T-DM1 Approval Benefits Technology More Than It Does ImmunoGen

| About: ImmunoGen, Inc. (IMGN)

A biotech company’s first ever market approval should be cause for a major celebration, but ImmunoGen (NASDAQ:IMGN) shareholders largely shrugged off the FDA’s green light on Friday for the company’s antibody-drug conjugate “smart bomb” T-DM1 in metastatic breast cancer.

The nonplussed reaction proves that, as EP Vantage had speculated, the event was already priced into ImmunoGen’s strongly performing stock. More important for the biotech group is the read-across to the rest of its pipeline; the development of such conjugates has been no bed of roses, but approval of T-DM1 should validate ImmunoGen’s technology, on which many of its remaining assets are based.

ImmunoGen’s shares closed up just under 2% on Friday, valuing the Waltham, Massachusetts company at $1.2bn. The stock had risen strongly since a dip in November, when full details of the royalty ImmunoGen stands to receive from its partner Roche on sales of T-DM1 – barely 5% – were revealed (Event – T-DM1 approval virtually assured, but upside tough to find, February 15, 2013).

Minor surprises

Friday’s approval of the conjugate, comprising trastuzumab, the active ingredient in Roche’s blockbuster Herceptin, linked to the cytotoxic agent DM1, contained just three minor surprises.

Firstly, the name: T-DM1 is to be branded Kadcyla, maintaining the recent trend towards ever more outlandish trade names for drugs.

Secondly, on the debit side, Kadcyla’s label will carry a black box warning of liver toxicity, in addition to the cardiac and embryo-foetal toxicity that already features on Herceptin’s. Patients on Kadcyla will have to have their ALT/AST ratio monitored for signs of liver damage, which could affect its use in the adjuvant setting, UBS analysts wrote. Speaking to EP Vantage today, ImmunoGen’s chief executive, Dan Junius, said the label seemed somewhat conservative, but was broadly in line with what the company had expected.

Finally, the drug has been priced at a hefty $9,800 per month – a sum that will surprise even the more bullish sell-siders. Last year Roche launched Perjeta at a 27% premium to Herceptin, and the Kadcyla price tag represents a further 40% hike above this – although, since Perjeta is dosed with Herceptin, Kadcyla might be seen to be slightly discounted.

Beyond this detail, the U.S. approval, for treating metastatic breast cancer patients who have failed on Herceptin and a taxane, will surprise few. First-line use is likely if the ongoing Marianne study yields positive data, which is possible next year, although it could begin sooner than that thanks to the types of patients that had been recruited into the pivotal Emilia trial.

Expanded use in breast cancer and future use in other malignancies could explain the bullish consensus forecasts for Kadcyla, which result in the risk-unadjusted NPV of ImmunoGen’s royalty interest – $1.7bn – being 34% higher than the market cap of the entire company.

But no matter how big the revenue potential, ImmunoGen will only see 3-5% of it reflected in its income statement, plus some fairly insignificant milestones; Friday’s US approval triggered a payment of just $10.5m. The more important victory is for the concept of antibody-drug conjugates, which until now have met with very limited progress (Therapeutic focus – Antibody drug conjugates still making slow progress, July 15, 2011).

ImmunoGen itself has a pipeline of antibody-drug conjugates that uses a broadly similar technology to that just validated by Kadcyla. It is here that the real long-term potential lies for the company to drive up its share price.