Imclone Systems Inc. - Inside Out
8/12/2008 8:13 AM ET
More than two years back when Imclone Systems Inc. (IMCL) put itself up for sale, the rumor mill was awash with speculation that Bristol-Myers Squibb Co. (BMY) may seek to buy the company. Bristol-Myers appeared to be the logical suitor as it already owned 16.6% of ImClone shares. That Bristol-Myers brushed aside those rumors and Imclone took itself off the auction block as it didn't get a fat premium is history.
Now, it's no more a rumor. As recently as July 31, Bristol-Myers tabled a $4.5 billion cash offer to acquire the 83.4% of ImClone that it doesn't own. The offer values Imclone at $60 per share in cash and represents a premium of 29% over the closing price of ImClone common stock on July 30, 2008.
Imclone stock shot up a stunning 38% to nearly $64 on the proposed offer and has been trading consistently above $60 since then. Analysts speculate that the elevated share price might force Bristol-Myers to sweeten its bid. Will it raise its offer price or drop out?
A Quick Walk Through Imclone
From a near-extinction in 1995, Imclone has regained its lost glory after an agonizing turnaround, going through several changes of management. Currently, the stock trades around $64, twice its value last year - the rally in the shares being driven by the recent buyout offer from Bristol-Myers. With Imclone adopting hardball tactics and considering a spin off of its pipeline now, there is bound to be an interesting turn of events in the days to come.
Imclone founded by two brothers Sam Waksal and Harlan Waksal in 1984, went public in November of 1991 at $14 per share. In the early 1990s, Imclone was involved in developing Erbitux - dubbed C225, and BEC2, a vaccine for use in small cell lung carcinoma and malignant melanoma. The company entered into a development agreement with Germany-based Merck KGaA for BEC2 in April 1990. Imclone began conducting several safety and efficacy tests (Phase Ib/IIa clinical trials) of Erbitux for various forms of cancer from December of 1994. Erbitux, a monoclonal antibody is a targeted therapy, which attacks cancer cells without damaging the normal cells.
The stock, which reached a high of $27 in its heydays during 1992, languished for the next successive years and plummeted to below $1 in early 1995. It was during that crucial time that billionaire investor Carl Icahn purchased ImClone's stake in Cadus Pharmaceutical Corp. for $6 million, which helped provide funds to develop its cancer drug Erbitux. Then followed a major jump in its stock price in the following year.
By May 1996, Imclone hit a high of $17, buoyed by a couple of positive news - initiation of additional safety and pharmacokinetic study of its lead cancer drug Erbitux for breast cancer, positive results of its BEC-2 vaccine in a pilot study and extension of its collaboration with Merck KGaA for BEC-2 development. In December 1998, Merck KGaA licensed from ImClone the right to develop Erbitux outside of the U.S. and Canada and the co-exclusive right to develop the drug in Japan.
But the euphoria was short-lived, and the stock shed most of its gains in the following years and began trading in a wide range between $4 and $14 till February 1999. The stock regained its momentum during the reminder of that year reaching a high of $43 by December of 1999, on a raft of positive early-stage study results of Erbitux and advancement of the drug to late stage in one of the trials. Investors were excited by the high response rate of Erbitux and the stock closed the year at $39.13, reflecting an impressive 289% growth from the beginning of the year.
The stock continued its upward journey in 2000, reaching an all-time high of $171.98 on March 7 (Adjusted for dividends, the close price on March 7 was $78.75). In one of the trials, which enrolled 123 late-stage colon cancer patients, administration of Erbitux combined with chemotherapy drug irinotecan, shrank the tumors in 22.5% of the patients. High hopes for Erbitux continued to propel the stock further. The stock, which underwent a 2:1 split on October 16, closed the year at $44.
In February 2001, Imclone was granted Fast Track designation for Erbitux in the treatment of colorectal cancer patients resistant to chemotherapy drug irinotecan. Colorectal cancer is the third most common cancer diagnosed in the United States.
