For those of you unfamiliar with Immunex (Nasdaq: IMNX), you might want to introduce yourself. Immunex describes themselves as a biopharmaceutical company, which I guess means that they're transitioning from being a money-losing biotech research firm to an honest-to-goodness FDA-approved, money-making drug company.
For most of the early 1990s, the company lost money as it developed new therapies for rheumatoid arthritis, asthma, cancer, and cardiovascular disease (By the way, I've written more on cardiovascular disease and investment opportunities in this year's Industry Focus). Immunex's big break came with the FDA approval of rheumatoid arthritis drug Enbrel. If you're not familiar with rheumatoid arthritis, it's one of the most painful conditions around, where the body has an autoimmune disorder that causes the immune system to attack the lining of a person's joints. In addition to being incredibly painful, it debilitates the body causing various deformities, organ damage and even premature death.
Not fun. Without getting all medical on you, Enbrel helps inhibit the inflammation caused by the disease. Patients get weekly shots of Enbrel and must stay on Enbrel permanently if they want to continue to enjoy its benefits.
The financial benefits of Enbrel have been amazing. The company has been marketing the drug since 1998 and in that time has seen sales grow from $185 million at the end of 1997 to $861 million through fiscal 2000. For most of the 1990s, Immunex was a profitless company, but it turned the corner in 1999 and 2000 because of Enbrel's success and achieved $107 million operating profit in fiscal 2000.
Enbrel accounts for 76% of the company's revenue, which leaves you with the somewhat unsettled feeling in your stomach that Immunex is a one-trick pony. It's possible, and something you should be watching closely. That said, Amgen was only a two-trick pony for a really long time with Epogen and Neupogen, but it achieved fantastic success, and it was able to develop new drugs as they rode those ponies all the way to the bank. So, don't underestimate the power of a blockbuster drug.
Part of Immunex's strategy is to get as many revenue streams out of one drug as possible. With Enbrel, they are involved in multiple FDA trials to get approval to use the drug for other ailments. For Enbrel, the company is conducting trials to use the drug to treat congestive heart failure, psoriatic arthritis, and psoriasis. In addition the company has other approved drugs and new ones in the pipeline, specifically for the treatment of asthma and cancer. They've seen promising results with a number of their trials, but especially with their asthma drug called Nuvance.
Now, all of this is really nice, but let's try and rap it back into the focus at hand, Rule Maker. Is Immunex a Rule Maker? Let's dash quickly through the criteria, in "speed round" fashion, to get a flavor for the company's possible Maker status.
Okay, first, the company absolutely has a competitive advantage in that Enbrel is approved by the FDA and it's the first in a class of drugs that does what it does. As for great management, I'll be honest with you, I don't know enough about the company yet to comment on this. This is something we'd definitely need to look into. The one thing I will say is that American Home Products (NYSE: AHP) owns 40% of Immunex, so that ownership stake should enter into your thinking about company management.
The company certainly has expanding possibilities that can make the future sweeter than the present. The real question is whether or not it can follow up the initial success of Enbrel with more approvals for various indications as well as new drugs that it has in the pipeline. The company's ability to do this will be the key driver in its success and how much money it spends to achieve those successes will be equally important, so pay attention to cash flow.
Sales growth has definitely exceeded 10% for the past 5 years and all indications are that sales will continue to grow at a rapid clip for the foreseeable future. Gross margins are running in the 70% range and net margins are around 17-18%. The Cash King margin for Immunex was only about 6% last year, but 11% the year before. My guess is that this is going to be a pretty volatile number, and not something we'll be able to hang our hat on in the short term.
As for cash-to-debt, the company has no debt right now, so that looks good. The Flowie was a crazy, freaky 6.02 at year-end last year, so that won't apply. Finally, with regards to a reasonable valuation that will allow the company to double in 5 years, all I can say is that the company isn't cheap. At $14.7 billion, Immunex needs everything to keep going its way, including robust Enbrel sales, new approvals for new indications for Enbrel, as well as one of their other drugs succeeding. Sales for 2002 are expected to be around $1.3 billion. The problem is that the company doesn't have a predictable enough business to forecast cash flows reasonably well.
Conclusion
I like Immunex. It looks like a great company that has some good things going for it. I'm impressed with the way it has managed its financials and with the alliances it has forged. I think its future is bright. That said, I don't think Immunex is a Rule Maker quite yet and its valuation is downright spooky. This is one that I plan to keep on my radar screen as it works towards new drug approvals. If the price comes down some, it might be interesting. In the meantime, while you wait for new drug approvals and a better price, start doing your own homework on this company and its competitors and let me know what you think on the Rule Maker discussion board.
