The Food and Drug Administration should have approved InterMune's (NASDAQ: ITMN ) Esbriet four years ago; Roche's $8.3 billion buyout of InterMune announced yesterday proves that.
Esbriet still isn't approved in the U.S., but Roche clearly doesn't seem worried since it's willing to make the purchase at this point and for a 63% premium on the price before rumblings of a potential InterMune buyout started about two weeks ago.A walk down InterMune's roller coaster stock chart
You'll recall -- or maybe not since it was so long ago -- InterMune ran two phase 3 trials testing Esbriet in patients with the lung disease, idiopathic pulmonary fibrosis, or IPF. Only one of the two trials showed a statistically significant difference in the primary endpoint -- a measurement of lung capacity -- compared to placebo after 72 weeks.
Without any approved drugs for IPF, the doctors on the FDA advisory panel recommended approving Esbriet. The data was far from clean, but nine of the 12 panel members concluded that something is better than nothing.
The FDA wasn't as lenient. The data-driven agency ignored the committee's recommendation and rejected Esbriet in 2010, demanding another trial to prove that Esbriet really helps IPF patients.
Its European counterpart followed the something-is-better-than-nothing philosophy. In late 2010, the Committee for Medicinal Products for Human Use (CHMP) recommended approving Esbriet. A CHMP recommendation is akin to an approval because the European Commission is just a rubber stamp.
Fast forward to earlier this year when InterMune reported that Esbriet passed the confirmatory clinical trial.
There seems to be little doubt in the minds of Roche's executives that the FDA will approve Esbriet on or before the November 23 PDUFA date. The only question is whether the approval will come with a sticky note attached apologizing for the first rejection.
Lessons from InterMune's comeback
There are a few lessons here:
Patience prevails. If you held onto InterMune through the rollercoaster, you're sitting on a 5-year return around 370%, beating the Nasdaq Biotechnology Index's approximately 260% 5-year return. Of course you might have spent all the additional gain on celebratory bubbly and antacids in the interim.
Understanding regulators' standards is the key to success. You could have done even better if you sold after the advisory panel meeting before the FDA handed down the rejection and repurchased shares during one of the subsequent dips.
Unfortunately, predicting regulators' actions can be difficult because they're constantly changing. I think the FDA has actually gotten a little more lenient with its data requirements in the last five years. If InterMune came to the FDA today with mixed phase 3 data, I could see the agency giving Esbriet an accelerated approval, requiring a new trial to gain full approval.
The FDA rejection was very costly. While investors are up about 370% over five years, InterMune's market cap is more than 1,000% higher than it was five years ago. Investors have a smaller piece of that pie -- and thus a smaller share price gain -- because InterMune had to sell additional shares to pay for the additional trial.
And not only would investors not have had the dilution if the FDA had approved Esbriet in 2010, but InterMune would have four years of sales under its belt, potentially propelling it to blockbuster status and InterMune's valuation well above the $8.3 billion that Roche is paying.
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