Failure is an inherent risk in the boom-and-bust world of biotech, and InterMune (Nasdaq: ITMN) shareholders saw that risk play out on Wednesday morning. The FDA effectively rejected the company's application for marketing approval of Esbriet (pirfenidone) in the treatment of idiopathic pulmonary fibrosis.


IN PICTURES: Learn To Invest In 10 Steps


Clearly the damage has already been done, but what InterMune investors must decide now is whether there is enough promise in the drug and the company to hang on in the hopes of a rebound.

The Genesis of the Drop
On Tuesday evening, InterMune issued a press release stating that the company received a complete response letter from the FDA concerning its application for marketing approval for the drug Esbriet in the treatment of pulmonary fibrosis. Although this is not exactly a rejection, it has the same effect for now - the FDA has essentially stated that the existing data is not sufficient to motivate them to approve the drug, and that the company needs to do an additional Phase 3 study and re-submit the application with that data. (For more, see The Ups And Downs Of Biotechnology)

Could Investors Have Avoided This?
From where I sit, Esbriet had been seen as something of a long-shot drug for most of its development history, until an FDA panel recommendation of approval in March of this year. Despite somewhat mixed efficacy data for the drug, the panel voted nine to three to recommend that the FDA approve the drug. The FDA generally follows the advice of its panels, but as we all saw on Tuesday there is no requirement or guarantee that the FDA will do so.

Still, it is difficult for me to see where investors should have clearly bailed out ahead of this announcement. The data was not perfectly clean, but the drug had been approved in Japan and there were mitigating factors. The disease that this drug targets, idiopathic pulmonary fibrosis, is rare but awful. Somewhere around 100,000 people in the U.S. have this disease, and the five-year survival rate is 20% - due in part to the fact that there are very few treatment options - and no drugs targeted specifically at the condition. Accordingly, I think it was entirely reasonable for investors to believe the FDA would overlook the less-than-perfect data and allow this orphan drug onto the market. (For related reading, see Measuring The Medicine Makers.)

What now?
InterMune now faces a series of uncomfortable choices. With $178 million in cash and a $41 million convertible bond coming due in 2011, I really question whether the company can fund this potential new trial as-is.

Perhaps the company will surrender some of its development responsibilities for its pipeline drug ITMN-191 and accept a lower royalty from Roche in exchange. Alternatively, the company could elect to partner this drug and surrender a chunk of its future profits. Potential partners with respiratory franchises could include GlaxoSmithKline (NYSE:GSK), Novartis, Merck or AstraZeneca (NYSE:AZN), but InterMune shareholders should prepare for a royalty rate in the teens to 20s should the company go that route.

There are a couple of other options, however. First, the company could file for formal dispute resolution. Gilead (Nasdaq:GILD) has gone this route in the past, but it would still take about 18 months and require some funds - though, if successful, not as much as a new trial. There is also a chance that the FDA could accept Shionogi's Phase 3 study in Japan as supplemental data (Shionogi has rights to this drug in Japan) and/or perhaps grant compassionate-use exemptions while InterMune works on a new trial.

Bottom Line
At the bottom line, I have to tip my hat to Jeffries analyst Eun Yang, who had an "underperform" on the stock and was openly concerned about the risk of the FDA not approving pirfenidone. Again, though, that does not help shareholders today.

I am not very optimistic about the company's hepatitis C drug (partnered with Roche), as I believe Merck and Vertex Pharmaceuticals (Nasdaq: VRTX) could have better drugs on the market before InterMune, and Achillion Pharmaceuticals (Nasdaq: ACHN) and Pharmasset (Nasdaq: VRUS) might have better HepC drugs in their pipelines.

As a result, it is really all about Esbriet for now. I think the odds of FDA approval are minimal at this point, which means I would be flying blind as a shareholder. If the company can assuage the FDA's concerns about risk-benefit, or force the issue through dispute resolution, then this is an orphan drug with billion-dollar potential. If not, then shareholders need to be prepared to take a major loss on this speculation. But that is the nature of the beast with biotech - only the fearless need apply.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  4. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  6. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!