Ahead of Incremental Catalysts, Immunomedics’ Options are Compellingly Priced

Since our original March 1 report highlighting Immunomedics (IMMU) as an inexpensive biotech with a novel platform and deep pipeline, shares have risen by 28.82%, outpacing the 24.52% rise in the NASDAQ Biotechnology Index. And over the next several months, there will be several catalysts that have the potential to lead to further outperformance as investors eagerly await the first half of 2014, which will bring with it key Phase III data from epratuzumab, Immunomedics’ most advanced clinical asset. See PropThink’s previous report for more details.

Immunomedics reported its Q3 2013 (the company’s fiscal year ends in June) results on May 8, and although the financial results themselves are largely irrelevant, there are several items in the update that are worth noting. Importantly, Immunomedics ended the quarter with nearly $47.8 million in cash & investments, thanks to the $16.7 million settlement the company inked with FINRA and Bank of America related to investments in auction rate securities. The infusion of cash from this settlement has strengthened the company’s balance sheet, and with a burn rate of $5.67 million per quarter, Immunomedics’ current cash & investment balance will fund operations for over 2 more years, assuming the present burn rate remains relatively constant. Additionally, on May 7, Immunomedics was granted 3 new patents related to the company’s clinical programs. Notably, the IEEE Spectrum Power Scorecard, a measure of patent portfolio quality developed by the Institute of Electrical and Electronic Engineers, has ranked Immunomedics’ patent portfolio as the 10th strongest in the biotechnology industry, ahead of even Amgen (AMGN) and Merck (MRK). With regards to veltuzumab, Immunomedics’ development partner for the compound, Takeda-Nycomed, has scrapped plans to develop the drug for rheumatoid arthritis (RA), and has instead chosen to pursue development in SLE (systemic lupus erythematosus). The decision was driven by a market analysis conducted by Takeda-Nycomed, which believes that there is a superior opportunity in SLE, where competition is far less intense than in RA. Immunomedics and Takeda-Nycomed are preparing Phase II trials of veltuzumab, and enrollment in Phase II trials in immune thrombocytopenic purpura (ITP) is continuing as planned. In addition, Immunomedics reiterated that it’s continuing to see interest in its anti-drug conjugate (ADC) program from the pharmaceutical industry, and the company is considering its options for the program. As investors await the release of Phase III data for epratuzumab in SLE, which Immunomedics reaffirmed will be released in the first half of 2014, there are several catalysts in the next 2 months tied to the company’s other pipeline assets.

The Months to Come

In the next several months, Immunomedics will release updated clinical data for a number of its development programs. New data regarding the mechanism of action for epratuzumab will be presented at the annual meeting of the European League Against Rheumatism, which will be held from June 12-15 in Madrid. Enrollment in Immunomedics’ Phase Ib trial of 90Y-labeled clivatuzumab tetraxetan has been completed, and data from the trial will be reported in July at European Society for Medical Oncology’s annual gastrointestinal cancer conference, which runs from July 3rd-6th.

