InterMune, Inc. (ITMN)

Intermune, Inc. (ITMN) develops drugs for the treatment of lung and liver diseases. I’m picking ITMN as my first short on CAPS because I’m struck by how little this company has to offer. It’s notoriously difficult to predict when these sorts of companies are going to implode, as at any given time there are dozens of companies in this sector that have never made a profit and don’t have any strong prospects for the near future yet have managed to stay afloat for years.

For those who don’t want to read all of this, here are the Cliffs’ notes of my analysis:

*Drug developer that has never successfully developed a drug in their pipeline to approval and brought it to market
*Small pipeline with 1 late-stage drug, 1 early-stage
*One product generating revenue with dwindling sales
*Recently laid off half their staff as the result of a failed Phase III trial
*Balance sheet is a horror show, limits their options

ITMN was spun off as a subsidiary of Connetics in April of 1999. Connetics is a dermatology company (merged into Steifel Laboratories in 2006) that was itself a spin-off of Genentech.

ITMN has one drug on the market, from which all of their revenue is currently derived. Actimmune is a form of interferon 1b, used to treat patients with severe, malignant osteopetrosis and chronic granulomatous disease. Sales of Actimmune have likely peaked, as a Phase III trial testing it as a treatment for idiopathic pulmonary fibrosis was shut down early in 2007, and for the rest of the year Actimmune quarterly sales were down relative to 2006. Failure of this trial and the loss of potential revenue the extra indication could’ve generated resulted in ITMN announcing that they would trim 50% of their work force. Analysts slashed revenue estimates for ITMN based on news of the trial being shut down, giving ITMN a bleak sales picture, particularly in light of the fact that Actimmune sales have already been slumping for a few years: 2003 $154.1M, 2004 $151.0M, 2005 $110.5M, 2006 $90.78M, 2007 E$66.78M, 2008 E$40.76M. At one point several years ago pundits were predicting that Actimmune could break $1B annual sales, so it’s safe to say this drug has been a disappointment. It’s also worth noting that Actimmune was licensed from their great-grandparent company Genentech, and not actually developed by ITMN. ITMN used to own the rights to Infergen, a Hepatitis C drug they licensed from Amgen and then dealt to Valeant in 2005, and Amphotec, used to treat invasive aspergillosis, which they licensed from Alza and dealt to Three Rivers Pharmaceuticals, also in 2005. ITMN made some decent money on Infergen; I was unable to find specifics on the deal with Alza so I can’t judge how its development affected ITMN financially.

ITMN has a teeny, tiny pipeline, which isn’t always a bad thing, as it streamlines R&D spending and allows the company to focus its expertise into a small niche or two. But obviously the flipside is that something better work or they’ll be gone before too long. Right now they’re focusing on two drugs:

•   Pirfenidone, a novel compound which has shown anti-inflammatory, antioxidant, and antifibrotic effects in experimental models of pulmonary fibrosis, is ITMN’s only late-stage drug candidate. Considering their ugly-and-getting-uglier finances (see below), that means this drug could likely make or break this company. Pirfenidone is being tested in two Phase III studies for treatment of idiopathic pulmonary fibrosis (IPF), a mysterious form of pulmonary fibrosis with an average survival time of 2.5 to 3.5 years following diagnosis (note: this is the same disease the Actimmune trial was halted for in early 2007). This is a decent disease niche from a development standpoint, as there are currently no standard treatments for IPF and an estimated patient base of 100,000 in the US. Competitors testing/developing drugs for IPF include Pfizer and Novartis. Results from ITMN’s trials are expected in early 2009, and probably represent the biggest driver of ITMN’s share price visible for the next couple years. The hazy nature of this disease means trial design and results could suffer. One of the 4 major requirements for a diagnosis of IPF is that no known cause of other forms of PF can be discerned; in other words, it’s likely that the patient population is extremely heterogeneous, and is actually suffering from PF’s induced by different causes which may respond differently to any individual treatment. If this is the case it could significantly cut into the statistical power of ITMN’s clinical trials.

•   ITMN-191 is an HCV protease inhibitor ITMN is developing in collaboration with Roche. ITMN-191 is currently in Phase 1b testing, and the recent release of data showing that “after completing the first two low-dosage cohorts, we have already achieved the principal goals of the MAD study for viral kinetic performance, safety and tolerability and are now advancing the program to study ITMN-191 in combination with Pegasys(R) and ribavirin” resulted in a significant bump (+12.7% on the day) in share price, particularly considering the early stage of the study. This is a sign that the market considers this drug to be extremely important to ITMN’s future and is keeping a close eye on development of this compound.

So it’s a very small pipeline. Previously it also included oritavancin, a novel semi-synthetic glycopeptide antibiotic being developed for the treatment of serious Gram-positive infections. Oritavancin was acquired from Eli Lilly by ITMN in 2001, who sold the rights to Targanta Therapeutics Inc. in 2005. In addition to wasting time and money on oritavancin while it was in their pipeline, ITMN bought it high and sold it low.

Which brings us to the financials. I’ll hit the high spots:

*ITMN has never turned a profit
*As always, cash flow negative, if you factor out total cash flows from financing activities (I do). The $76M raised by issuing new stock made things look a lot rosier last quarter than they really are. Total Cash Flow From Operating Activities was -$19.8M, Total Cash Flows From Investing Activities was -$2.2M, but because of the stock their bottom line was +$54M.
*Revenues peaked in 2003, going down every year since. ’07 and ’08 revenues are estimated to continue this trend.
*Long-term debt of $170M has been there since 2004. They have $178M in cash. As mentioned above, last year they diluted shareholder value by issuing $76M of new stock (http://www.biospace.com/news_story.aspx?NewsEntityId=70279).
*Total assets $291M, total liabilities $304M. Current ratio looks healthy (6.9) because only $40M of the liabilities are current, but they’re running out of rope.

The 2007 Q4/annual conference call is this Thursday at 4:40PM EST – realistically I should wait until after they say whatever they have to say to establish a position. I’m guessing management will focus as much as possible on Perfenidone and ITMN-191, try to put some lipstick on the pig that is their balance sheet, and is loading up for a lot of “we can’t comment on that at this time”. I’m rooting for the analysts to ask some seriously brutal questions regarding the future of this company, as I think it’s more than warranted.