Immunogen (IMGN) reported 2Q 2013 revenue of $2.6 million with a net loss of $24.4 million. The adjusted loss is 29 cents per share which is wider than analysts' consensus of 24 cents. As a result of the earnings, within three days, the stock price tumbled 5% to $14.52 per share. This stock price represents a 24% drop compared to its 52-week high of $18.10.
Right after the earnings, Immunogen was downgraded by analysts with a target price of $14. According to Oppenheimer, the target price of $14 already reflects the FDA approval of T-DM1 expected on February 26, 2013.
Why analysts downgraded this company and gave it a target price of $14 is beyond my comprehension. Since it is widely known that this company does not have any approved products on the market, why are analysts expecting a revenue of more than $2.4 million?
It is also logical to expect the current revenue to increase significantly with the approval of T-DM1. Therefore it makes no sense why the current stock price with no T-DM1 approval would drop another 52 cents to the analyst's $14 target price with T-DM1 approval unless investors are spooked by the analyst and it becomes a self-fulfilling prophecy. Since T-DM1 projected sales have a range of $2 billion to $5 billion, based on which sales figure did the analyst magically come up with a price target of $14?
If investors can look beyond the surface, the recent earnings report actually paints a very positive outlook for Immunogen. In 2Q 2013, the research and development (R&D) spending was $21.7 million. This represents a whopping 39% increase in R&D spending compared to the same period a year ago. The increase in R&D spending reflects the company's desire to develop and market its own product rather than relying on low paying royalties from its partners. An example of a low paying royalty agreement is Immunogen's partnership with Roche (RHHBF.PK). Upon FDA's approval of T-DM1, Roche stands to make $5.6 billion in annual T-DM1 sales while Immunogen is rewarded with a mere 3-5% in royalty payments. If Immunogen can successfully develop and market its own compound IMGN901, IMGN529, and IMGN853, its revenue can be in the billions from selling its own products rather than collecting a modest $2.4 million in current milestone payments.
A near term catalyst for an Immunogen stock price jump comes from the possibility of it being acquired. Recently, the company's executives filed an 8K form. The 8K form outlined the compensatory arrangement and departure process of officers in the event of a merger or consolidation. Immunogen may be acquired at any time this year given that it sits on $211 million in cash with no debt and that a widely expected FDA approval of T-DM1 is right around the corner.
The approval of T-DM1 validates the clinical usefulness of Immunogen's TAP technology. Once validated, the company's proprietary TAP technology will serve as the building block for numerous next generation antibody- mediated chemotherapies. Companies with big stakes in developing next generation chemotherapies include Roche, Sanofi (SNY), Bayer (BAYRX.PK), Lilly (LLY), Novartis (NVS), and Amgen (AMGN). These companies also happen to be Immunogen's partners and most likely a future owner.
Immunogen's acquisition price can be anybody's guess. However, based on historical price movements or premiums paid on recently acquired companies: Amylin (54%), Human Genome Science (99%), Medics (39%), Genzyme (38%), Ardea (50%), and Map Pharmaceuticals (60%), an Immunogen acquisition price of $22.80 seems reasonable. I arrived at this number by adding a 57% premium (averaged from recent premiums paid) to the current Immunogen's price. This process has to be more mathematically accurate than the analysts' predictions.
While analysts see Immunogen's earning as a glass half empty, I see it as a buying opportunity given Immunogen's upside potential moving forward.
Disclosure: I am long IMGN.