I'm sorry for being a Debbie Downer. I like the guys running ImmunoGen. It's a feel-good story -- a small drug delivery technology company done good with a nice run in the stock price. Unfortunately, the numbers don't lie: ImmunoGen only gets a tiny 5% royalty on sales of the breast cancer drug T-DM1 being developed by the Genentech unit of Roche (RHHBY).
Even if T-DM1 becomes a blockbuster cancer drug, ImmunoGen's stake is tiny, meaning there is no fundamental rationale for the stock to be even close to $15..I understand that traders are bidding up ImmunoGen on today's announcement from Genentech about the positive T-DM1 results from the second-line breast cancer trial known as "EMILIA." At some point, numbers do matter -- a point "investors" should keep in mind. Let's do some math. Genentech is developing T-DM1 as a next-generation version of Herceptin, which generated sales of roughly $5 billion last year. I'm going to be incredibly generous and assume that T-DM1 replaces Herceptin. Never mind that T-DM1 will be approved next year only for second-line breast cancer or that expanding into first-line breast cancer (Herceptin's current role) could take another two or three years. So, I'm projecting $5 billion in T-DM1 sales by the end of 2017, or four years after initial approval. A tremendous success story! Immunogen gets 5% of that $5 billion in 2017, or $250 million. Applying a multiple of 7 times sales, discounted back to the present, puts ImmunoGen's enterprise value at about $900 million, or roughly the company's current value. Like I said, you really need to stretch the bounds of reality to make ImmunoGen's current valuation work. Even if you want to ascribe some value to its pipeline outside of TDM-1 (although not sure it deserves much at this point given the stilted clinical progress), the stock is too richly priced. Enough fantasy thinking. Let's be more realistic. If T-DM1 is approved next year it will compete against Glaxo's (GSK) Tykerb as a second-line breast cancer therapy. Tykerb's worldwide sales in 2011 were $372 million. If we use round numbers and assume T-DM1 totally displaces Tykerb in a couple of years, that's only worth $20 million in royalty revenue to ImmunoGen. As you can see, the math doesn't work too well in ImmunoGen's favor. And that covers any takeout scenario you might want to conjure up as well. Roche owes so little to ImmunoGen for TDM-1 that it makes more financial sense to pay the royalty ever year -- forget about forking over a premium or even current market value for the entire company. Happy trading. --Written by Adam Feuerstein in Boston.
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