InterMune, Inc (ITMN) recently posted disappointing results with regards to its drug launch in Germany. On the bright side, the company did manage to secure reimbursements from France, which is a positive development for ITMN in terms of market access. We expect that the news on reimbursement/pricing from other national agencies will be in line with the guidance provided by the company. We also believe that despite its current underperformance, sales of the company's drug will eventually pick up once the pending reimbursement decisions from other countries are confirmed. The major catalyst will of course remain the decision from the FDA, which is not expected shortly. In the mean time, based on the valuations provided below, we rate the stock as a hold.
InterMune is a biotechnology company focused on pulmonology and orphan fibrotic diseases. Under pulmonolgy, it specifically attends to idiopathic pulmonary fibrosis (IPF), which is a progressive and fatal lung disease. InterMune is behind the only drug approved for IPF in the world, Esbriet, currently marketed in the EU. Prior to Esbriet, IPF has traditionally been treated with antioxidants and immunosuppressants. The drug is also in Phase 3 trials (ASCEND trial), which the FDA says will demonstrate a clinically meaningful impact on forces vital capacity. The trial is expected to be fully enrolled by the end of 2012, and the results will be available in mid-2014. Early in February, InterMune won marketing authorization of pulmonology and pirdendone in 27 EU countries for the treatment of mild to moderate IPF. Additionally, the company has several pre-clinical research programs in IPF and orphan fibrotic diseases.
In Germany, the drug has achieved almost 6%-7 % penetration in the 8,000-12,000 mild to moderate IPF population. Revenues for the recent quarter came in at $5.5mn, against a market expectation of above $7 million. Analysts have placed the blame for the revenues miss on the relative modest launch of the drug in Germany. On September 11, ITMN announced that it had received reimbursements from France worth €25,000 per year, or $32,000 at the current exchange rates. The launch in France is scheduled to be in December. Reimbursement decisions from other major European countries, such as Spain, Italy and Belgium, are expected in the fourth quarter of this year. A decision from the U.K. is expected in the first quarter of the next year. The National Institute for Health and Clinical Excellence (NICE) in the U.K. is the toughest pricing body amongst the countries that InterMune wishes to launch its product in. The decision by France is a positive development, since this means that national agencies have begun to acknowledge Esbriet.
The drug's lackluster performance in Germany is partly explained by the high discontinuations rate, which was approximately 30%, against the management's expected rate of 20%. This is explained by the fact that the drug was prescribed to patients with advanced and progressing IPF, a stage at which the high discontinuations rate is somewhat justified. The management announced in its earnings call for the quarter that it did not expect patients with advanced fibrotic diseases to see a reverse in their conditions. Furthermore, the negative impact of the IQWiG judgment is to be blamed here.
Analysts expect revenues for the year ending 2012 to be $26.72 million, and $74.57 million for the following year. Analysts from Credit Suisse have placed a peak sales figure of $473 million in the EU, assuming that there will be 20,000 patients. They have set a price target of $20 for the stock (12-month target). Analyst mean target price is $16.
We expect a better performance in the third quarter in terms of sales; analysts expect sales of $6.24 million in the third quarter. The management draws a lot of analogies with the drug Tracleer (prescription drug for certain types of pulmonary arterial hypertension (PAH) i.e. high blood pressure in the vessels of the lungs), which analysts are using to estimate the price of the product in different countries. The weighted average European price, as estimated by Credit Suisse analysts, is $44,000. Also, note that they are discounting the average price by 30% for analysis purposes. Despite the disappointing second quarter for InterMune, we believe that since the drug has shown wide awareness (80% among German pulmonologists), the third quarter will witness a boost in sales going forward. Based on estimates provided for the 2014E revenue figure of $175mn, and an industry average P/S multiple of 4x, we estimate a price target of $10. The sales figure does not account for possible U.S. sales; however, the market expects the global IPF market to be $1.9b by 2018. We recommend the stock as a hold, and maintain that it is a high risk stock whose performance will depend on various factors.