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Loss at ITMN Wider-Than-Expected

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InterMune Inc. posted second-quarter loss per share of 78 cents, wider than the year-ago loss of 70 cents and the Zacks Consensus Estimate of a loss of 17 cents. Higher costs exacerbated the loss in the reported quarter.

InterMune reported revenues of $5.5 million in the second quarter, up from year-ago revenues of $1.3 million. Notably, revenues in the year-ago quarter only consisted of collaboration revenues from the company’s research agreement with Roche Holdings Ltd. (RHHBY - Free Report) , which completed in June 2011. Revenues, however, were well below the Zacks Consensus Estimate of $40.0 million.

We remind investors that in June 2012 InterMune divested Actimmune, which is approved for the treatment of chronic granulomatous disease (CGD) and severe, malignant osteoporosis. InterMune sold its rights to Actimmune to Vidara Therapeutics International Limited for $55 million plus royalty payments over a two-year period. InterMune expects royalty payments to be around $2–$4 million over the period.

Quarterly Details

Esbriet (pirfenidone), which was launched in Germany in September 2011, was the sole contributor to InterMune’s total revenues in the second quarter of 2012. Esbriet is approved for the treatment of idiopathic pulmonary fibrosis (IPF), a fatal lung disease.

During the reported quarter, research and development (R&D) expenses increased 25.3% to $25.2 million. The increase in R&D was due to the expenses associated with the ASCEND trial. The ASCEND trial is supporting pirfenidone for the treatment IPF in the United States. The company expects to complete enrollment in the US and some other regions for the phase III study by this year. The result of the ASCEND trial is expected in the first half of 2014.

Selling general and administrative (SG&A) expenses shot up 18.5% to $25.6 million. The increase was attributable to the costs associated with the launch of Esbriet in Europe.

2012 Guidance

Apart from releasing the second quarter earnings results, InterMune also provided guidance for Esbriet and operating expenses for 2012.

The company expects Esbriet sales in 2012 in the range of $20-$25 million. Management stated that while the lower end of the guidance reflects no Esbriet launch in France, Spain and Italy this year, the upper end of the projected range assumes Esbriet launch in all these countries by the year end.

InterMune reaffirmed its operating expense guidance range for 2012 provided last month. The company continues to expect operating expenses in the range of $200-$235 million for 2012. While R&D expenses are expected in the range of $90-$105 million, SG&A expenses are forecast in the range of $110-$130 million.

Esbriet Update

In March 2012, Germany's Federal Joint Committee (G-BA) recognized the additional benefit of Esbriet. The company has already negotiated the prices with the Statutory Health Insurance which was expected to be done by September 15, 2012. The new price represents a discount of 10% from the current price. The new price will be effective from September 15, 2012.

During the second quarter of 2012, approximately 400 new patients were prescribed Esbriet across Germany, compared with 300 new patients in the first quarter of 2012. InterMune believes that around 750-800 patients are treated with Esbriet in Germany.

Our Recommendation

We currently have a Neutral recommendation on InterMune. The stock carries a Zacks #3 Rank (short-term ‘Hold’ rating).

We believe Esbriet has significant commercial potential as it targets IPF which is an orphan indication. Currently, there is no FDA approved therapy for the treatment of IPF in the US. With the EU approval of Esbriet, InterMune became the first company to offer an IPF medicine in Europe. Though the sell of rights of Actimmune will enable the company to pay more focus on Esbriet, pricing for the latter remains a concern.

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