InterMune (ITMN) Bulls Waiting on FDA

InterMune shares were not allowed to begin trading in the pre-market session today due to a trading halt by NASDAQ. This is common on FDA event days for biopharma stocks. Yesterday, I introduced readers to the company’s drug pirfenidone and the disease for which it is the only treatment designed, idiopathic pulmonary fibrosis (IPF).

Today, I want to address what the FDA designations “Fast Track” and “Priority Review” mean for ITMN’s pirfenidone and how they have been affecting recent stock price action. And we’ll also look at what analysts who have been following the company’s drug R&D for a while think about the potential of today’s decision.

The FDA meeting that is probably still going on this morning as you read this, of the Pulmonary-Allergy Drugs Advisory Committee (PADAC), was scheduled to review the New Drug Application (NDA) for pirfenidone. This committee is usually composed of independent physicians and medical researchers who are not employed by the FDA, but who have been involved in advising the FDA on the new drug’s trial data and ultimate efficacy. After ITMN’s NDA was submitted on November 4, 2009, the FDA granted Orphan Drug and Fast Track designation to pirfenidone. On January 4, 2010, FDA granted Priority Review status to the drug.

Why the Hurry?

The primary motivations for the FDA’s actions revolve around their philosophy of making experimental drugs with some promise to treat previously untreatable diseases get the quickest path to market where they could potentially begin saving lives or reduce suffering and/or progression. Below are the short definitions for these designations, taken directly from the FDA’s guide page, which gives details of the approaches and statistics on approval times. Even the agency admits there is much confusion about these terms because they all imply some form of “speed.”

• Fast track is a process designed to facilitate the development, and expedite the review of drugs to treat serious diseases and fill an unmet medical need. The purpose is to get important new drugs to the patient earlier. Fast Track addresses a broad range of serious diseases.

• When studying a new drug, it can take a long time – sometimes many years – to learn whether a drug actually provides real improvement for patients – such as living longer or feeling better. This real improvement is known as a “clinical outcome.” Mindful of the fact that obtaining data on clinical outcomes can take a long time, in 1992 FDA instituted the Accelerated Approval regulation, allowing earlier approval of drugs to treat serious diseases, and that fill an unmet medical need based on a surrogate endpoint.

• A Priority Review designation is given to drugs that offer major advances in treatment, or provide a treatment where no adequate therapy exists. A Priority Review means that the time it takes FDA to review a new drug application is reduced. The goal for completing a Priority Review is six months.

From the above FDA designations, it’s clear that once ITMN’s pirfenidone received Priority Review status in early January, the stock was poised for imminent action. We noticed right away in our daily options scans that the implied volatility “curve” for ITMN options was uniquely structured to anticipate a big event in March, which was then known to be the likely month for an FDA review meeting. The February options traded at a mild 50% implied volatility, while the April options had vaulted to over 150%.

But the FDA walks a tightrope on these approval processes. On the one hand, they want to get new drugs to market that might help terminally ill or greatly suffering patients. On the other, they need to stand for good science and public safety. Pirfenidone had two completed research studies, only one of which gave the positive result of improved breathing.

Thus the caution by investors since the FDA usually likes to see two positive studies. Overall though, data from the two studies seemed to confirm that fewer people died who received the drug versus those who got only a placebo, and that news had investors much more positive last Friday after the FDA posted its pre-review briefing documents. See my article yesterday for a fascinating look at recent placebo research.

Where the ITMN Analysts Stand

In a Bloomberg.com article by Catherine Larkin on March 5, the day the FDA posted PADAC review documents which were seen as less critical of pirfenidone research results, a couple of InterMune analysts were quoted and they will give us a starting point for gauging today or tomorrow’s possible stock reaction.
From Bloomberg.com:

Annual sales of pirfenidone may reach $666.5 million in 2014, according to the average estimate of four analysts surveyed by Bloomberg. A positive FDA panel review would make InterMune an attractive acquisition target for Gilead Sciences (GILD) of Foster City, California, or Roche Holding AG, of Basel, Switzerland, said Brian Abrahams, an analyst of Oppenheimer & Co. in New York.

“InterMune works with Roche on their other product,” an experimental treatment for hepatitis, he said. “Gilead is a company that is building out a respiratory franchise as well as a hepatitis C franchise.”

Abrahams anticipates that InterMune shares will continue to rise if the panel recommends approval of pirfenidone. He raised his 12-month price target on the shares today to $33 from $25. Oppenheimer makes a market in the securities of InterMune.

The Oppenheimer analyst mentioned had just recently raised his price target on ITMN on January 25 from $20 to $25. But he is not alone in his bullishness.

My sources spoke last Friday with an analyst from Wedbush Morgan, who had an Outperform rating on ITMN shares in October 2009 with a $23 price target. Wedbush’s equity valuation with an FDA approval of pirfenidone would probably put the name at $32, and initially they expect the stock to hit a range of $27 to $33 on a positive PADAC decision. Others I am hearing have targets in the $35 to $37 range on approval, while a negative vote would suggest something around $8-12.

Keep in mind that we might not get the whole move higher this week even with a positive PADAC outcome because, as I mentioned yesterday, the final FDA decision is not due until May 4th and there have been instances where they did not follow the recommendations of an Advisory panel. That said, the potential for InterMune becoming an acquisition target by its larger biopharma brothers is still high enough to make the stock worthy of serious consideration by biotech investors.

And for biotech investors who don’t want that kind of volatility, remember the First Trust NYSE Arca Biotechnology ETF (NYSE: FBT) as my favorite, safest, and “mandatory” way to invest in the future of medicine. Tomorrow, I will look at the recent gains in the FBT off of its exposure to small biotech “gems in waiting” like ITMN.