double-blinded, placebo-controlled study.
He contrasts it with the trial of the German drug and chemical company
Hoechst's Arava, which was approved earlier this month. Hoechst
conducted a Phase III trial of Arava in 1,936 patients treated for one year. He
says because of the lack of long-term data on the drug, both long-term safety
and long-term efficacy of Enbrel remain questionable. He raises the possibility
that the FDA could delay approval until the outcome of a more ambitious trial of
about 600 early-stage patients. Critical analysts raise questions about whether
the effect of Enbrel will fade over time.
Then, Sacane raises the question of whether Enbrel will gain easy
reimbursement from health care payors, thanks to a likely cost of around $8,000
to $10,000 a year. Also, the drug is self-injected subcutaneously, or just under
the skin, which could pose problems for patients with severely swollen joints.
Competition is also increasing. Not just from Arava, but also potentially from
Centocor's (CNTO:Nasdaq) Remicade. That drug could be approved for RA
-- though serious questions remain about its side effects -- sometime next year.
(It has been approved for Crohn's disease.) It is possible that the emerging
class of "super-aspirins" called Cox II inhibitors from Merck (MRK:NYSE) and
Monsanto (MTC:NYSE) could also be used to treat the disease.
Concludes Sacane with wise words that extend beyond the Enbrel situation:
"Our philosophy remains that any time investors must rely on a biotech
company to perfectly navigate its way through multiple commercialization
obstacles in order to merely justify current valuation, the risk-to-reward ratio
almost always favors selling the stock."
For more info on institutional holders of these stocks, as well as financial
statements and earnings estimates, please see the Thomson Company
Reports.
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