Anticipating a blockbuster or near-blockbuster sales status for ImClone's investigational cancer drug Erbitux, Bristol-Myers inked a $2 billion marketing deal with Imclone in September of 2001. Under the agreement, Imclone agreed to share 40% of the profits derived from Erbitux with Bristol-Myers. The deal required Bristol-Myers to pay $1 billion in upfront payments, $200 million immediately, followed by two payments of $300 million and $500 million during the course of the drug approval process. Bristol-Myers also agreed to buy a 19.9% stake in ImClone for $1 billion at a price of $70 each and acquired marketing rights to Erbitux in the U.S. and Canada, in addition to 2 seats on Imclone board. Now, Bristol-Myers owns 16.6% stake in Imclone and a seat on Imclone's nine-member board.
Coming Events Cast Their Shadows Before
Imclone had completed submission of Erbitux filing on October 31, 2001 for regulatory approval. However, the much-touted drug received a deadly blow on December 28, 2001 when the FDA refused even to review Erbitux, citing inferior data and poor trial design. The regulatory agency rejected the application as the company failed to demonstrate the need for including irinotecan in the trial and also for failing to prove that Erbitux would have achieved the same benefit of tumor shrinkage all by itself. There were media reports that FDA had informed Imclone of the pitfalls in the Erbitux study design as early as August 2000. Imclone's stock lost 16% of its value in a single day.
That was the start of Imclone's woes, plaguing it for the next two years just as the old adage goes, "When it rains, it pours."
A month after Imclone's Erbitux application was rejected, the company was dealt yet another blow. In January 2002, Imclone's Erbitux came under the scrutiny of a House subcommittee, sending its already battered stock further down. Class-action suits were filed against members of the company's board of directors for alleged insider-trading. Imclone, which was trading as high as $75.45 in December 2001 had cratered to $19 by the end of January 2002.
The following month, Imclone held talks with the FDA and sought guidance on how to proceed with the resubmission of its Erbitux application, rekindling hopes for the drug, which was mirrored in its stock price. By March, the stock had improved over 28% to settle at $24.63.
It wasn't long before when the stock was on the road to recovery, did yet another crisis strike Imclone. An insider trading case was launched by the SEC against Imclone founder and CEO Sam Waksal in April 2002. Hardly days before did the FDA reject the Erbitux filing, Waksal and his family members had sold over $150 million of Imclone shares at peak prices. Investors lost confidence in the company and the stock went into a tailspin in the successive months as more bad news kept pouring in.
Amid several allegations and mounting dissatisfaction among the management as well as investors, Sam Waksal resigned as CEO in May 2002 and was replaced by his brother Harlan Waksal who was then serving as the company's Chief Scientific Officer.
Sam Waksal, who had an ignominious exit from the company he founded, was arrested by the FBI agents on June 12, 2002 on insider-trading charges and freed on a $10 million bail. The same day, the SEC filed insider trading charges against him and nearly a year later was sentenced to seven years and three months in prison. Sam Waksal is scheduled to be released this month after serving about five years of his seven-year sentence. Martha Stewart, the founder of Martha Stewart Living Omnimedia Inc. (MSO) and an investor in Imclone was also indicted over insider trading as she sold nearly 4000 shares of ImClone, a day before the FDA announced its decision of rejecting Erbitux in December 2001.
Just when the company was beginning to put things in order, it received a disastrous blow. In January 2003, the Feds notified the company that it was liable for taxes that were not withheld as one or more of its employees who exercised certain non-qualified stock options in 1999 and 2000 failed to pay income taxes for those years. Two months later, the IRS commenced audits of the company's income tax and employment tax returns for the years 1999-2001.
On March 31, 2003, Imclone announced that it would delay filing its 2002 annual report with the SEC and incur a charge of at least $23.3 million related to tax liability. The reason for the delay being, the company needed to restate financial statements beginning with 2001 and for period prior to 2001. The restatement was attributable to the failure of the former CEO Sam Waksal to pay taxes on the exercise of certain warrants and options.
