Over the span of two years, Immunomedics (NASDAQ:IMMU) saw its stock rise more than 1,000%, from $2.20 per share in October 2016 to $26 a share in August 2018. Then bad news hit in 2019. The U.S. Food and Drug Administration didn’t approve the company’s billion-dollar molecule, sacituzumab. The stock dropped all the way to $12 a share. But now sacituzumab is back on track, and Immunomedics is slowly rising again…
A few years ago, Immunomedics signed away most of the rights of its cancer drug, sacituzumab, to Seattle Genetics. The drug was widely seen as a potential blockbuster in the fight against triple-negative breast cancer. Seattle Genetics paid $300 million upfront for global rights to the drug, in a deal that could have been worth as much as $2 billion to Immunomedics.
Nonetheless, Immunomedics investors were unhappy with the deal. The company’s largest shareholder, a hedge fund called VenBio, sued Immunomedics, claiming that it was “giving away its crown jewel” by assigning the rights to Seattle Genetics. The fight over the drug’s future turned into a fight for control of the company. Ultimately, the founder David Goldenberg and CEO Cynthia Sullivan of Immunomedics were both ousted. VenBio won several seats on the board of directors, and a managing partner at the hedge fund, Dr. Behzad Aghazadeh, was named the new chairman of the company. In May 2017, the agreement with Seattle Genetics was ended, resulting in Immunomedics keeping all the rights to sacituzumab. The board hired a new CEO, Michael Pehl, who was formerly head of oncology at Celgene. As the market became more and more certain the drug would be approved by the FDA, the stock price went up and up.
An ugly surprise
When the FDA failed to approve the drug in January, the stock dropped 26% in one day. That’s what happens when unprofitable biotechs aren’t allowed to sell their drugs to the public. And yet the news was not as bad as it first appeared. The FDA did not raise any objections to the results from the clinical trials. The science was still good. Instead, the FDA was unhappy with manufacturing issues at the plant where the drug was to be made.
During an ordinary inspection, the FDA discovered data manipulation and fraud going on at the factory where sacituzumab was to be manufactured. So, of course, the FDA couldn’t approve the drug until this situation was fixed. In response, Immunomedics cleaned house. The new CEO Pehl resigned in February. A month later, Robert Iannone, the chief medical officer, also resigned. In the meantime, the chairman of the board took control of the company. Immunomedics decided to farm out all its drug manufacturing to another business, Samsung Biologics, a subsidiary of Samsung that is the world’s largest contract development and manufacturing organization.
Why is Immunomedics a no-brainer?
One really nice thing about drug stocks is that there are clear events that cause the stock to immediately go up or down, and in a big way. So the correlation between the stock price and what’s happening in the real world can be very specific. A drug fails a clinical trial, and the stock price goes into free-fall. Or the FDA approves a drug, and the stock price responds by doubling. We know what’s happening, and we know why it’s happening.
In the case of Immunomedics, investors know exactly why the stock dropped so dramatically. The FDA did not approve sacituzumab. And we know precisely what the FDA objected to: fraud at the manufacturing plant. And we know that this issue has been resolved. People resigned, and Immunomedics no longer plans to manufacture its drug. Samsung Biologics is going to handle it.
We also know that the FDA’s complete response letter sent in January was not based on the underlying science. The company’s billion-dollar molecule is still a marvelous drug, with fantastic response rates. When the company first filed the NDA, the market was very optimistic about approval. So the price was $26 a share.
Now the company has resolved the issue and will file a Biologics License Application (BLA). So the price of the stock should be restored to where it was before. Yet the market is still punishing the stock for news that is no longer relevant. The stock price is now $16 a share, more or less. That’s a huge difference in value, over $1 billion dollars, for a company with a $3 billion market cap. If Immunomedics hadn’t had the hiccup at the manufacturing facility, its stock price would probably be a great deal higher than it is right now…
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