We are downgrading biopharmaceutical company Micromet Inc. (MITI) to Neutral from Outperform due to concerns regarding its early-stage pipeline and its strategy of raising funds by selling shares. Moreover, the downgrade is also based on valuation grounds, as we see limited near-term price upside.
Micromet recently posted impressive results in the third quarter of 2010 driven by an increase in revenues and a decline in operating expenses. Adjusted loss per share of 12 cents was narrower than the Zacks Consensus Estimate of a loss of 19 cents and the year-ago loss of 22 cents.
Read our full coverage on the earnings report: Q3 Revenues Up at Micromet.
However, we believe that investor focus will be more on the development of lead candidate blinatumomab rather than the earnings report.
Even though we are pleased with Micromet’s re-acquisition of blinatumomab rights from MedImmune, a wholly owned subsidiary of AstraZeneca (AZN), which will enable the company to re-license the drug at more attractive terms, we believe that Micromet requires the strength of a large established player to accelerate blinatumomab’s development in order to gain a head-start over potential competitors.
We are also concerned about its early-stage pipeline. Most of the pipeline candidates, being in the initial to middle stages of development, are several years away from commercialization. Any kind of hiccup in the development process or any adverse results will weigh heavily on the stock.
Furthermore, we are not comfortable with Micromet’s strategy of raising funds by selling its shares as it leads to dilution of shareholder value. For example, in November 2010, the company raised approximately $70.5 million by selling 9.9 million shares of its common stock.
Earlier in the year, Micromet raised $75.4 million by issuing 11.5 million shares. We believe that the company will need to tap the capital market again as it attempts to develop its pipeline, which will increase its research & development (R&D) expenses.
These headwinds cause us to downgrade the stock to Neutral. We believe that the risk/reward profile at Micromet is balanced and there is limited upside potential at current levels.
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