ImClone's Value May Rest On Debate Over Next Erbitux
10:37 AM EDT August 7, 2008
By Thomas Gryta
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The battle for ImClone Systems Inc. (IMCL) may come down to the fight over who has rights to the follow-up to the company's sole but increasingly successful product, the cancer treatment Erbitux.
ImClone claims to own the complete rights to the next-generation Erbitux, which carries high expectations but isn't seen on the market until well into the next decade. That interpretation contradicts the company's own statement two years ago and is disputed by Bristol-Myers Squibb Co. (BMY), which co-markets the current Erbitux in the U.S. and is seeking to buy the 83% of ImClone that it doesn't own for $4.5 billion.
ImClone has said Bristol's offer "greatly undervalues" the company partly because of its product pipeline, of which the next-generation Erbitux is a key part.
Resolving the next-generation Erbitux dispute could influence billions of dollars in sales in the next decade, ImClone's total value, the action of other possible suitors and whether ImClone attempts to spin off its pipeline, a move the company said it was considering.
The disagreement centers on whether the drug, called IMC-11F8, was derived in any way from the current Erbitux and if its development can be viewed as a "competing product," as defined by the 2001 agreement between the companies. If either of those are true, Bristol is entitled to rights to the drug.
"My read is that the contract language is nebulous," Cowen & Co. analyst Eric Schmidt said. There is "clearly room for (Bristol) to claim one thing and (ImClone) the other."
Because of the confusion, the battle over IMC-11F8 could end up in front of an arbitrator and may take years to resolve - something that Bristol-Myers can avoid by buying ImClone, which may mean raising its offer of $60 a share. Wall Street expects a higher offer for ImClone as the stock closed Wednesday at $64.07 and recently traded at $64.09.
The IMC-11F8 dispute comes as the first-generation Erbitux gains traction. Erbitux is approved to treat head, neck and colorectal cancer; is expected to be filed for approval in lung cancer in the fourth quarter; and is being studied in multiple other forms of the disease.
UBS projects 2008 global Erbitux sales of $1.7 billion, up 31% from $1.3 billion in 2007, and sees that rising to $3.1 billion in 2011.
Such sales estimates aren't available for IMC-11F8, which won't enter pivotal trials - likely to last at least 2 1/2 years - until the first half of 2009. The success of the first-generation Erbitux reduces some risk on the follow-up because it has a similar target. The key difference between the two is that the new drug is a human antibody, expected to be safer and have less-frequent dosing, while Erbitux is a hybrid of a human and mouse antibody.
The unknown over IMC-11F8's rights is likely to give pause to other potential suitors of ImClone or any spinoff of its pipeline. That's because other companies may be less willing to pay billions for a company if they then have to share the profits on a key future drug.
Of course, if Bristol buys ImClone, that issue would be moot, which is why some might see the recent posturing - that started from ImClone before Bristol made its offer - as a bargaining tactic.
Conflicting Views
ImClone has asserted, as recently as two weeks ago, that it owns all the rights to IMC-11F8, and in a statement this week said that Bristol-Myers "may have no rights to market" the drug.
Bristol-Myers disagrees. "We believe we have the rights to 11F8 under our existing contractual agreement," a Bristol-Myers spokeswoman said this week, with no further comments on the company's strategy for claiming the rights.
The agreement, dating from 2001, covers Erbitux, along with "all fully humanized or human" versions, analogs or derivatives of the drug.
ImClone's recent comments even conflict with its own language from April 2006, when ImClone won an arbitration decision against Erbitux's international marketing partner, Germany's Merck KGaA (MRK.XE), for the international rights related to IMC-11F8. The decision gave ImClone the rights to develop and commercialize the drug outside the United States and Canada, rights that Merck KGaA currently has with Erbitux.
At the time, ImClone stated that "commercial rights to this antibody in the U.S., Canada and Japan fall within the scope of ImClone Systems' commercial agreement with Bristol-Myers Squibb regarding Erbitux."
Officials from ImClone weren't immediately available to comment, but the company was under different management when the statement was issued.
Current management is said to frustrated with the 2006 statement, based on comments from a person familiar with the situation, but the company may try to justify that statement by claiming it refers to Bristol-Myers' right of first refusal for all of ImClone's pipeline products, which Bristol had until that right expired in September 2006.
ImClone also may claim that IMC-11F8 is actually a separate drug, not derived from Erbitux in any way, but that angle will force it to deal with the restrictions on developing a competing product that are contained in the agreement.
Under the agreement, a competing product is defined as one that "has as its only mechanism of action an antagonism of the EGF receptor."
Both drugs attack cancer cells by latching onto, and blocking, a growth-related trigger called epidermal growth-factor, or EGF, that occurs in some cancers.
"If this drug is therapeutically effective because it interferes with - or otherwise antagonizes or blocks or inhibits - the EGF receptor and does nothing else, then it is a competing product," said John P. Iwanicki, a patent attorney and senior partner specializing in the pharmaceutical industry with Banner & Witcoff Ltd in Boston.
If it is a competing product, it must either be divested or ImClone must offer Bristol-Myers to participate in the commercialization and development on a 50/50 basis.
Even then, ImClone still may have an argument. The company could argue that the restriction only applies to late-stage development in North America, where Bristol holds rights to Erbitux. IMC-11F8 is being developed in Europe, where ImClone controls all rights to the drug.
That argument may hold water, Iwanicki said, and ImClone could begin developing or commercializing IMC-11F8 in the U.S. after September 2008 when ban on competing products expires.
-By Thomas Gryta, Dow Jones Newswires; 201-938-2053; thomas.gryta@dowjones.com
