<SPECIAL FEATURE>
June 15, 1999
Immunex Corp. for Dad
Trading at $112 3/4 as of June 14, 1999
Hey Dad, Next -- Yahoo! from TMFVerve
* A Stock for Dad represents the opinion of one Fool and in no way should be taken as the opinion of either The Motley Fool, Inc., the company in question, or representative of anyone or anything else other than that specific Fool's thoughts.
by Warren Gump ([email protected])
I've decided to go with something pretty high-octane for your pick this year. There's quite a bit of risk in this stock since it's priced so dearly, but the company is extraordinarily well positioned to enjoy tremendous success in the years ahead as a biotech leader. My selection is Immunex Corp. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IMNX)") else Response.Write("(Nasdaq: IMNX)") end if %>
The driver of Immunex's near-term success is its rheumatoid arthritis drug, Enbrel, which came on the market last November. Since marketing approval of the drug was granted, the stock has almost quadrupled. I have a preference for staying away from stocks that have already experienced significant gains and have skyrocketing multiples, but I think that the potential success derived from Enbrel will lead to a long and prosperous future for Immunex. I wouldn't blame you if you decided to hold off until the stock cooled off and corrected a little, but that decision will depend on your investment style.
Just to get some clutter out of the way, Immunex does have products on the market besides Enbrel, but they're basically insignificant at this point. During the first quarter, sales for Leukine, a white blood cell stimulant, and Novantrone, a chemotherapeutic agent, totaled $26.8 million, up 8% from the prior year. On the other hand, Enbrel sales hit $59.7 million and Q1 was the first full quarter the drug was on the market. Analysts now expect annual sales for the drug to reach well over $1 billion when it reaches maturity.
Those increased sales should flow through to the bottom line, turning 1998's loss of $0.04 per share to a profit of $0.66 in 1999 if First Call's consensus estimate proves to be accurate. Looking into 2000, analysts are expecting earnings to almost triple to $1.83 per share as the arthritis drug matures. While the catapult from a loss into earnings is great news, an even more important attribute will be the cash flow that will be generated to fund future research and development (R&D) efforts.
The cost of bringing a drug through the development pipeline to market is extraordinarily expensive, often running several hundred million dollars. Even then, success is not guaranteed due to the rigors of government regulatory approval. Because of these challenges, smaller companies often require cash-rich partners to bring promising therapies to fruition. The cash flow from Enbrel will enable Immunex to join Amgen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %>, Biogen <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: BGEN)") else Response.Write("(Nasdaq: BGEN)") end if %>, and Genentech <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GNE)") else Response.Write("(NYSE: GNE)") end if %> as the pure-play biotech partners of choice -- those that have both the cash flow and know-how to bring a product to market.
Looking at Immunex's cash flow statement, operating cash flow increased to $23 million last year from $15 million in 1997 as Enbrel sales began late in the year. That number will likely soar higher in 1999 as the company reaps the benefit of this emerging blockbuster drug.
At the end of the first quarter, Immunex was sitting on about $150 million of cash and marketable securities. While that sounds like a hefty amount, it pales in comparison to the $1 billion+ held by some competitors. Thanks to a May sale of a $450 million convertible bond offering to Immunex's majority shareholder American Home Products <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AHP)") else Response.Write("(NYSE: AHP)") end if %>, that balance has increased substantially to a more competitive level.
Earlier this month, Immunex agreed to partner with Genentech on a cancer gene they both are developing. This combination should result in a speedier development and eliminate some duplicative costs. Of course, the companies will split profits if they successfully bring a product to market. Immunex also has several promising drugs in the development pipeline (click here for information on products in development).
You need to be forewarned that there are risks to Immunex beyond its high valuation. While Enbrel appears to be headed for annual sales greater than $1 billion, problems could develop. In May after six patients died, the company strengthened its label to warn that Enbrel shouldn't be prescribed to patients with infections. It is too early to determine whether the deaths were related to Enbrel, but caution dictated the warning. Other unexpected side effects could also emerge.
In addition to potential problems with Enbrel, sales could be hurt by the introduction of new competition. Centocor <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: CNTO)") else Response.Write("(Nasdaq: CNTO)") end if %> recently announced results of a study showing that its Remicade might be an effective rheumatoid arthritis treatment. An application has already been filed with the Food and Drug Administration for the drug to be approved for this condition. Additional competition could also enter the horizon as biotech developments accelerate.
Despite the risks, I think the potential rewards of owning Immunex justify the investment. The company is poised for tremendous success with Enbrel and positive results will roll through the company. You should look into the company further to make sure you're comfortable with its prospects, but I think it's an excellent pick.
Happy Father's Day!
Immunex Company Information:
Trades on Nasdaq under symbol IMNX
Immunex's website: www.immunex.com
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