Small Biotech, Big Rewards

03/13/2013 10:00 am EST

Focus: STOCKS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Although already approved for use in Europe, this biotech’s lead product has not yet received FDA approval, but it has blockbuster potential, says Ben Shepherd of Investing Daily.

When evaluating development-stage companies, I look for companies whose treatments address diseases other drugmakers have ignored, or whose drugs will ease the treatment regimen or reduce dangerous side effects. I also favor companies that have at least one product that’s already on the market, preferably in the US or elsewhere in the developed world.

The path to approval for a new drug is a long and arduous process. If a company has already shepherded at least one product through the approval process, then that suggests it has both the expertise and the resources to achieve that same feat again.

InterMune (ITMN) develops therapies that treat pulmonary and fibrotic diseases. At present, its lead product is Esbriet, a treatment for idiopathic pulmonary fibrosis (IPF). IPF is characterized by chronic scarring or thickening of the lungs that causes chest pain and shortness of breath, but has no known cause. Not only is the disease extremely uncomfortable for the patient, it is also progressive—and the complications caused by the disease are often fatal.
 
Esbriet has been shown to reduce the body’s production of fibroblasts, the basic framework around which tissue is built. It also inhibits the body’s production of collagen, which is another basic tissue building block. Esbriet is the only treatment for IPF in many markets, and if approved in the US, it will be the only IPF treatment here as well.

While Esbriet has been given an “orphan drug” designation by the US Food and Drug Administration [FDA], it has yet to receive FDA approval for marketing in the US. However, it has been approved for use in Europe and is currently available in nine countries there, as well as in Canada and Japan.

InterMune submitted an application for new drug approval for Esbriet in 2010, but has since hit a regulatory roadblock. Although the FDA advisory committee that reviewed the drug recommended its approval by a wide margin, the FDA then stalled the process by issuing what is called a complete response letter. That occurs when the FDA has completed its review process, but has additional questions that preclude an immediate approval of a new drug. In the case of Esbriet, the FDA requested an additional clinical trial for more data on the drug’s efficacy.

So now InterMune is proceeding with an additional phase III trial, and initial data is expected sometime in the second quarter of 2014.

In the meantime, sales of Esbriet have been growing in the EU, and InterMune is currently awaiting a response from the UK’s Institute for Health and Clinical Excellence on whether the country’s National Health Service will offer reimbursement for the drug. A favorable response is expected to add about $15 million to the company’s annual revenues along with its growing sales in Europe and Canada.
 
In addition to steadily rising revenues, InterMune completed a convertible bond offering last year that raised $262 million. As a result, the company now has a bit more than $300 million in cash on hand, which will easily fund the ongoing clinical trial in the US and keep it afloat until the key FDA approval is secured.

Though approval isn’t guaranteed, it appears quite likely, especially since the drug has received approvals from other key regulators. If approved, Esbriet could easily generate more than $1 billion in annual sales. And thanks to its orphan drug designation, it will enjoy a seven-year period of exclusivity, adding an additional buffer to revenues.

Should Esbriet achieve blockbuster status, shares of this $638 million market-cap stock will jump higher as well.

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