InterMune suffered a major setback recently when the FDA rejected marketing approval for pirfenidone, a novel treatment for idiopathic pulmonary fibrosis. All is not lost: the agency asked for one more phase III clinical study. The big question is “Whither InterMune?” What's next for this company? Are there lessons to be learned?

Introduction

InterMune is an emerging pharmaceutical company based on Brisbane, CA—a short drive from San Francisco. InterMune suffered a major setback this week when the FDA rejected marketing approval for pirfenidone, a treatment for idiopathic pulmonary fibrosis. InterMune submitted two phase III clinical trials in its NDA: one study met the endpoint; the second did not. Traditionally, the FDA asks for at least two phase III studies, so it wasn’t surprising that a request was made for a second trial. Many people hoped that given the approval of the drug in Japan with successfully trials for that effort; the fact that there is no other treatment for this fatal complaint and that the second, unsuccessful trial was a “near miss,” the agency might give marketing approval under strict conditions, insisting on a third phase III trial to broaden the use of the drug. It wasn’t to happen: the agency followed the process used for decades and rejected the drug, requesting a second phase III trial. By the way, pirfenidone would have been marketed as Esbriet had it received approval.

So, what happens next and what lessons can be learned?

The CEO and some people in senior management need to go.

InterMune messed up in a few areas, but the response to the agency earlier this week was, well, strange.

"After the positive FDA Advisory Committee meeting of March 9 at which the Committee recommended the approval of the pirfenidone NDA by a 9-3 margin, we are disappointed by this outcome," said Dan Welch, Chairman, Chief Executive Officer and President of InterMune. "We will meet with the FDA as soon as possible to understand their points of view and to determine the most appropriate path forward to expeditiously make Esbriet available to the approximately 100,000 patients with IPF and their families who suffer from this terrible disease and for whom no FDA-approved medicines exist."

This last comment wasn’t necessary. Embedded in its mission, the FDA has concerns for the 100,000 patients with IPF and their families. It was a poorly measured comment unworthy of a CEO of a pharmaceutical company. To those of us in the pharmaceutical industry, it raises questions about the corporate culture within InterMune: what was the CEO thinking? It’s by no means the worst of his sins, but it is symptomatic of something untoward in the corner office of InterMune.

Why didn’t InterMune file another shelf registration last month?

The company did well by raising closing $100 million in January, but why didn’t it go back to the trough? It’s a perplexing lack of ambition. The share price of emerging companies spends its early days in one of two places: intensive care or fantasy world. InterMune enjoyed a six week visit to fantasy world, it should have grabbed everything it could while good judgment deferred to greed. The share price on January 20 peaked at $14.82; it recently peaked in the mid to high 40s. With close to a quarter billion dollars in debt, a plausible argument could have been made for yet another offering to raise $250 million to pay down debt. Last week, when the company had a market cap of $2.5 billion, such an offering would have had minimal dilutive impact. In the optimism that surrounded the company, the shares would have been snapped up. There was no downside to raising more money: if the drug were approved, the company would have more R&D funds—important to keep the party going. If the FDA said no, which it did, the company would have funds to finish another trial. Management should have been prepared for the possibility of a run up months ago and filed an additional shelf registration; they didn’t, so it makes one wonder if they know how the world of biotech financing operates.

Why did InterMune file an incomplete NDA?

I outlined the reasons earlier why many hoped the agency would grant approval—even restricted marketing approval—to pirfenidone. However, there are scores of competent consultants in the industry, including many dozen FDA veterans that likely would have cautioned InterMune on their strategy. InterMune didn’t appear to hire the correct consultants: a fault of management. I can’t think of an example where the FDA has granted marketing approval to a drug without two complete, phase III trials. Why did InterMune management think that their company would be treated differently?

Where is Plan B?

Why didn’t InterMune have another, phase III trial running after the NDA submission? Why was there no plan B? Understanding how the agency works, one would think a company would have another phase III trial running as a backup. It does run the risk for forcing the hand of the reviewers: the FDA might just wait until the trial is completed. However, it does speak to a lack of understanding of how the FDA, a very conservative agency, works.

What’s next for InterMune?

Expect a downsizing. The company has negative cash flow and earnings; its balance sheet is reasonable for an emerging pharma company, but problematic for a company in its position. Without a fresh infusion, it doesn’t have sufficient cash to run a phase III clinical trial without inject sizeable risk into the long-term viability of the company. InterMune will have to downsize considerably—perhaps losing at least half of its employees.

Get new management

The company needs fresh management; for the reasons I annunciated earlier, I don’t have confidence in the management of InterMune and a major shake-up is necessary. There’s no guarantee that a new management team will be able to pull the company out of its current problems, but I would hold out little hope for the future of InterMune if the current team is left in place.

InterMune might lose pirfenidone

There’s a chance that InterMune will sell its assets. InterMune may not be able to pay for a new trial, but other companies could help. In return, ITMN would have to surrender substantial upside: bad for current investors. One way for the company to move forward would be for InterMune to license pirfenidone to another party. It would surprise me if this effort isn’t currently underway. This option shouldn’t be alien to InterMune as it bought the rights from Marnac, Inc. in 2007. In fact, it’s not clear to me that InterMune currently owns all the rights to pirfenidone. The agreement with Marnac: since the drug is not approved, they many actually owe Marnac $14.5 million. On a bright side, failure to gain marketing approval relieves InterMune of other possible payments to Marnac.

In conclusion

In summary, things look bleak for InterMune right now and decisive action is needed by the board. Management appears to have failed shareholders in not capitalizing on the opportunity to raise funds after an FDA advisory panel voted in favor of the drug. The company took an extremely risk approach with its FDA NDA submission and lost. Management needs to answer tough questions.

Just one more comment: InterMune appears to be overvalued at its current price of $11.10. There's too much uncertainty surrounding this company to call it an investment. Without major changes, I'd avoid this company right now. I'd be more comfortable if the stock traded lower, certainly under $10 a share.