As if all this was not enough, Imclone received a delisting warning from the NASDAQ on April 9, 2003 for failing to file its financial report for fiscal 2002 and was given grace period till June 23 to file its 10-K. However, the company was able to avert that crisis by filing its annual report just before the deadline.
During the same month (April of 2003), the company carried out a shake-up of its management in connection with the previously disclosed internal review related to withholding tax liabilities. Harlan Waksal resigned from the posts of President and CEO and Daniel Lynch took over as acting CEO. In February 2004, Lynch was officially named chief executive.
Despite the cloudy headlines, Imclone also had its silver lining. The study results of Erbitux presented by Imclone's European partner Merck KGaA, at the ASCO (American Society of Clinical Oncology) meeting in June of 2003 indicated that Erbitux when used in combination with irinotecan for treating metastatic colorectal cancer, shrank tumors in 22.9% of the patients and showed 4.1 month median time to progression and 55.5% overall rate of disease control. Erbitux when used alone showed a 10.8% response rate, 1.5 month median time to progression and 32.4% overall rate of disease control. The results presented by Merck KGaA at the ASCO meeting were identical to Imclone's study results, which were rejected by the FDA in 2001.
Merck KGaA's findings renewed interest in Erbitux, which was almost on the verge of getting lost by the kerfuffle at Imclone. In June of 2003, Imclone and Bristol-Myers met with the FDA to discuss clinical trial data including the Merck KGaA-sponsored clinical trial of Erbitux in patients with metastatic colorectal cancer as well as data from completed ImClone-sponsored clinical studies.
The Light Dawns
August 14, 2003 marked the end of a long wait. Imclone filed with the FDA seeking approval of Erbitux in combination with irinotecan, for the treatment of patients with irinotecan-refractory metastatic colorectal cancer. The filing was accepted for review on October 10, 2003. The stock, which had taken a severe beating in the past two years, began to gain steam on the prospects for Erbitux, closing the year at $39.66.
Finally the D-day arrived! On February 12, 2004, the FDA approved Erbitux in combination with irinotecan in the treatment of patients with metastatic colorectal cancer who are resistant to irinotecan-based chemotherapy and for use as a single agent in the treatment of patients with metastatic colorectal cancer who are intolerant to irinotecan-based chemotherapy. Thereafter it was no looking back for Imclone.
In April of 2004, Imclone reported its quarterly profit in more than eight years as revenues rose five-fold on the recognition of license fees and milestone payments from its partners Merck KGaA of Germany and Bristol-Myers, related to Erbitux sales.
The stock continued to be driven by positive news about Erbitux. The drug was approved in the European Union on June 30, 2004 for treatment of metastatic colorectal cancer.
However, Imclone did have its share of bad tidings too in 2004. The company's BEC2 cancer vaccine for small cell lung cancer failed to meet its primary endpoint of survival. In all, though 2004 was a banner year for Imclone, its stock closed the year at $46.08, well-off from its July high of $87.24.
Back To Square One
Imclone landed in trouble again in 2005 as higher operating costs dented its profits, despite a surge in Erbitux sales. In November of that year, Lynch resigned his positions of CEO and Director by mutual agreement with the company's Board of Directors. Philip Frost took over the post of CEO on an interim basis. By the end of 2005, the stock had fallen down to $34.24.
Following the departure of Frost on January 23, 2006, Joseph Fischer was named the interim CEO. A day later, Imclone announced that its Board of Directors had engaged the investment bank Lazard to conduct a full review of the company's strategic alternatives to maximize shareholder value, which might include a sale of the company.
The company continued in its effort to expand the uses of its star drug Erbitux. On March 1, 2006, the FDA approved Erbitux for use in combination with radiation therapy to treat patients with squamous cell cancer of the head and neck that cannot be removed by surgery. The drug was also approved for use as a monotherapy to treat patients whose head and neck cancer has spread despite the use of standard chemotherapy.
