No Major Earnings Surprises, but InterMune is Cash-Rich and An Interesting Trade

A month after raking in more than $225M through a combination of debt and equity sales, InterMune’s (ITMN) 2012 financial results released Thursday contain little in the way of surprises, and results are largely inline with those of analysts. The company reported a full year loss per share of $2.30, just beating consensus estimates for $2.47, and generated $26.2M in revenue last year, a slight miss compared to consensus. InterMune’s revenue derives from the company’s treatment for idiopathic pulmonary fibrosis, Esbriet, which recently launched in Europe and Canada. If favorable, results from an ongoing Phase III study slated for read-out in the first half of next year will support submission and approval in the U.S. (Read more in our previous article) InterMune is guiding for Esbriet sales this year of between $40 and $70M depending on reimbursement progress in the European Union, and with a freshly-reinforced balance sheet to support the ongoing launch and the possibility to expand into the American market next year, ITMN at current levels is an appealing prospect. Most pertinent, however, is a reimbursement decision from the United Kingdom’s National Institute for Health and Clinical Excellence (NICE) over the next two months, which could mean a considerable improvement in revenue prospects this year.

Guidance for revenue of $40-$70M in 2013 is dependent on two factors according to the company: sales in European countries in which Esbriet has already launched ($40-$55M), and the potential for launches in new territories (an additional $0-$15M), reimbursement pending. Most important to these prospects is a reimbursement decision in the United Kingdom. A NICE appraisal committee voted against recommending Esbriet in November of 2012, but as CEO Dan Welch explained on the company’s 4Q conference call, “This outcome was expected and anticipated as we announced to you because roughly two thirds of files receive a negative recommendation at the first appraisal. Roughly half of those files – half of the files that receive a negative first appraisal – eventually secure a positive recommendation from NICE.” Management seems optimistic about a positive recommendation by April, but noted the possibility for a second rejection and a subsequent third attempt: “There is a third round. It’s rarely implemented, but it’s not never implemented…If that were to happen – in our case, we have no indication that it would or wouldn’t – but if it were to happen, it generally would lead to a couple of months’ delay in the process. But, again, it is not a zero chance, but the third hearing is quite rare.” Analysts expect, on average, revenue this year of $65M, suggesting confidence in the NICE decision and further reimbursement throughout Europe. A positive decision from the U.K regulatory body over the next two months is a material catalyst, and if favorable, will drive shares higher; at current levels, betting on a positive opinion may make sense.

Although InterMune reported cash and equivalents of $308M at the end of 2012, factoring in the capital raise last month and full exercise of its over-allotment, $66M in debt buybacks, and continued average cash burn, we expect InterMune will end the first quarter with approximately $461.8M on the balance sheet. With 81.5M shares outstanding, InterMune has approximately $5.66 in cash per share, making its $8.57 current share price attractive relative to many biotech peers.

You can read further analysis of InterMune’s fundamentals in our prior coverage, but the stock is oversold on a number of technical levels (14-day RSI and MFI), and Friday’s bounce is setting ITMN up for a reversal. In addition to the NICE decision, an article from Bloomberg on Wednesday speculated heavily about the possibility of a buy-out, which could fuel interest in the story. Although we don’t necessarily want to push that envelope, the article ends on noteworthy comment: “InterMune Chief Executive Officer Dan Welch has a history of selling businesses. Welch was at the helm of Triangle Pharmaceuticals Inc. when Gilead bought it in 2002. The deal gave Gilead an HIV drug that was already under FDA review and helped build the company into the world’s largest maker of such medicines. ‘That was widely heralded as the best acquisition in the history of biotech,’ [Robert W. Baird Analyst, Brian] Skorney said. Welch is seen ‘as not being an empire builder, but someone who takes things to a certain point and then sells the company.’ Interesting food for thought as the company moves towards possible approval in the U.S.