Before You Give Up on ImClone


By Catherine Arnst For Samuel Waksal, co-founder and former CEO of ImClone Systems (IMCL), it was just another day of legal reckoning. Having already pleaded guilty to insider trading, bank fraud, perjury, and obstruction-of-justice charges, Waksal added a new chapter to his fall from grace on Mar. 11, when he agreed to pay the Securities & Exchange Commission $800,000 in a partial settlement and vowed to never run a public company again.

The news struck a sour note for ImClone's stock, which fell 2.8%, to close at $14.82 a share on Mar. 11. But smart investors might want to keep an eye on this once high-flying biotech pioneer. ImClone is shaping up as an interesting case study in whether a company can shake off a major corporate scandal and prosper in the post-Enron era.

From all appearances, the bad news just keeps coming. Bristol-Myers Squibb (BMY) which owns 20% of ImClone, recently had to lower its own earnings, citing "inappropriate" accounting. Waksal is scheduled to be sentenced on May 29 based on his earlier admissions of guilt to a gaggle of federal criminal charges that carry up to 65 years in prison terms. Plus, he has since been charged with new civil insider-trading allegations stemming from his attempted sale of his own ImClone stock in December, 2001 -- the day before his company made public the Food & Drug Administration's decision to reject ImClone's application for cancer drug Erbitux because of a faulty clinical trial design. That news stunned investors who expected the drug, projected by Waksal to be a potential blockbuster, to win approval in mid-2002.

BACK ON TRACK? As if the picture weren't bleak enough, Waksal has also admitted to illegally avoiding more than $1.2 million in New York State sales taxes on art works he purchased. In addition, he was charged with advising his daughter and father to dump their shares. And then there's the matter of his close friend Martha Stewart, who was ensnared in the insider-trading probe because she, too, sold off her ImClone shares the day before the FDA news was announced. Stewart has not been charged but is still under investigation.

Look behind the headlines, however. ImClone stock, which once traded as high as $75, fell as low as $5.24 last September but has since risen back to the $15 range. The main reason: tantalizing hints recently that ImClone is getting its controversial cancer drug Erbitux back on track.

With flamboyant Sam Waksal fading out of the picture, his much quieter brother, Dr. Harlan Waksal, ImClone's new CEO, has a chance to win back the confidence of investors, the cancer community, and most important, the FDA. And analysts note that if Erbitux wins approval -- still a big if -- ImClone could well end up with the major drug it thought it had two years ago.

MOVING CAUTIOUSLY. Erbitux is part of a new generation of targeted cancer therapies that kill tumor cells without causing severe side effects. Though never positioned as a cure, in tests the drug did seem to halt the disease's progression in deathly ill colon cancer patients, a group that now has no viable treatment options. Unfortunately, all of these targeted drugs, among them AstraZeneca's (AZN) Iressa and Genentech's (DNA) Avastin, have worked in only a small percentage of patients, and the FDA is evaluating them cautiously (see BW Online, 3/5/03, "Cancer Drugs' Iffy Profit Prognosis").

Harlan Waksal, unlike his boastful brother, has been careful not to make any public claims about Erbitux since taking over last May. But some signals indicate that clinical trials of the drug run by ImClone's European partner, Merck KgaA of Germany (no relation to Merck & Co.), may be producing positive results. Merck won't release the results until the prestigious American Society of Clinical Oncology (ASCO) meeting in late spring. But in December, it said it's on track to file for approval of Erbitux with the European Union in the first half of 2003, based on an early analysis of data from colon cancer trials.

Merck KgaA also recently announced that it would go ahead with plans to build a $300 million manufacturing plant for Erbitux in Europe. These moves were enough to get Thomas Weisel Partners analyst Patrick Mooney in February to change his investment recommendation on ImClone to buy from market perform. He said he believes data from two pivotal clinical trials, including Merck's, will be positive and form the basis for regulatory filings both in Europe and the U.S.

STICKING WITH IT. That's not to say that shaking the legal cloud hanging over Samuel Waksal will be easy. ImClone still faces dozens of lawsuits filed by furious shareholders, and Harlan Waksal has undergone a tough grilling twice by congressional investigators probing the scandal. Still, last month he managed to convince the FDA to approve a compassionate-use program for Erbitux that would allow dying cancer patients with no other options to take the drug even if they're not in a clinical trial.

And despite the problems caused by its partnership, Bristol Myers isn't giving up. ImClone got another milestone payment from the giant drugmaker of $60 million on Mar. 5, under the development agreement between the two companies. In a press release, ImClone said the payment shows their mutual commitment to advance the drug's program.

Ultimately, what will matter most is the outcome of the several clinical trials testing Erbitux for colon cancer and head and neck cancer. Updates on those trials will be among the most closely watched at the upcoming ASCO meeting in Chicago May 31 to June 3. ImClone can only hope that the headlines will get brighter then than they are now. Arnst is a senior writer for BusinessWeek in New York


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