Meanwhile, on September 19, 2006, Imclone lost a patent lawsuit filed against it by Israeli research institute Yeda in 2003. The disputed patent covers the use of monoclonal antibody with chemotherapy, the basis on which Erbitux works. Imclone licenses the patent for Erbitux from Sanofi-Aventis (SNY). ImClone and Sanofi-Aventis resolved the issue late last year by agreeing to pay $60 million each to Yeda for full and final settlement of the claims. In addition, ImClone will make a contingent payment to Yeda of a low single-digit royalty on sales in and outside of the U.S. and will pay Sanofi-Aventis a low single-digit royalty on sales outside of the United States.
Tough times were back again at Imclone and by the end of September 2006, the stock dipped to around $26.
Enter Icahn, The Tough Taskmaster
Carl Icahn, a corporate raider well-known for bringing about management changes to boost shareholder value in the company he invests, became a director of ImClone in September 2006.
Icahn had long been calling for the ouster of Imclone's Chairman David Kies, and five other directors including interim CEO Joseph Fischer accusing them of the inept handling of the patent lawsuit related to Erbitux and for failing to capitalize on the potential of Erbitux.
In August of 2006, Icahn turned down a buyout offer from a major international pharmaceutical company, which valued Imclone at $36 per share, saying the offer was too low. The offer represented a 32% premium to Imclone's stock price then.
Imclone, which hoisted a 'For Sale' sign over its business in January 2006, took itself off the auction block in August that year and Icahn was blamed for derailing the offer, which according to some reports was from Sanofi-Aventis IMC-11F8.
The battle for the control of Imclone came to an end on October 10, 2006 when David Kies resigned as Chairman of Imclone and handed over the reins to Icahn. Currently Icahn owns about 13% stake in Imclone. The company, which had been without a CEO since Icahn ousted the management in October of 2006, appointed John Johnson to the post in August 2007.
Now, Icahn has been quick enough to rebuff the current takeover bid from Bristol-Myers saying that the offer substantially undervalues the company, given the strength of Imclone's product pipeline. He is also concerned that one of the directors on the ImClone Board who is the Bristol-Myers designee would have had access to the information discussed at previous meetings concerning the potential spin off of Erbitux from its other pipeline, and how this restructuring might enhance stockholder value.
Pipeline - Half Full Or Half Empty?
Imclone is a one-trick pony dependent upon Erbitux, and the other investigational cancer drugs in its pipeline are years away from making it to the market. The company has eight antibodies under preclinical testing for various forms of cancers.
Erbitux, the lead drug of Imclone, faces competition from Genentech Inc's (DNA) Avastin and Amgen Inc.'s (AMGN) colon cancer drug Vectibix. Avastin is approved by the FDA for advanced colorectal cancer, advanced non-squamous, non-small cell lung cancer and metastatic HER2-negative breast cancer. Erbitux notched $1.3 billion in global sales in 2007, compared to $1.1 billion in 2006. Avastin sales totaled $2.29 billion in 2007, up from $1.75 billion in 2006.
Imclone is aggressively pursuing further market penetration of Erbitux in the U.S. and Europe through product label expansion in colorectal cancer and head and neck cancer as well as in non-small cell lung cancer. As recently as July 16, Erbitux was approved in Japan to treat patients with advanced or metastatic colorectal cancer.
The company is making a meaningful foray into the lung cancer market where there is ample room for growth. Lung cancer is the most common cause of cancer-related death, responsible for 1.3 million deaths annually. According to statistics, survival rates for lung cancer are generally lower, compared to other types of cancers. The overall five-year survival rate for lung cancer is about 16%, compared to 65% for colon cancer, 89% for breast cancer, and over 99% for prostate cancer.
A number of new drugs in combination with chemotherapy to improve survival rate in lung cancer, are being evaluated but thus far none has succeeded, barring Genentech's Avastin. But Avastin, a targeted monoclonal antibody, cannot be used in treating people with squamous cell cancers and who face increased risks of pulmonary hemorrhage and other complications.
