In the past few days, when the ImmunoGen (IMGN) and Roche (RHHBF.PK) royalty agreement was announced, analysts dropped the ImmunoGen royalty earnings estimate from $2.4MM to $300K for the year 2013 and $176MM to $126MM for the year 2018. The revised royalty earning estimates caused ImmunoGen's stock price to plummet 16.7% in one day.
However, if you can look beyond the royalty agreement terms and focus on the revenue potential of TDM-1, you will come to realize that Roche's royalty payments to ImmunoGen can be much higher than analysts' conservative estimates.
In the year 2011, Roche achieved an annual Herceptin sale of $5.251BB in Swiss Francs. This comes to about $5.61BB in U.S. dollars. A $300,000 royalty payment reflects an annual TDM-1 sale of $10MM. To put this into perspective, a $300,000 royalty payment represents a 0.17% Herceptin market share penetration by TDM-1 for the year 2013.
Given that up to 23% of the Herceptin patients can experience serious side effects and that the EMILIA trial showed TDM-1's patients have a 35% improved survivability compared to the standard treatment, a 0.17% Herceptin market share penetration is absurdly low even if TDM-1's FDA submission is for a 2nd line treatment indication for metastatic breast cancer.
In the year 2013, data from the Marianne trial supporting TDM-1 for a 1st line therapy is expected to be available. A FDA submission or approval can occur around the year 2015. The revised analyst's ImmunoGen royalty payment for the year 2018 is $126MM. A figure of $126MM reflects a TDM-1 Herceptin's market penetration of less than 75%. This would be 3 years after the Herceptin patent has expired. Furthermore, by the year 2018, TDM-1 would have already been on the market for 5 years as a second line treatment, therefore, market uptake of TDM-1 to replace Herceptin should be much faster and more aggressive than analysts' conservative estimates.
ImmunoGen's potential revenue upswing can be dramatic. For every 1% TDM-1 penetrates into the Herceptin's market beyond analysts' predictions there can be an additional $1.6MM (3% royalty rate) to $2.8MM (5% royalty rate) in royalty payments. Any small upside deviation from analysts' conservative estimates will result in a considerable increase in ImmunoGen's revenue and value.
In addition to an increased revenue, an accelerated approval time line, the potential for future partnerships, and the rate of product development can also increase ImmunoGen's value. Currently ImmunoGen has several partnerships with Lilly (LLY),Novartis (NVS), Amgen (AMGN), Sanofi (SNY) Bayer (BAYRX.PK), Roche, and Biotest (BIESF.PK).
In summary, when one is assessing ImmunoGen's value, having an understanding of TDM-1's potential impact on generating revenue is far more important than focusing on the current royalty payment structure and reacting to analysts' limited conservative projections.
Disclosure: I am long IMGN.