ImClone Saga Shows Biotech Risk
Among the mysteries surrounding the implosion of ImClone Systems Inc. is the terrible timing of a $1.2-billion investment in the company by Bristol-Myers Squibb Co.
The pharmaceutical giant acquired 19.9% of ImClone at $70 a share in October, two months before ImClone’s stock collapsed amid allegations that the small biotechnology company had misled investors about prospects for its cancer drug Erbitux.
Bristol-Myers has not commented in detail about its investment since the Food and Drug Administration refused Dec. 28 to accept ImClone’s application to market Erbitux, triggering ImClone’s slide. Documents that Bristol-Myers had been asked to deliver to a congressional committee by Thursday should begin to offer clues.
Analysts who follow the pharmaceutical industry suspect the documents will show that Bristol-Myers, anxious to keep its edge in the lucrative oncology drug business, either ignored or failed to see problems the FDA and others later raised about Erbitux.
“In their eagerness, they made broad assumptions about the data [on Erbitux] and, apparently, did not dig into the nuts and bolts,” said Eric M. Yee, a research vice president with Murphy Investment Research in Half Moon Bay, Calif.
The ImClone saga underscores the riskiness of investing in biotechnology when even savvy companies with full access to information can get caught. “These stocks aren’t for small investors,” said Eric S. Sharps of investment firm FourSquare Partners in Los Altos, Calif.
The FDA, in its rejection letter to ImClone, cited numerous problems with the clinical trials the company conducted to test Erbitux in colon cancer patients. The confidential rejection letter, obtained by an industry publication called Cancer Letter, said new trials “would be needed” to show whether Erbitux worked.
Before it made the investment, Bristol-Myers had full access to ImClone internal documents about Erbitux, said ImClone Chief Executive Samuel Waksal. Bristol-Myers “did real due diligence. [They] feel comfortable this is an approvable drug,” he said. But Waksal, speaking to investors last month, said he did not know whether people from Bristol-Myers reviewed all the data.
The House Energy and Commerce Committee, chaired by Rep. W.J. “Billy” Tauzin, has asked Bristol-Myers to provide a list of people who conducted due diligence of ImClone, the opinion of Bristol-Myers’ oncology committee about Erbitux and audits and investigations of ImClone conducted by Bristol-Myers. Peter Dolan, chairman and CEO, pledged last week to comply “fully with any and all requests” by the panel.
The committee is investigating allegations, raised in numerous shareholder suits, that ImClone misled investors; Waksal has denied that charge. Besides Bristol-Myers, the panel is seeking documents from ImClone and the FDA. It isn’t known whether the documents will be made public.
Bristol-Myers at first spurned overtures from ImClone, a 17-year-old company with no products. Bristol-Myers representatives “conducted due diligence” during the summer of 2000, according to a regulatory filing, but they decided against a “strategic transaction.”
By last April, the top brass at Bristol-Myers had changed their minds. Bristol-Myers Vice President Brian Markinson, working through Lehman Bros., sent word to Waksal that the big drug maker was interested in a deal.
Analysts speculated that Bristol-Myers had become nervous about its shrinking oncology franchise and thought Erbitux could replace sales being lost to generic versions of Taxol, its blockbuster chemotherapy drug.
The effect of generic competition on Bristol-Myers became evident last week, when the company reported that worldwide Taxol sales plummeted 25% in 2001 to $1.2 billion. Leading the decline was a 45% revenue drop in the United States, as oncologists switched patients to knockoff versions of the cancer drug.
Meanwhile last spring, a buzz had grown around Erbitux, a new type of treatment that targets growth receptors found on the surface of many kinds of cancer cells. Bristol-Myers later said it expected sales of Erbitux to reach at least $1.5 billion by 2005, putting it in the same league as Taxol.
Markinson, the Bristol-Myers vice president, at first proposed that his company acquire as much as 80% of ImClone for stock valued at $65 a share. His proposal included a separate marketing deal for Erbitux.
Beginning in mid-May, representatives of Bristol-Myers went through ImClone’s books and files, including the company’s “clinical development ... intellectual property and regulatory affairs,” according to the filing with the Securities and Exchange Commission. By late June, for reasons not specified in the SEC document, Bristol-Myers backed away from acquiring a majority stake in ImClone.
Since the companies began talking, ImClone shares had risen to about $50 from $40. Wall Street was excited by research data presented at a May medical conference that showed a combination of Erbitux and a chemotherapy drug helped 22.5% of 121 colon cancer patients who received the treatment. (The FDA, according to the Cancer Letter, later found that the study was flawed.)
Waksal told Bristol-Myers CEO Dolan that he would consider an alternative proposal, but any deal must involve “a significant equity investment” from Bristol-Myers. Waksal suggested a deal structure that would reward shareholders directly. “Stockholders would benefit most if [Bristol-Myers] acquired an equity interest through a tender offer,” Waksal told Dolan, according to the filing.
Within days, the two companies sketched the outline of a deal; besides the $1-billion tender offer, it included a separate Erbitux marketing pact worth as much as $1billion for ImClone. Bristol-Myers also got two seats on ImClone’s board. It completed the tender offer in October.
Waksal and brother Harlan Waksal, ImClone’s chief operating officer, sold their shares to Bristol-Myers for $111.3 million. Another director, Dr. John Mendelsohn, president of the M.D. Anderson Cancer Center in Houston, received $6.5 million. ImClone Chairman Robert F. Goldhammer, a New York investment banker, received $25.5 million.
Since the FDA’s rejection of Erbitux, Bristol-Myers has written down its investment in ImClone by $735 million. Dolan last week called Erbitux “a top priority for Bristol-Myers Squibb, me and my senior management team.”
The company is devoting its “considerable oncology resources” to refiling an acceptable application with the FDA “if at all possible.” Dolan acknowledged what Wall Street has already assumed: that the launch of Erbitux could be delayed. Bristol-Myers had expected to launch Erbitux with ImClone in April.
Any delay increases the vulnerability of Erbitux to competition from new drugs that also target the same growth receptors on cancer cells. The investment firm Goldman Sachs does not expect Erbitux to reach the market until 2004. By then, at least one and possibly two competing drugs will be available.
The FDA is reviewing AstraZeneca’s application to market Iressa for head and neck cancers; Erbitux is conducting clinical trials for those cancers.
Next year, OSI Pharmaceuticals Inc. and its partner, Genentech Inc., expect to file an application for approval to market a similar drug, called Tarceva.
ImClone shares closed Thursday at $19.16, down 87 cents, on Nasdaq. Bristol-Myers closed at $45.37, up 44 cents, on the New York Stock Exchange.
