It's generally been a good year for the overall stock market, but an even better year for the SPDR S&P Biotech ETF, which is up 24% year to date. Given this strong move higher, most investors would be under the impression that biotech stocks across the board have moved upward. However, if you're a shareholder in predominantly clinical-stage biopharmaceutical company ImmunoGen (IMGN +0.00%), you're likely very unhappy that shares are down 22% on the year.
Why have ImmunoGen shares been clobbered in 2014? That's a question we'll answer today, as well as look at where ImmunoGen shares may head next.
Why ImmunoGen shares crashed in 2014
I wish I could say it was one simple reason why ImmunoGen shares are down in the dumps, but that'd be far from the truth. In reality, there are a number of reasons the going has been tough for this promising biotech stock.
First and foremost, the company's only FDA-approved therapy, Kadcyla, an antibody-drug conjugate that combines the company's drug-linking technology with Roche's (RHHBY +0.67%) Herceptin, hasn't sold as well as investors would have hoped. Perhaps the biggest cloud hanging over Kadcyla's approval in Feb. 2013 as a second-line treatment for patients with late-stage, HER2-positive, breast cancer was the fact that ImmunoGen would only see mid-single-digit royalties from Roche as a result of net Kadcyla sales. Even though Roche reported a robust 188% increase in first-half Kadcyla sales to $243 million, that equates to just a small pittance of consistent cash flow for ImmunoGen, which reported only $3.4 million in product revenue last quarter.
Source: Roche.
Secondly, weaker than expected Kadcyla revenue is likely to result in continuing losses for ImmunoGen. Although ImmunoGen has a number of ongoing collaborations and ways to generate licensing revenue, its lack of recurring revenue is projected to keep the company in the red until 2018, which is still a long way out. In the meantime, ImmunoGen is likely to burn through its $142.3 million in cash on hand to the tune of $40 million-$45 million per year. In other words, cash burn is a serious concern.
Finally, ImmunoGen's stock has been reeling since November of last year, when it announced the mid-stage failure of IMGN901 in combination with etoposide and carboplatin as a treatment for small-cell lung cancer. The failure was significant because, at the time, IMGN901 was the company's most advanced in-house therapy. Though collaborations are great in that they provide upfront capital to ImmunoGen, and they can be a nice boost if the salesforce of collaborating companies are more experienced than ImmunoGen's, it also means having to share perhaps a majority of its revenue with another company.
ImmunoGen's catalysts
Despite the rough performance in 2014, ImmunoGen also has plenty of opportunities to turn its fortunes round.
ImmunoGen 2013 annual report. Source: ImmunoGen.
To begin with, its proprietary technology could be the source of its success. As an antibody-drug conjugate developer, its therapies are designed to link a toxin to an antibody and to release that toxin once it comes in contact with a cancerous cell. The goal is to reduce healthy cell death often seen with chemotherapy treatments and to focus the delivery of toxins strictly to cancer cells. Clearly, that technology works, as Kadcyla helped improve patients' median overall survival to 30.9 months from 25.1 months in the late-stage study that led to its approval. It still remains to be seen, however, if Kadcyla, or any of its other ADC-based drugs, will wind up adding to its early success.
Secondly, ImmunoGen has a robust pipeline complete with 20 separate compounds being studied in about two-dozen different indications. To use a baseball analogy, think of ImmunoGen's pipeline as a home-run derby -- the company has two-dozen pitches to hit one out of the park. When it comes to cancer therapies, sometimes all it takes is one home run to deliver healthy profits to the innovating company, so ImmunoGen has plenty of chances to knock one of out of the park.
Also, keep in mind that the company has a nice blend of three early-stage, in-house therapies -- IMGN853, IMGN289, and IMGN529 -- as well as a mountain of collaborations. This means the company has the ability to generate cash by amortizing its licensing deals.
Source: ImmunoGen.
Where ImmunoGen will head next
While I personally am hopeful that ImmunoGen's pipeline is successful, I also realize that much of its pipeline is early stage and there really aren't any catalysts in the near-term poised to move the stock much higher.
A key component to ImmunoGen's success is going to be whether or not it can get Kadcyla approved as a treatment for first-line, HER2-positive, metastatic, breast cancer as well as gastric cancer. Both of these studies are currently in phase 3 trials, and they'll provide the most immediate impact on where ImmunoGen heads next. Until investors are able to wrap their hands around those studies, it's quite possible that ImmunoGen shares will simply drift sideways.
On the other hand, I wouldn't fault investors if they considered taking a chance on ImmunoGen with the idea that it had 20 different therapies in development. Even though a late-stage failure of Kadcyla in any of its other indications would hurt ImmunoGen's share price, the potential for anyone of its other experimental drugs to step up is always there.
