Jenks Healthcare Business Report March 2002

In the March 2002 issue:

Of ImClone, Icahn and Investing: Perils of Single Product Dependency

ImClone Systems lost 70% of its market value in a matter of days when the FDA refused to review the application for one drug, jeopardizing the company’s recently signed deal with Bristol-Myers Squibb. But the company is not alone in depending heavily on one product; other biotech and small pharmaceutical firms struggle with bad news, and investors have little patience.
P. 1

***

Fourth Quarter Earnings

WebMD meets its financial goals for the end of the year, but does that mean it is worth $2.5 billion? Aetna continues to struggle, but management believes it will turn the corner in 2002.
P. 6

***

Public Equity Market

Just three secondaries are priced, two IPOs are filed and one is withdrawn.
P. 7

***

Venture Capital Market

Venture firms invest $316 million in 15 companies in the past month.
P. 10

***

Acquisition Market

M&A activity slows, except in the medical device sector. Results from The Senior Care Acquisition Report for 2001 are in.
P. 12

Jenks Healthcare Business Report

Of ImClone, Icahn and Investing: Perils of Single Product Dependency

When pharmaceutical giant Bristol-Myers Squibb (NYSE: BMY) agreed to buy 19.9% of ImClone Systems (NASDAQ: IMCL) last fall in order to partner with the much smaller company on its new cancer treatment drug, Erbitux, the pundits of Wall Street believed a new era of big pharma/small biotech partnerships and mergers would be spawned. Never mind that IMCL was trading near its all-time high at the time that BMY agreed to invest and pay a total of $2 billion over a few years to have access to a drug that what was (and still is) considered to have blockbuster potential. New drugs with annual revenues of $1 billion or more were much in demand, and the large pharmaceutical companies had several such drugs going off patent protection.

Investors started looking for the next ImClone, companies with promising drugs in development, preferably in clinical trials, which would be attractive to their larger pharmaceutical brothers. The trouble is, there can be a great distance between promise and delivery. As the world now knows, just two months after the historic agreement between the two companies, ImClone’s share price plunged sharply when it was revealed in late December that the FDA refused to review the application for Erbitux.

Senior management at BMY was incensed, but the better word was embarrassed, because it showed to many investors that the company was willing to invest a substantial amount of money for access to a potentially lucrative (and let’s not forget medically beneficial) drug without, perhaps, doing a thorough due diligence analysis. BMY’s CEO wanted to have the two top officers of IMCL pushed aside until matters could get sorted out with the FDA. We wonder, however, if any heads rolled at BMY on the "ImClone team," considering that BMY already has been forced to write off more than $700 million of its investment. By way of comparison, that’s a little more than the total losses accumulated (and hidden) by a currency trader at a bank in Baltimore over two years.

In early February, Bristol-Myers was threatening to walk away from its deal with ImClone, but that stance was more bluff and bluster for one simple reason: walking away made no sense, because everyone still believed that Erbitux would successfully treat cancer, whether it becomes available this year or the next. And, if they had walked, the only winners would have been the lawyers, while shareholders, and let’s not forget about cancer patients, would have all been the losers. And while BMY was doing the talking, famed "corporate raider" Carl Icahn was doing the filing, as in with the SEC, to purchase up to $500 million of IMCL shares, or potentially a 40% stake.

Mr. Icahn was no stranger to ImClone, having purchased $2 million of stock and assets of the company more than 10 years ago. In 1999, he filed a 13D with the SEC indicating he owned 5% or more of ImClone’s stock, most of which was subsequently sold. He apparently considers himself a friend of ImClone founder and CEO Sam Waksal, but no one really knows what his agenda is this time. Too bad instead of filing his "intention" to buy shares he didn’t make outright purchases, because within weeks he could have added to his several billion dollar net worth.

The much-awaited meeting with the FDA in late February, attended by both ImClone and Bristol-Myers officials, was "very productive," with an indication that ImClone may not have to conduct a new large clinical trial. Instead, the company may be able to use data from a European trial conducted by its partner there, Merck KgaA of Germany, and can continue gathering missing data from its own trials. This means that Erbitux could reach the market in the first half of 2003 instead of 2004 or later. While a year later than originally expected last year, this "good" news sent ImClone’s stock soaring by 44%. Unfortunately, it appears that Mr. Icahn did not participate in this financial reward, as it is unknown if he ever made any purchases.

Was Mr. Icahn playing "white knight" to his friend Sam Waksal, sending a message to Bristol-Myers that big money may be backing ImClone in its spat with BMY, or, after plummeting 70% in value, did he see real value in IMCL and its new drug? We may never know, but it has been reported that he fears rival cancer drugs may now come to market before Erbitux, specifically Iressa from AstraZeneca (ISEL: AZN) and Tarceva from OSI Pharmaceuticals (NASDAQ: OSIP).

