Markets & Finance

A Dose of Good News for ImClone


Shares soared Tuesday after a study showed the company's Erbitux could be effective against a form of lung cancer

On the one hand it's easy to see why ImClone Systems' (IMCL) stock surged 18% Tuesday on news that its Erbitux drug may be useful in battling lung cancer. But it's also easy to see why several analysts are skeptical that ImClone can seize what could be a $1 billion opportunity.

A relatively small drug company which has had its share of controversy, ImClone depends almost entirely on Erbitux. It's already approved to fight colorectal cancer and head and neck cancer.

But Erbitux may be headed for bigger things. ImClone, along with its Erbitux partner Bristol-Myers Squibb (BMY), announced on Sept. 11 that a large, three-year study showed Erbitux increased survival rates for patients facing non-small cell lung cancer.

"It is a huge surprise," says Hanzhong Li, an analyst with Stanford Group. An earlier, smaller study using a different chemotherapy mix had shown far less success fighting lung cancer.

Bears Stearns (BSC) analyst Akhtar Samad upgraded the stock on the news. "This result was widely unexpected and opens up a new potential blockbuster market opportunity for Erbitux," he wrote in a Sept. 11 note.

Because ImClone relies so heavily on Erbitux, the potential for profits is huge. Cowen & Company (COWN) analyst Eric Schmidt estimates every $1 billion in U.S.

Erbitux sales could result in earnings before interest and taxes of $270 million. ImClone's stock closed at $44.90 per share on Sept. 11. At a price-to-earning multiple of 10, every $1 billion in sales might be worth $29 per share to ImClone, he wrote.

But getting to that point won't be easy.

ImClone says the full results of the Erbitux study won't be released until a future medical conference. The study was conducted by Merck KGaA (MRCG.DE), which hasn't given ImClone the full data, the company says. Without the full data, it's impossible to know exactly how effective Erbitux is, and how it stacks up against competitor drugs.

Also, Schmidt notes that even good data might have trouble winning FDA approval because of previous results for Erbitux alongside chemotherapy commonly used in the U.S. Approval could take a year or more, so extra sales may not fully show up until late 2008 or early 2009.

There are also other things for ImClone investors to worry about. As Morningstar (MORN) analyst Karen Andersen wrote this summer, "Imclone has a long history of corporate governance issues."

That's one way to describe the conviction of former chief executive Sam Waksal, who quit in 2002. (That investigation also snared Martha Stewart.)

Stanford's Li notes ImClone spent the past two years without a permanent chief executive. The company faces lawsuits over Erbitux patents. And, ImClone's board has been shaken by the activities of activist investor Carl Icahn. He became the board's chairman late last year.

Still, Li says the company may be at "an inflection point." Its new CEO, John H. Johnson, was most recently chairman of Johnson & Johnson's worldwide biopharmaceuticals unit. It announced recently that one of its patent disputes had been settled. Many investors like the way Icahn is shaking up ImClone. Though Erbitux remains the sole breadwinner for ImClone, a couple other drugs under development show promise, Li says.

"They are making improvements on all fronts," says Li, who has a buy rating on the stock.

Steverman is a reporter for BusinessWeek's Investing channel.

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