Is ImmunoGen More Than T-DM1?

| About: ImmunoGen, Inc. (IMGN)
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One of the crueler aspects of biotech is that investors can be right about a technology or drug, but still not make much money from it. Bad deals, bad management, and mismanaged expectations can sometimes do harm that even blockbuster drugs can't fix. While I don't think any of that applies to ImmunoGen (NASDAQ:IMGN), I do wonder how much value lies in this company's Targeted Antibody Payload (TAP) technology (basically the company's own antibody drug conjugate approach).

Is ADC A Good Place To Be?

Antibody drug conjugates (ADCs) look like the real deal and a step forward in oncology. The concept is pretty straightforward - a known cancer-killing chemical is linked to an antibody which targets a particular antigen that is expressed on the membrane of a cancer cell. If old school chemotherapy represents a "carpet bombing" approach where cancerous and healthy cells alike are killed, ADCs are more like smart weapons that focus in much more directly on the target with less collateral damage.

As a relatively new technology, this market is just getting started from a commercial perspective. Seattle Genetics (NASDAQ:SGEN) has its Adcetris drug on the market for Hodgkin's lymphoma and that's pretty much it. Pfizer (NYSE:PFE) had Mylotarg on the market a while back for AML, but pulled the drug in 2010 due to iffy efficacy and troubling safety data - a good reminder that even a better class of drugs can still have clunkers.

There are multiple compounds in trials and several companies are giving this technology a serious look. In addition to Seattle Genetics and ImmunoGen partners Roche (OTCQX:RHHBY) and Sanofi (NYSE:SNY), Celldex Therapeutics (NASDAQ:CLDX) has a promising Phase II compound (CDX-011) in development for breast cancer, and other companies are in trials with ADCs as well.

Super Herceptin?

Although ImmunoGen has been around as a company for quite some time, it seems like they've found a real winner with T-DM1. This drug links Herceptin (a successful cancer-fighting monoclonal antibody from Roche) to a chemotoxin (DM1) with an MCC linker. Trials of T-DM1 have been consistently positive, and recent data from a pivotal study showed a 32% reduction in the risk of death for patients with metastatic Her2-positive breast cancer.

At the risk of hyperbole, this data positions T-DM1 as a potential "Super Herceptin" and a major blockbuster for Roche. Not only is the initial indication likely worth much more than $1 billion, but Roche will be pushing ahead with additional studies aimed at getting broader labeling and usage for the drug; given Roche's past success in this regard, chances are good that T-DM1 will be a $5 billion drug and maybe a lot more.

So now for the bad news. While ImmunoGen is Roche's partner on T-DM1, the company's financial leverage is more modest than is typical for biotech-Big Pharma partnerships. Roche is quite thorough in forcing partner companies to stick to an approved script, so ImmunoGen can't say much more than that they're entitled to a tiered "mid single-digit" royalty over a period of 10 to 12 years, depending upon on the patent coverage in various countries.

That said, T-DM1's success is clearly good for ImmunoGen - it brings positive attention to the ADC space, as well as ImmunoGen's capabilities. It's also worth mentioning that 4-6% royalties may not be huge, but 5% of a multi-billion dollar drug is hardly nothing.

Now, Do It Again

The big question is whether there's value in ImmunoGen's pipeline and technology beyond T-DM1. The company has three wholly-owned ADCs under development, as well as seven other out-licensed programs (not all of which are ADCs), including three to Sanofi and two to Amgen (NASDAQ:AMGN). ImmunoGen also has technology licensing agreements with a host of other Big Pharma names, including Lilly (NYSE:LLY), Novartis (NYSE:NVS), and Bayer (OTCPK:BAYZF).

IMGN-901 is the most advanced wholly-owned program, currently in a Phase II study in small-cell lung cancer. The two other compounds are in earlier stages of development and target lymphoma and solid tumors.

Sanofi's lead partnership compound, SAR3419, targets CD19 and is in three Phase II studies of various lymphomas, while the other two are still in Phase 1 for hematological cancers and solid tumors.

As unsatisfying as this will be to readers, there just isn't really much to say about these programs at present. The success of T-DM1 doesn't directly transfer to these programs, as the chemo drugs, linkers, and antibodies are all different. While it seems unlikely that the cytotoxin will be the problem, issues of antibody affinity and broader efficacy and safety all could derail these programs. Nevertheless, lymphoma (all types) could be a $10 billion market by 2020, and if these drugs show similar superiority the rewards will be there.

What's It Worth To You?

Valuation is where I seem to make most of my enemies among readers, but it's too important not to discuss. As is so often the case, assigning a value to ImmunoGen is not unlike trying to play darts while blindfolded and standing in a thunderstorm.

T-DM1 is clearly the most valuable asset today. As I am a Roche shareholder, I freely admit I may be too in love with its prospects. Nevertheless, I do believe this drug has a very good chance of reaping at least $4.5 billion in sales within six years (excluding possibilities in gastric cancer). Assuming 5% of that goes to ImmunoGen, that's worth about $11 today (using an 8x revenue multiple and a 10% discount rate which assumes almost no approval risk). If Roche can reap $7.5 billion (extremely bullish, but not impossible), the value jumps to more than $18 (or $22 if you think the royalty goes to 6%).

The rest of the pipeline is even harder to value, as there is practically no useful efficacy data yet. An analysis from the brokerage firm Cowen showed an average enterprise value of $140 million for Phase II biotech compounds (a little higher than I'd estimate). That points to more than $1.50 per share in value for IMGN-901. Assuming a similar royalty structure for Sanofi's Phase II drug, I'd chip in another $0.50 for SAR3419. I'm not including anything for the other compounds, but I am including the current cash value of about $2.50 per share (as development proceeds, cash will decline but pipeline value should offset that).

All in all, that results in a target of about $15.50, with upside into the $20s if T-DM1 really succeeds. Given the current price of about $15, that tells me the Street is dialed into the consensus expectations for T-DM1 and assigns modest value to the pipeline. While I think the odds of a Roche buyout are small (there's little need to acquire a single-digit royalty stream), this is a name that I'd watch carefully and reconsider on a pullback not tied to a clinical setback.

Disclosure: I am long OTCQX:RHHBY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.