The recent results of Imclone's late-stage study dubbed FLEX (First-line in Lung cancer with Erbitux) have shown that patients with advanced non-small cell lung cancer, treated first-line with a combination of Erbitux and chemotherapy, live significantly longer (on average 5 weeks longer) than patients treated with the platinum-based chemotherapy alone. In the FLEX trial, Erbitux in combination with chemotherapy, benefited patients with adenocarcinoma as well as squamous cell cancer, the two most common subtypes of non-small cell lung cancer, according to the company. Avastin cannot be used to treat people with squamous cell lung carcinoma where the tumor is located deep within the lungs.
Imclone is expected to seek FDA approval for Erbitux in treating lung cancer in the fourth quarter. However, according to some analysts, Erbitux in no way poses a threat to Avastin. Avastin has an overall survival benefit of nearly two months, compared to Erbitux's 5 weeks and therefore Erbitux is going to be preferred only by non-small cell lung cancer patients with squamous cell histology. Cowen analyst Eric Schmidt is of the view that Erbitux upon approval for non-small cell lung cancer would add $700 million in annual U.S. sales and boost shares by 35%.
According to the results of the company's first line colorectal cancer study dubbed CRYSTAL, which were released in the second half of last year, Erbitux is especially useful for colon cancer patients with normal gene KRAS while those with mutated KRAS might be harmed by Erbitux therapy. That spells some trouble for Imclone because it is estimated that between 30%-40% of all patients with colorectal cancers have a KRAS mutation that would ultimately render them ineligible for EGFR-targeted therapy like Erbitux. But Erbitux still has a chance to serve 60% of the colon cancer patients.
ImClone's IMC-11F8, which is also a target growth factor receptor, just like Erbitux, is being evaluated for its potential as cancer therapeutics. According to the company, IMC-11F8 is a follow-up form of Erbitux. While Erbitux is a human/mouse chimeric monoclonal antibody, IMC-11F8 is a fully human monoclonal antibody. IMC-11F8 is expected to enter late-stage studies in the first half of 2009.
Betting On The Erbitux Successor
With patent expirations looming large on Bristol-Myers, acquiring Imclone, with which it already has a partnership to market the blockbuster cancer drug Erbitux, represents a wise deal for Bristol-Myers. Of late, Bristol-Myers has shifted its focus on biopharmaceuticals and has undertaken a thorough strategic review of its non-pharmaceutical assets. As part of the transformation, Bristol-Myers recently sold its wound therapy and surgical care unit ConvaTec to private equity firms Nordic Capital and Avista Capital Partners for $4.1 billion. Therefore, now is the time for Bristol-Myers to make an acquisition as it is flush with cash.
Imclone's IMC-11F8, a cancer drug under development is expected to be a potential successor to Erbitux. With IMC-11F8, being touted as "the next generation Erbitux", it is no wonder that Bristol-Myers will like to get its hands on the supposed star drug in waiting. In a recent statement, Imclone said that Bristol-Myers does not have rights to market IMC-11F8 under its existing contractual agreement, while Bristol-Myers claims it otherwise.
Under the existing agreement, ImClone receives a distribution fee based on a flat rate of 39% of net sales of Erbitux in North America. The agreement, which was amended in July 2007 to provide for additional development funding for certain indications, expires in September 2018 with respect to Erbitux in the U.S.
Imclone's recent statement contradicts its earlier stance when it said that the exclusive rights to market IMC-11F8 outside the United States and Canada and co-exclusive development rights in Japan belong to ImClone Systems, while commercial rights to the antibody in the U.S., Canada and Japan fall within the scope of ImClone Systems' commercial agreement with Bristol-Myers regarding Erbitux.
Conclusion
A potential acquisition of Imclone would strengthen Bristol-Myers' competitive positioning as a pure pharma play, making it a more attractive buyout target. But that said, Imclone has already thumped its nose at Bristol-Myers' offer.
Will Bristol-Myers sweeten its bid? If the takeover deal fails, the issue of rights to the next generation Erbitux might lead to the next legal bickering between Imclone and Bristol-Myers. It's a wild guess though.
