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ImmunoGen (NASDAQ:IMGN) concluded the week with a market cap of ~$1B, up 200% in less than a year. This valuation is quite unusual for a company that ascribes the vast majority of its value from a 3-5% royalty stake in a single drug: Roche’s (OTCQX:RHHBY) T-DM1, which utilizes ImmunoGen’s antibody-drug conjugate technology, comprises of Herceptin conjugated to a drug payload. It is in two phase III trials and multiple phase II studies in breast cancer. If proven effective, many believe T-DM1 will eventually replace Herceptin, at least in certain treatment lines.

Although results from the trials are expected only next year and in 2013-14, the market clearly assigns a high probability of success to both studies. This is reasonable in light of the impressive results T-DM1 has generated to date, including a phase II study that demonstrated unequivocal activity in patients with no real treatment options. This trial was supposed to get T-DM1 on the market but eventually the FDA was reluctant to review the application, stating the patient population had not exhausted every possible therapeutic option. In April, Roche announced that T-DM1 was superior to Herceptin in combination with chemotherapy in a randomized phase II trial (actual results are expected later this year).

The best benchmark for T-DM1’s addressable market is Herceptin, which generated more than $5B in sales last year. Theoretically, T-DM1 could be even bigger than Herceptin because it might be useful in diseases where Herceptin is not effective like ovarian and prostate cancer. Moreover, T-DM1 will probably have better pricing and could be given for longer periods of times (where patients are treated to progression).

The majority of Herceptin’s sales come from early stage treatment while advanced stage breast cancer represents a $1-1.5B opportunity. Although Roche has an ongoing phase II evaluating T-DM1 as adjuvant therapy, its plans are still unclear and in any case, it will take years to get the drug approved in this setting. There are still no open trials in other tumor types, so it is too early to assess this opportunity as well.

This leaves T-DM1 with a market opportunity of ~2B assuming better pricing and longer treatment duration compared with Herceptin. Assuming the drug gets approved for first line breast cancer in 2013, it could reach sales of $1B in 2016, of which $30-50M will go straight to ImmunoGen’s bottom line. Even when assigning a very high probability of success, Immunogen’s current market cap seems to be more than fair.

Looking at ImmunoGen’s proprietary and partnered pipeline, there are not a lot of assets to which investors can ascribe meaningful value at present. The company’s two proprietary assets, IMGN901 and IMGN388, still do not have a clear route to registration. The prior has been in development for several years with mild activity as a single agent; the latter is still in phase I, with no clear signs of efficacy. IMGN901 will have randomized phase II results only in 2013.

With respect to the partnered pipeline, the only agent which has shown unequivocal activity is Sanofi’s (NYSE:SNY) SAR3419 in non-Hodgkin lymphoma. The two main issues with this agent is the abundance of approved treatments and promising agents in clinical development, at least in certain subtypes of NHL. The rest of ImmunoGen’s pipeline has either no clinical data or limited efficacy.

In summary, ImmunoGen has a validated technology but only a single asset with substantial value. New clinicals from the company’s early stage pipeline (there are three ongoing programs from Sanofi and Bayer (OTCPK:BAYZF)) could support higher valuations, but these are too early to be factored in at the moment. The company expects three additional programs to reach the clinic this year, so 2013 could be a very interesting year for ImmunoGen.

In terms of future catalysts, the most important catalysts are T-DM1 results from the first line trial in September as well as combination data with other investigational agents. In particular, it will be intriguing to see how activeT-DM1 is in combination with pertuzumab, which recently met the primary endpoint in a phase III trial. Sanofi is expected to present updated results and disclose its development plans for SAR3419 towards year end at ASH.

Array’s deal disappoints

Earlier this month, Array (NASDAQ:ARRY) announced a licensing deal for ARRY-543 with ASLAN, a recently established Singapore-based company. In contrast to Array’s two previous deals with Amgen (NASDAQ:AMGN) and Novartis (NYSE:NVS) (discussed here), the current deal is viewed by the market as a sign of weakness. Unlike the two previous deals, the current one does not involve substantial upfront or milestone payments until ASLAN finds a partner for a phase III program in gastric cancer. The only near term economic impact is ASLAN’s commitment to develop the drug in gastric cancer, which takes another clinical stage program off Array’s budget.

The unfavorable deal terms represent the lack of excitement with ARRY-543 among pharma companies, probably because there are similar drugs from GSK (NYSE:GSK), Pfizer (NYSE:PFE) and Boehringer Ingelheim in more advanced stages of development. Aquilo Capital’s Adam Bristol drew my attention to an interesting finding that did not appear in the press release. Array’s SEC filing reveals that ASLAN has an option to negotiate a license for additional undisclosed compound in Array’s pipeline. This can be viewed as an indication for the low interest in this compound as well.

