Imclone Systems (IMCL) is a cheap, well run growth stock.
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There are three reasons I like Imclone Systems (IMCL) right here at $42. First of all, their colorectal cancer drug Erbitux is exhibiting strong current growth and has good prospects for future growth. Second, Imclone’s valuation is attractive. Third, I perceive the company as being run in the best interests of shareholders.
The Erbitux Story
Erbitux is a big cancer drug, with $1.4 billion in 2007 global sales. $705 million of those sales were generated outside the US by Merck KGaA, while $692 million of those sales were generated by Bristol-Myers Squibb in the US. Most of the growth has come from overseas recently — the non-US sales grew 40% in 2007 over 2006, while the US sales grew 6% in 2007 for a combined growth rate of 21%. Consensus growth for Imclone’s revenues in 2008 is 16%, which would translate into 2008 global Erbitux sales of $1.6 billion.
Erbitux was approved by the FDA as a second line treatment (after straight chemotherapy) for colorectal cancer in February of 2004, then for cancer of the Head and Neck (SCCHN) in March of 2006. Approval in Europe for colorectal cancer came in December of 2003.
Imclone’s ongoing efforts to extend Erbitux’s use against colorectal cancer to a first line treatment are intense. In their 2007 annual report, for example, Imclone lists 11 studies currently ongoing for Erbitux’s efficacy against colorectal cancer. Six of those studies use Erbitux as a first line treatment. As further evidence of their efforts, I note that two of the three abstracts Imclone is delivering at the ASCO meeting next month deal with Erbitux as a treatment for colorectal cancer.
The American Cancer Society estimates that there were 153,760 new cases of colorectal cancer in the US during 2007, along with 52,180 deaths. Cancer of the Head and Neck (SCCHN) is smaller, with 34,360 new cases estimated and 7,550 deaths. The combined total, comprising Eribitux’s target market here in the US, is 188,120 new cases and 59,730 deaths.
That’s a big category of cancer, more cases and deaths than breast cancer, for example. If Erbitux is approved as a front line treatement for colorectal and SCCHN cancer, they could grow their sales dramatically both here and abroad. The big enchilada on Imclone’s plate right now, however, is getting Erbitux approved for lung cancer.
Getting Erbitux Approved for Lung Cancer
There are 229,400 new cases and 164,840 deaths expected for lung cancer in the US during 2007. By getting approved for lung cancer, Erbitux could more than double their current target market of colorectal and SCCHN cancers. The key study for this approval is called the FLEX study, completed by Merck KGaA in September of 2007. The press release of the completed FLEX results said only that Erbitux had met their primary endpoint of increasing survival for lung cancer. The actual numbers were to be released in the upcoming ASCO presentation.
I’m going to quote Jack West here, a doctor who runs a cancer clinic and writes for several medical blogs. I think Mr. West sums up the current informed thinking going into the conference.
- “The antibody to the epidermal growth factor receptor erbitux (cetuximab) has been used as an effective treatment for colon and also head and neck cancer for several years, but its role in lung cancer has yet to be defined. Early work in lung cancer was not especially impressive, but in September, 2007, a press release reported that the FLEX trial, a European randomized study for first line advanced NSCLC that gave cisplatin/navelbine with or without erbitux, was positive with a statistical survival benefit. Several months later, we’ve got no more information than that press release, but we do know that the trial was designed to require a survival benefit of at least 20-25% (I’ve never gotten a firm answer on this) from chemo/erbitux compared with chemo alone to be positive, so presumably it achieved a pretty impressive result that should be clinically relevant, offering a survival benefit in the same range as adding avastin to chemo for first line advanced NSCLC.”
Imclone’s management seems to think that they now have the research pieces in place to get FDA approvals for Erbitux as a first line treatment for colorectal cancer and lung cancer later this year. Jack Johnson, Imclone’s CEO, said in their March 2008 quarterly conference call:
- Building on our steady sales growth for ERBITUX, we expect to file two FPLAs in 2008. We’ll file for first-line head and neck cancer mid year based upon the EXTREME data and we will file for first-line non-small-cell lung cancer in the second half of this year based upon the FLEX data.
I think the chances are good that Imclone will get the approvals they need to more than double their target market here in the US during the next year. If they do get the approvals, Imclone’s management has said that we should see the benefit to revenues starting in 2010.
IMCL - 5 Year Target Value $96, Current Value $51
View the spreadsheet used for this valuation analysis.
How much would success in these new approvals be worth to Imclone? I think they could drive Erbitux revenues to $4.1 billion by 2012 from the 2007 global revenue base of $1.4 billion. By way of comparison, Genentech’s Avastin had 2007 global sales of $4.1 billion.
You can click the spreadsheet above to see the details, but basically I have developed a December, 2012 target price for Imclone of $96. The stock is trading for $42 right now, which would imply a 19.7% annualized return over the next five years. I require a 15% annualized return to buy Imclone, so the stock is a buy for me up to $51.
I’ve made several assumptions in developing this five year target value of $96.
- 16% revenue growth in 2008 and 2009, in line with consensus estimates. Then, I project accelerated 30% growth in 2010, 2011 and 2012 as the approvals I expect over the next 12 months kick in.
- Operating margins of 28% in 2012, up slightly from the 26% Imclone posted in the first quarter of 2007. This conservative view of margin improvement is driven by my expectation of continued aggressive commitments from Imclone in R&D and SG&A.
- No increase in shares outstanding every year. Imclone has a reasonably generous options program at 11% of shares outstanding, but I believe that the presence of major shareholders such as Carl Icahn, Bristol-Myers Squibb and Bill Miller will result in shares outstanding holding steady over the next five years. I note that diluted shares outstanding have dropped -6% since Icahn assumed the Chairmanship of Imclone in October of 2006.
- I project a 5 multiple on 2012 estimated sales and a 25 multiple on 2012 estimated earnings. I actually think these value metrics are too cheap, but they are in line with historical norms for Imclone.
Major Shareholders own 51% of Imclone
The major shareholders own 51% of Imclone in aggregate, include Bristol-Myers Squibb with 14.4 mm shares (16.7% of shares outstanding), Carl Icahn with 11.7 mm (13.5%), Legg Mason with 9.4 mm (10.9%) and Capital Group Intl with 8.5 mm (9.8%).
Reading through the financials and literature on Imclone, I think the company is saying and doing the right things to make themselves attractive as a takeover target. The settlement of two patent violation cases last year for a total of $125 million could be seen in this light. So too could the CEO’s emphasis on building a pipeline along with Erbitux, the company’s discipline in terms of share dilution, and the rigour with which the company is pursuing Erbitux approvals.
The way Imclone handled their debacle in auction securities last quarter is another example. They wrote down the securities for a non-cash loss of $85 million (the securities could easily return to full value eventually) and replaced their CFO. I see all this as evidence of a firm hand at the wheel, cleaning house, demanding execution and possibly looking for a liquidating event.
See also: Cancer - Onyx Pharmaceuticals Inc (ONXX)
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