Immunomedics, Inc. (NASDAQ:IMMU) was a big winner towards the end of last week, as the company put out news that it had scored a deal with fellow biotech entity Seattle Genetics, Inc. (NASDAQ:SGEN) related to one of its lead development assets. The company closed out the week for a more than 20% gain, but looks set to pick up further strength as this week opens up, given the volume spike seen. The question is, however, can it maintain this strength moving forward? The answer is rooted in the long-term potential of the development partnership.
So, with this in mind, and as we move forward into the latter half of the first quarter of 2017, let’s take a look at what the deal means for both companies, and where we expect things to be longer-term.
So, the deal is rooted in one of Immunomedics’ drugs called sacituzumab govitecan (IMMU-132). It is an oncology asset, and is currently under investigation as part of a development pathway investigating the efficacy and safety of the drug in patients with various solid tumors. Specifically, and what serves as the company’s lead indication for this asset, the drug is targeting triple negative breast cancer.
The mechanism of action for 132 is relatively simple – at least in concept. It is a reformulation of a currently approved (and widely used) drug, and contains SN-38, the active metabolite of irinotecan. The basic theory is that this compound cannot be administered on its own in its natural form because it is not well tolerated or processed by the body. As such, it is neither safe nor effective in targeting solid tumors. However, Immunomedics has conjugated SN-38 site-specifically and at a high ratio of drug to hRS7, the company’s anti-TROP-2 antibody. This conjugation allows for a relatively low degree toxicity to be dramatically increased in efficacy, while maintaining an acceptable degree of tolerability.
132 has Breakthrough Therapy Designation from the FDA for treating patients that have the above mentioned type of breast cancer, and who have failed earlier treatments for metastatic disease.
So what does the deal look like?
Immunomedics will pick up $250 million in upfront cash, and Seattle Genetics will receive exclusive global rights for developing, manufacturing, and commercializing the drug. Seattle also has to shoulder costs associated with development, regulatory and sales-associated milestone payments across multiple indications and geographic areas of up to what is currently estimated at around $1.7 billion. Seattle will also pick up close to 3% equity in Immunomedics, with an additional 8.6 million shares available to the company for a fixed price of $4.9 if and when Seattle wants to pick them up.
What’s our take on the setup?
The drug has proven effective in early stage studies, but in our opinion, this deal is favors Immunomedics. Not that Seattle isn’t getting a decent deal – the global commercialization rights to what could be a game changing, multiple indication cancer asset are extremely valuable – but the drug in question is still a ways off collecting the raft of data required to underpin a BLA, and there’s a long way to go before it hits markets, even with fast track designation in the cancer indication in place.
With the $250 million in cash up front, Immunomedics is strengthening considerably what was basically a weak balance sheet pre-deal, and the cash will take some of the pressure (rooted in potential for dilution) off management near term. It will also allow the company to put its lower priority pipeline into overdrive, and really get things moving near term.
Which brings us to our initial question – what are our expectations for the company from a market capitalization perspective, both near and long term?
After the latest run, Immunomedics is valued at around $550 million. With more than $250 million cash on hand, and the potential for a further $1 billion and more in milestones, we think this current capitalization is a long term floor, and that the company should appreciate in value as 132 moves through the development pathway towards an FDA submission. Near term we may see some degree of correction as the shorter term participants pull profit from the table, but this should turn around quickly as the longer term traders load up at a discount.