By Rajesh Patel, Ph.D.
InterMune (ITMN) just announced very favorable pricing on their latest round of financing. The company sold $105 million aggregate principal amount of its 2.5% senior convertible notes as well as 13.5 million shares of common stock priced at $9.90 per share (the stock closed yesterday at $10.04). The financings netted the company $228.1 million, not counting any over-allotment options granted to the underwriters (up to $35.79 million additional gross proceeds). We believe that InterMune is attractively priced given fundamental developments at the company as well as technical positioning of the stock.
In their press release, the company indicated that they have commitments to repurchase $50 million of their 5.00% senior convertible notes due 2015. The 2015 notes had an aggregate principal amount outstanding of approximately $85 million. We believe that the company will eventually be able to repurchase the entire tranche of 2015 notes. It's encouraging to see that the 2017 notes will bear interest at half the rate of the 2015 senior notes. The market is acknowledging the progress the company has made in gaining European approval of Esbriet and commencing sales. Furthermore, the new notes have an effective conversion price of $12.87 which is 30% above the current stock price. Interestingly, the 424(b)(5) prospectus filed with the SEC indicated that the company expected to raise about $82.1 million through the notes offering. Instead, they have been able to raise $105 million, offering ITMN additional cash runway.
Prior to this stock offering, ITMN had 65.9 million shares of common stock outstanding. After the offering, not counting over-allotments, the company will have 79.7 million shares outstanding. As of September 30, 2012 the company had 351.4 million in cash and cash equivalents. Since ITMN has been using approximately $42 million in cash per quarter, after the offering the company's current cash position should be approximately $513 million. The company recently guided that total operating expenses for 2013 should be in the range of $245 to $285 million; therefore, the company should be able to end 2013 with an additional year's worth of cash on-hand at 2013 expense levels.
InterMune will be expanding their EU rollout of Esbriet to the remaining 6 of the top 15 EU markets this year. While EU sales are a focal point of the story, management's wide guidance range for these sales sets the tone for conservatism. The company expects EU Esbriet sales to fall in the range of $40M to $70M this year, versus the Wall Street Consensus estimate of approximately $65M. While estimates are currently towards the high end of the range, analysts are likely to tweak their estimates down given the company's detailed guidance, which reminds investors that certain territories in the EU still need to come on-line in terms of final drug approval and reimbursement. As a result, ITMN should be positioned to meet expectations as the year progresses, removing any prior overhang on the stock (see company's guidance below). Most importantly, the majority of value that analysts are ascribing to the stock relate to the results of the ASCEND trial and the subsequent U.S. sales opportunity.
"Esbriet revenue: currently projected to be in a range of $40 to $70 million. This includes projected revenue in a range of $40 to $55 million in countries where Esbriet is currently launched (Germany, France, Canada and seven mid-sized European countries), and projected revenue in a range of $0 to $15 million in countries where Esbriet pricing and reimbursement approval and launch is not yet concluded but is currently anticipated during 2013 (Italy, UK, Spain and three mid-sized European countries). The guidance also accounts for the projected time needed to address regional and provincial reimbursement procedures in Italy, Spain and Canada before meaningful Esbriet revenues can be achieved in all regions or provinces in these countries."
In the UK the National Institute for Clinical Excellence (NICE) issued a preliminary assessment of Esbriet in November 2012 that did not support reimbursement for the drug. The company is addressing issues raised in the NICE preliminary assessment and expects a final assessment in March 2013. The market currently appears to be pricing in a negative decision by NICE. The march NICE final assessment for Esbriet is a binary event for ITMN stock because if the drug receives reimbursement in England, 2013 Esbriet revenues are likely to come in towards the middle to upper end of the guided range of $40 - $70 million.
The key catalyst for ITMN's stock is actually in 2014 with the outcome of it's ASCEND phase III trial to support US approval. Recall that in 2010, ITMN received a 9-3 positive advisory committee vote supporting approval of Esbriet (pirfenidone) for treatment of idiopathic pulmonary fibrosis (IPF). Two months later, the FDA issued a complete response letter requiring another clinical trial to demonstrate further efficacy of the drug. The ASCEND trial reached full enrollment towards the end of 2012, and the company has guided that top-line results from the study will be available in Q2 2014.
We believe that the ASCEND trial is well positioned to show a treatment benefit for pirfenidone due to changes in study enrollment criteria compared to previous trials. According to the company:
Relative to InterMune's previous studies of pirfenidone in IPF, the entry criteria for ASCEND have been refined to enrich the study population for patients who are more likely to experience decline in lung function and disease progression during the study. InterMune believes that enrolling patients whose disease is more likely to progress will provide greater opportunity to demonstrate a treatment effect in a one-year study.While the entry criteria have been refined, the study is conservatively powered based on the intent-to-treat analyses from the previous CAPACITY Phase 3 program.
Indeed, in 2013 the company intends to "begin building its U.S. commercial infrastructure and begin pre-launch preparations for Esbriet." We take this as a bullish indication that the company expects a positive outcome in the trial based on the enriched study population.
With the overhang of financing removed at very favorable terms, as well as full EU roll out and initiation of Esbriet sales in Canada, our view is that ITMN stock is positioned to move higher. This past August, ITMN's stock price put in a 5-year low of $7.21. Since then the stock has been moving in an ascending triangle and the latest financing should serve as a support level. The 200-day Exponential moving average stands at $11. Once this price level is broken to the upside, the stock has room to move back to the $12 - $13 range in the short term. As outlined above, should the UK NICE agree to reimburse for Esbriet in March, this will serve as a near-term catalyst and will position the firm to achieve the middle to upper range of their 2013 revenue guidance.
Another potential positive note for the stock is the possibility of in-licensing or acquisitions. As mentioned in the prospectus for the latest financing round, after refinancing the 2015 debt, the company plans to use proceeds to fund the EU roll out of Esbriet, for working capital, possible capital expenditures, and "acquisitions or investments in complementary businesses, products and technologies." If the company does in-license or make an acquisition, we believe that this will be viewed favorably by the market as it diversifies their future revenue stream.
Disclosure: I am long ITMN.
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