More Biotech Mergers: Roche to Acquire InterMune (ITMN) - Stocks in the News

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This year has been a very hectic year for pharmaceutical and biotechnology companies. California biotech company, InterMune ( ITMN ), has agreed to be bought by Swiss pharmaceutical behemoth, Roche Holding AG ( RHHBY ) for a deal worth roughly $8.3 billion net cash. The deal was announced August 24 th when Roche stated its willingness to fully acquire InterMune for $74/share in an all cash deal.

This turns out to be approximately a 38% premium to InterMune's closing price on Friday, August 22 nd . The merger would allow Roche to expand its horizons, by making sure that it has a stake in the respiratory/lung diseases niche, which is one of the world's biggest markets for pharmaceutical firms.

Roche and InterMune's Prospects

Roche's last major deal was in 2009, when it had agreed to pay $46.8 billion for a stake in biotech company, Genentech. Roche did not take up on the opportunity to purchase a stake in DNA sequencing firm, Illumina Inc. ( ILMN ), for which it had already offered $6.7 billion. So why did Roche change plans and aim for ITMN?

Apparently, RHHBY sensed that ITMN would add significant value to the company, due to ITMN's new lung drug, Esbriet, that treats lung scarring (idiopathic pulmonary fibrosis). The disease is thought to be caused by unfortunate genetic makeup. The scarring of tissue in the lung builds up, and eventually becomes too much for a patient to handle, hitting a patient's oxygen intake, and cycling to other parts of the body and organs.

Esbriet had already been approved of in Europe and Canada, however, the US's Food & Drug Administration (FDA) did not approve of the treatment, citing insufficient proof of effectiveness.

Still, the prospects for this drug globally remain favorable and Roche understands that companies can also seek to charge high prices for drugs that treat rare cases which other options are limited. Idiopathic pulmonary fibrosis affects about 100,000 US citizens, and the disease is estimated to be deadly, in that it kills patients after three to five years of infection.

Esbriet seems to be a good bet for RHHBY, as the drug has already managed to acquire approval from Canada and Europe. Coupled with positive trial results, and the prospects of the drug to treat other diseases that cause tissue scarring in the kidneys and liver, Esbriet seems like a very promising drug. According to ITMN's CEO, Dan Welch, it is estimated that the cost of Esbriet would be around $40,000/year for patients not in the US.

The price is due to how Esbriet is the only treatment for patients with the disease. Prior to the merger, it was widely expected that ITMN would have better than expected results in the medical testing of Esbriet, which led to the stock price tripling in the first half of 2014.

Esbriet's Competitors

Esbriet is in direct competition with German pharmaceutical company, Boehringer Ingelheim's ninetedanib, which is expected to be approved in February. Drugs treating respiratory issues generate about $33 billion in revenue each year.

Roche is heavily invested in cancer, and autoimmune diseases, but now it is seeking to be a player in the respiratory treatment market. RHHBY has two drugs for respiratory problems in the US, mainly Xolair, and Pulmozyme. ITMN will have to make sure that Esbriet passes tests, in order to start selling the treatment.

Financials & Bottom Line

As of now, ITMN and RHHBY both carry a Zacks Rank #3 (Hold), and ITMN's stock price is up about $19, or around 35% today. Achillion Pharmaceuticals's ( ACHN ) stock price is also up today by about 12%, due to speculation of a potential merger or buyout by RHHBY, and it is an excellent stock to look into , bearing in mind how the stock has been revised by analysts and upgraded to a Zacks Rank #1 (Strong Buy). It is a very smart move by RHHBY as it broadens its portfolio and the patients it caters to. Roche shares have also risen by about 0.4% after the ITMN deal was announced (see Should Achillion Pharma Be In Your Portfolio? ).

ITMN's financials have been quite depressing, with sales last quarter (ending 6/30) worth only about $35.74 million, with a gross profit of $29.97 million, and a net loss of -$71.19 million. ITMN's diluted net EPS is also disappointing, with only -$0.72/share. ITMN surprised negatively last quarter, missing by -19.64%. The good news though, is that analysts have revised and upgraded their expectations for next year.

On the other hand, RHHBY's financials have been doing very well for 2013's financials, or last year. The pharmaceutical giant has managed $52,477 million in revenue, and a gross profit of about $39,579 million, and a net income of $12,277 million. The company's diluted net EPS is an impressive $1.81/share. It is also important to note that analysts have revised and raised their EPS expectations for next year for RHHBY.

Conclusively, RHHBY could see some gains if ITMN's drug proves to be a winner, while the financial strength of Roche should help the drug to get through the pipeline more smoothly. Still, it is a good idea to keep vigilant and practice a little bit of caution when investing or trading the stocks in the near term.

Long-term investors will most likely not be disappointed, as we will see how effective Esbriet is, and what it can do for ITMN, or as a part of Roche. On another note, for other interesting picks, investors should look to Achillion Pharmaceuticals ( ACHN ) or Gilead Sciences ( GILD ), as both of these stocks maintain a Zacks Rank #1 (Strong Buy).

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INTERMUNE INC (ITMN): Free Stock Analysis Report

ROCHE HLDG LTD (RHHBY): Free Stock Analysis Report

ILLUMINA INC (ILMN): Free Stock Analysis Report

GILEAD SCIENCES (GILD): Free Stock Analysis Report

ACHILLION PHARM (ACHN): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Stocks

Referenced Stocks: ITMN , RHHBY , ILMN , GILD , ACHN

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