Immunex Gets a Dose of Competition Brian Graney (TMF Panic)
November 11, 1999
High-flying biotechnology firm Immunex (Nasdaq: IMNX) was back in the news today as investors ruminated over the eventual effects of a new competitor to the company's leading product, the rheumatoid arthritis (RA) treatment Enbrel. Last night, the FDA approved Johnson & Johnson's (NYSE: JNJ) Remicade drug for reducing the signs and symptoms of RA when used in conduction with the current RA standard of care methotrexate. The approval marks the second treatment indication for Remicade, which J&J picked up through its recent purchase of biotech firm Centocor. Previously, Centocor had garnered the FDA's rubber stamp to use Remicade as a treatment for Crohn's disease.
Enbrel has been integral to Immunex's emergence as a top-tier biotech over the past year, which has been a textbook case of how a company's share price can be driven into the stratosphere in no time thanks to rising expectations. When Enbrel was initially approved last year for use by advanced RA patients, analysts were speculating that the drug might contribute $200 million or so in 1999 sales with annual revenues topping out potentially at $600 million one day. As it turned out, the first year expectations have proved to be way too low.
Enbrel sales hit $102 million in the third quarter alone, putting the firm on track to rack up $350 million in sales of the drug this year. Immunex expects the growth to continue in 2000, when sales might hit $500 million. Analysts, excited by the heady growth rates and the renewed interest by investors in biotechnology, quickly adjusted their estimates for Enbrel's selling power and speculated that the drug could generate a startling $2 billion in annual revenues at some point down the road. The ratcheting up of expectations prompted a value explosion in Immunex's market capitalization, which has ballooned from $2.2 billion to $11.6 billion in the past 14 months.
With Remicade nearing approval, momentum investors backed off of Immunex late this summer and the firm's shares now trade hands at roughly a 20% discount to the all-time high hit in August. But even at this reduced valuation, the future expectations remain quite high for Enbrel, which accounted for two-thirds of Immunex's total revenues in the most recent quarter. The company currently trades at about 15 times projected 2000 sales and roughly 85 times next year's expected earnings.
Observers have acknowledged the competitive threat posed by Remicade virtually since Enbrel's initial approval last year, but the general consensus is that Immunex's drug will end up being the long-term market share winner. A major issue standing in the way of all-out Enbrel market dominance is Medicare reimbursement policies. As a self-injectable product that can be used by RA patients outside of the doctor's office setting, Enbrel's estimated $11,000 annual price tag is not covered by Medicare. Remicade on the other hand, which will cost about $9,500 annually, is administered by intravenous (IV) infusion in the doctor's office, making it eligible for Medicare reimbursement.
The $64,000 question for investors now becomes how much of the total RA patient population Enbrel may ultimately lose to Remicade due to the reimbursement issue. In their $2 billion annual revenue projections for Enbrel, most analysts have assumed that 25% to 30% of the RA market will be ceded due to the reimbursement issue. Yesterday, J&J tested the accuracy of that statistic and stated that up to 50% of all RA patients are covered by Medicare.
Whether the RA Medicare statistics end up being just "lies" or "damned lies," as Mark Twain might put it, may not matter very much for long-term investors. As tumor necrosis factor (TNF) inhibitors, the real sweet spot for Enbrel, Remicade, and a similar treatment in late-stage development by Amgen (Nasdaq: AMGN) may be in larger indications, such as their use in combating widespread conditions such as congestive heart failure. Looking at the competitive situation through this lens, Immunex investors should get used to the idea of competition and likely much more of it down the road. At its currently steep valuation, the company's performance will need to be near-perfect to live up to the expectations currently reflected in its share price.