In addition to these data points, Immunomedics is continuing to make progress within its ADC programs. Immunomedics’ lead ADC compound is milatuzumab combined with Immunomedics’ CD74 antibody for the treatment of multiple myeloma, non-Hodgkin’s lymphoma, and chronic lymphocytic leukemia. The binding of milatuzumab with CD74 allows for its rapid internalization within a patient’s system, thereby making it an “ideal target” for delivering doxorubicin to cancer cells, as stated by CSO David Goldenberg. Milatuzumab highlight’s Immunomedics’ strategy of differentiating itself via a focus on less toxic therapies with fewer side effects, and the company believes that the therapeutic effect of the therapy lies in the combined effects of both the CD74 antibody and milatuzumab, due to the fact that CD74 is involved in certain cellular communication functions, and when it is blocked by milatuzumab, it has the potential to lead to cell apoptosis. Immunomedics’ 2nd ADC program is labetuzumab-SN-38; SN-38 is the active metabolite of irinotecan, the generic name for Pfizer’s Camptosar. Due to the fact that SN-38 cannot be given directly to patients due to high toxicity and poor solubility, it must be delivered via circumventive methods. In this instance, SN-38 is conjugated with labetuzumab, Immunomedics’ anti-carcinoembryonic antigen antibody, which allows for selective delivery to tumors, bypassing non-cancerous tissues and organs. Immunomedics has been focused on crafting a differentiated ADC program, and this pipeline asset is no different. Labetuzumab-SN-38 has a 6:1 drug to antibody ratio, higher than most other ADC-based therapies, and labetuzumab-SN-38 is currently in Phase I trials in pre-treated patients with metastatic colorectal cancer; initial data presented at the 2013 AACR meeting showed that the therapy was generally well-tolerated across several doses (2, 4, 8, and 16 mg/kg). There was one instance of dose-related toxicity at the 16 mg/kg dose within the 11 patients for whom data was available, and an analysis conducted by Immunomedics of serum samples showed that the intact conjugate clears at a faster rate than the antibody itself, consistent with the gradual release of SN-38. Alongside its existing Phase I trials, Immunomedics has chosen to initiate a new Phase I program in metastatic colorectal cancer with higher doses and more frequent dosing. Immunomedics has also moved IMMU-132 into clinical trials. IMMU-132 is the company’s hRS7 (humanized anti-epithelial glycoprotein-1)-SN-38 compound, and is currently in Phase I dose-escalation trials across a wide variety of oncology settings, including breast, lung, pancreatic, renal, ovarian, and esophageal cancers. Patients in the IMMU-132 Phase I program have been receiving the drug in cycles, consisting of weekly doses for 2 weeks, followed by a 1-week break, for up to 8 cycles until either unacceptable levels of toxicity have been reached, or disease progression has been documented. CSO David Goldenberg notes that as of May 9 (Immunomedics’ Q3 conference call), “nine patients have been treated, completing two dose levels, so the dose escalation is continuing. Although it is too early to speak of responses, we have surprisingly noticed some tumor shrinkage at these early doses.” Immunomedics has retained full global rights to its ADC programs, and in the months to come, further upside would be realized should Immunomedics announce further collaboration agreements with either its existing partners (UCB & Takeda-Nycomed), or with new partners.

Favorable Options Conditions

Currently, there is a good deal of favorable pricing within Immunomedics’ option chain, thereby creating opportunities for bullish investors to either leverage their exposure at favorable prices, or hedge their positions. Currently, Immunomedics’ January 2014 $1 call is trading at $2.10 per contract; creating an entry point of $3.10, versus a closing price of $2.95 on May 14. In our view, this 5.08% premium for exposure through January 2014 is quite favorable, and the use of covered calls can lead to an even more favorable entry point. Immunomedics’ January 2014 $5 call can be sold to create a fig leaf position (also known as a leveraged covered call), and with proceeds of $0.35 per contract, the net cost per share falls to $2.75, creating a cushion of over 7% relative to the Immunomedics’ May 14 closing price, and this fig leaf trade allows for potential gains of nearly 82%.

On the put side, favorable pricing allows for the opportunity to create what is in effect a cost-less collar with downside protection through November 2013. Immunomedics’ November $4 puts are currently trading at $1.35 per contract, and the purchase of these puts will grant protection through 2 additional earnings releases (Q4 2013 & Q1 2014) and another six months of exposure to possible updates on Immunomedics’ ADC programs or discussions with potential partners regarding the rest of the company’s earlier-stage pipeline assets. The net cost per share of this trade comes in at $4.30, capping losses at just below 7%. However, for this trade to be profitable, Immunomedics must rally nearly 46% from current levels, and although such a move is possible if the company announces meaningful clinical data and/or business development agreements, it is a tall order on its own. However, this can be partially remedied by selling call options, specifically the January 2014 $5 call. Why the differing expiration dates? The reason lies in the timing of catalysts for Immunomedics. Phase III data for Epratuzumab is expected in the first half of 2014, and it’s unlikely that these results will be released between November 2013 and January 18, 2014. And Immunomedics’ Q2 results are released each February, meaning that between the expiration of the November put and the January call, there will be no earnings-related swings in the company’s stock price. And to date, Immunomedics has not indicated that there will be meaningful clinical data to report between November and January, making it likely that there will be little to drive fundamental shifts in the company’s share price. The proceeds from selling the $5 call bring the net cost per share down to $3.95, thereby creating what is in effect a costless collar, with potential profits capped at around 27%.