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Tickers in this Article: SNY, ITMN, TRGT, CELG, NVS
InterMune Inc. (ITMN) recently priced its concurrent underwritten public offerings of convertible senior notes and shares of its common stock, announced earlier this week. InterMune has agreed to sell its 2.5% convertible senior notes (due 2017) of around $105 million along with 13.5 million shares of its common stock at $9.90 per share. InterMune said that the initial conversion rate for the 2.5% senior notes will be 77.7001 shares of common stock per $1,000 principal amount. This is equivalent to an initial conversion price of about $12.87 per share and represents a 30% premium to the pricing of the concurrent stock issue.

Underwriters will have 30-day options to purchase an additional $15.8 million aggregate principal amount of convertible senior notes plus up to 2 million shares of common stock. InterMune expects to raise around $228.1 million from the concurrent offerings after adjusting underwriting discounts, commissions and other expenses.

We note that InterMune exited the third quarter of 2012 with outstanding 5.00% convertible senior notes (due 2015) of $84.1 million. The company expects to use the net proceeds from the offerings to repay its outstanding convertible senior notes. Holders of 5.00% convertible senior notes may allow InterMune to repurchase around $50 million of the 2015 convertible notes.

Moreover, InterMune also intends to use the funds for Esbriet's (pirfenidone) commercialization. The company is looking to fund the ASCEND trial on Esbriet in the US from the proceeds. The company may use a part of the funds raised for other corporate purposes as well. InterMune also has plans to spend a portion of its net proceeds for capital expenditures, acquisitions or other investments.

We remind investors that the company expects total operating expense of $245-$285 million in 2013, including R&D expense of $100-$120 million and SG&A expense of $145-$165 million.

Our Recommendation

We believe Esbriet has significant commercial potential as it targets idiopathic pulmonary fibrosis (IPF), which is an orphan indication. Though Esbriet is the only approved medicine for IPF, companies like Novartis (NVS), Sanofi (SNY) and Celgene Corporation (CELG) are developing candidates for IPF treatment. We are concerned about the fact that InterMune is dependent on a single product for growth.

We currently have a Neutral recommendation on InterMune. The stock carries a Zacks Rank #3 (Hold). Meanwhile other pharma stocks such as Targacept Inc. (TRGT) carry a Zacks Rank #1 (Strong Buy).

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