Another Setback For Roche Is Bad News For ImmunoGen

By Stephen D. Simpson, CFA | August 26, 2010 AAA

For Swiss drug and diagnostics giant Roche (Nasdaq:RHHBY), the hits just keep on coming. Already bruised by setbacks in the Avastin franchise, Roche announced Friday morning that the FDA rejected an accelerated approval application for T-DM1, a potentially major drug for metastatic breast cancer. As the originator of the technology behind the drug and Roche's partner, ImmunoGen (Nasdaq:IMGN) will also suffer for this surprising FDA decision.

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Precision Munition for Resistant Patients
In very simplified terms, T-DM1 is a derivative of Roche's successful Herceptin drug. ImmunoGen found a way to add a cell-killing compound (DM1) to the HER2 binding antibody trastuzumab that is the active component of Herceptin. What this means in practice is that T-DM1 hones in on the HER2+ cancer cells and delivers a lethal dose, while sparing the sort of system-wide toxicity that so often limits powerful drugs. In early stage studies this drug has shown progression-free survival of five to seven months and Roche had been talking about this drug as a $2-$5 billion/year opportunity.

The Timeline Slides Back
Roche had hoped to achieve an accelerated approval from the FDA that would have likely meant approval in early 2011. The FDA allows these approvals in circumstances where there are serious diseases with minimal options. Although that would certainly seem to apply to third-line metastatic breast cancer (that is, breast cancer that has spread beyond the breast and showed resistance to two prior drugs), the FDA ruled in this case that the patients in Roche's study groups had not exhausted all available options.

Regardless of whether the FDA is being overly literal or not, there is little than Roche can do about it. Now, instead of an early 2011 approval, Roche is looking at a filing in mid-2012, and a possible follow-on filing for T-DM1 as a front-line therapy in 2014. Given the normal FDA review timeline, that means a likely delay of two and a half years. (For related reading, see Measuring The Medicine Makers.)

Where Do They Go Now?
This is clearly a significant setback for ImmunoGen. T-DM1 is the company's only late-stage candidate, and it will be years before the company's other pipeline candidates, IMGN901 and earlier candidates partnered with Sanofi-Aventis (NYSE:SNY) and Biogen Idec (Nasdaq:BIIB), get close to the market.

Moreover, ImmunoGen could certainly have used the milestone payment from Roche that is tied to approval, as well as the royalties from actual sales. With about $110 million in cash and a $10 million quarterly burn rate, ImmunoGen could find itself cash-constrained without additional milestones or financing.

For Roche too, this is a major setback. Roche has been struggling to generate enthusiasm lately, as investors increasingly seem to perceive it as a company with low earnings growth potential and relatively near-term risk of biologics competition from Teva (Nasdaq:TEVA) and Mylan (NYSE:MYL). As a valuable line extension of the Herceptin franchise, this delay on T-DM1 does the company no favors in terms of trying to get investors on board with better near-term expectations.

The Bottom Line
Figuring on a two-and-a-half year delay in T-DM1 (but eventual approval all the same), this news would seem to reduce the fair value of ImmunoGen by about $2 per share. Since the market has driven the stock down by $3, patient risk-tolerant investors may want to take a look - the data on this drug still looks good, and the real damage from this announcement is a time value of money question.

For Roche, the impact is likely to be more severe on perception than financials. T-DM1 should be a lucrative product for the company, but Roche is large enough that this delay is not a serious wound. Still, the seemingly constant stream of bad news is taking a toll on perception and weighing heavily on the stock. Roche shares look quite cheap for the long haul, but will likely be frustrating to investors who are not patient long-term value mavens. (For more, see Big Pharma's Big Problem.)

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