Following the recent organization and restructuring of debt, and the company’s broad partnered pipeline, Array is still attractive at its current valuation, based on exposure to multiple clinical programs that could generate signals and become important catalysts.

The most advanced is AZD6244 (a MEK inhibitor developed by AstraZeneca (NYSE:AZN)), which will have results from two phase II combination trials in melanoma and lung cancer in the coming months. Importantly, both studies include patients selected based on a biomarker (BRAF and KRAS mutations in the melanoma and lung trials, respectively). The lung cancer trial is more important, as it represents a higher unmet need and a larger market. The role of AZD6244 in combination with chemotherapy in BRAF+ melanoma is unclear even if the drug has activity, as these patients respond very well to RAF inhibitors as single agents. In contrast, KRAS mutated tumors are not candidates for RAF inhibitors, making them an ideal target population.

Array’s second MEK inhibitor, MEK162 (partnered with Novartis) is less advanced than AZD6244, but it is making a lot of progress thanks to Novartis’ aggressive clinical program. Novartis is expected to start three combination trials with other investigational agents in its pipeline, which appears the most appropriate way to advance MEK inhibitors. These trials will not generate meaningful data in the coming year or two. The only piece of clinical evidence investors could expect in the coming year is results in biliary cancer and colon cancer with BRAF or KRAS mutations.

In December, Array will report data on two proprietary programs, ARRY-520 and ARRY-614 in multiple myeloma and MDS, respectively. ARRY-520 had initial signs of activity as a single agent, but it is probably not potent enough to be developed as monotherapy. Array will report first data with ARRY-614 after two years in phase I. The company intends to pursue this drug in MDS and is working on an improved formulation. This might imply the drug has some level of activity but it is still too early to ascribe any value to this program.

Two long term assets Array has are collaborations with Genentech and Celgene (NASDAQ:CELG). Each collaboration has yielded a clinical stage program and more are expected to follow. Genentech’s program (GDC-0068) is an AKT inhibitor currently in phase I, where the drug demonstrated good PK and PD data. Although there is still no efficacy data, it appears Genentech intends to pursue this drug in combination with other drugs. Celgene’s program, ARRY-382 (a cFMS inhibitor), entered phase I earlier this year. cFMS is an intriguing target as it is implicated not only in cancer biology but also in several in functions in the tumor microenvironment. Plexxikon (acquired by Daiichi Sankyo (OTCPK:DSKYF)) has two cFMS inhibitors in clinical trials in oncology and inflammation.

Seattle Genetics’ (NASDAQ:SGEN) underappreciated asset

Last week, SGEN made a step closer towards becoming a commercial stage company following an overwhelmingly positive ODAC recommendation for Adcetris (SGN-35). Adcetris is expected to be approved this year for two rare blood cancers based on excellent results. Seattle Genetics retained US rights for this drug as part of a licensing deal with Takeda (OTCPK:TKPHF) and is expected to generate sales of ~$250M in the US alone in 2015.

The company derives the majority of its market cap ($2B) from Adcetris but there appears to be one asset the market does not fully appreciate: The strategic relationship with Genentech/Roche, the world’s leading oncology company.

As I discussed in a previous post, Seattle Genetics is clearly Genentech’s favorite provider of ADC technology, despite the impressive results with T-DM1, which is based on Immunogen’s technology. In the past several months, Genentech advanced seven ADCs to phase I, all of which are based on Seattle Genetics’ technology. This means that next year, there could be initial data from seven different programs across multiple indications. As ADCs are extremely potent molecules, they could provide efficacy readout early on in phase I.

Seattle Genetics’ exposure to Genentech’s ADC pipeline is in the form of mid-single-digit royalties and milestone payments; however, the cumulative value of the ongoing programs could be substantial. Genentech is putting a lot of efforts behind its ADC pipeline, which will probably generate more clinical candidates in the coming years.

Portfolio updates

We are selling all of our holdings in ImmunoGen at a profit of 415%, solely based on the valuation issues discussed above. The company has exposure to one of the most promising drugs in development and its technology should generate multiple long term catalysts. Nevertheless, there is not much which could support the stock in the coming six to nine months.

We are starting new positions in Merck (MRK) and Progenics (PGNX). We are also adding additional positions in Micromet (MITI) and Synta (SNTA), both of which have wholly owned programs with exciting clinical data (discussed here). Micromet should report new data for its lead program at ASH in December. Synta is expected to announce a deal with a pharma company which will include either outlicensing of Asian rights or a drug development collaboration with a partner without giving away rights to the product.

Portfolio holdings as of July 24

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Source: Why It's Time to Sell ImmunoGen