A week after the meeting with the FDA, BMY management made up with the Waksals and entered into a revised co-development and co-commercialization agreement for Erbitux. Instead of a $300 million milestone payment, BMY will pay $140 million in cash upon signing the revised agreement and $60 million on its one-year anniversary. In addition, BMY will pay the originally agreed upon $500 million upon approval by the FDA, but instead the sum will be split in two, with one-half paid upon approval of the first indication, and the second part coming upon approval by the FDA of a second indication.

Also, instead of receiving 60% of future profits from Erbitux, IMCL will receive 39% of Erbitux revenues in North America. The agreement will continue to run through 2018. Since BMY management had threatened to make no additional payments, this appears to be a financial win for ImClone, which will ultimately receive 88% of the originally agreed upon $800 million. Without BMY’s financial (as well as political) support, it is unclear what might have happened to Erbitux, let alone ImClone itself. When news of the settlement hit the market, IMCL’s shares rose by 20%, but they still are less than one-half the level of last December.

So, after all of the bluster and threatened litigation, Bristol-Myers still most likely overpaid for its total investment in IMCL and Erbitux. And ImClone still has to get Erbitux approved, which may not be an easy task. Although the drug was originally fast-tracked by the FDA because Erbitux was considered a breakthrough therapy, the Feds are going to have a more jaundiced eye the second time around, given all of the publicity. While BMY management may be embarrassed by being blindsided, IMCL management’s inept handling of the clinical data is really inexcusable, especially just after snaring BMY as its partner. This entire saga, however, is indicative of what can happen to a company that is so dependent on one product or partnership.

In the past two weeks, shareholders of several health care technology companies have watched their share prices plummet. British Columbia-based Angiotech Pharmaceuticals (NASDAQ: ANPI) dropped 20%, or more than $10 per share, after the company announced that its experimental drug to treat multiple sclerosis just did not work in clinical trials and that further tests would be suspended. This comes after Alcon Laboratories last November ended a joint venture to develop eye implants aimed at treating diseases such as glaucoma. Angiotech remains unprofitable as it searches for a breakthrough drug.

Isis Pharmaceuticals (NASDAQ: ISIS) lost 16% of its value when the company announced that one of its experimental drugs to treat psoriasis was not as effective as hoped for, and that further studies as a stand-alone drug were unlikely. Instead, ISIS will most likely consider conducting trials of the drug in combination with other treatments. The company has a second psoriasis drug in clinical trials, so some analysts were surprised at the market reaction. Despite the news, the analyst at Needham & Co. reiterated his strong buy rating and price target of $30 to $32 per share, or double the level after the announcement.

On March 8, Schering-Plough (NYSE: SGP), because of regulatory and competitive pressures, announced that it would switch its allergy medicine, Claritin, to over-the-counter status. Not only will this result in lower sales for SGP, with worldwide sales of Claritin estimated to plunge from $3.1 billion last year to just $400 million next year, but it also has an impact on other companies. Shares of generic drug maker IMPAX Laboratories (NASDAQ: IPXL) fell more than 34% on the news because it had filed for approval to market a generic version of Claritin, which goes off patent at the end of this year. With a huge advertising campaign, most allergy sufferers are well aware of Claritin, and once it is sold over the counter, generic versions may be left in the dust, so to speak.

Similarly, shares of Albany Molecular Research (NASDAQ: AMRI) declined by more than 20% to $23.00 based on concerns that its partner, Aventis SA (SBF: AVEP), would move its allergy drug, Allegra, to non-prescription status as well. AMRI helped Aventis develop the drug and receives approximately 40% of its royalty revenues from sales of Allegra. If the proportional drop in sales were to be close to what is expected with Claritin, it would be a big blow to AMRI.

As ImClone can attest, partnering with much larger companies has some pitfalls. Shares of SuperGen Inc. (NASDAQ: SUPG) plunged by 50% when Abbott Laboratories (NYSE: ABT) ended its two-year old alliance with the small biotechnology company. ABT owns 1% of SUPG’s stock, but had an option to buy nearly 50% of the company. The two companies originally got together to develop SUPG’s experimental oral cancer drug, Rubitecan, for the treatment of pancreatic cancer, as well as ovarian, prostate, lung and stomach cancers. SuperGen management is taking an upbeat view of the termination, claiming that the agreement with ABT impeded business activities with other potential partners. It seems that ABT had an exclusive 180-day "right of first-look" for all of SUPG’s products. SuperGen is in phase III trials for Rubitecan and will gather data from 1,000 pancreatic cancer patients this spring. The drug is also the subject of several other clinical trials. While management believes it will now have more flexibility, investors obviously liked the influence and market clout of an Abbott Labs.

Shares of Portland, Oregon-based Bioject Medical Technologies (NASDAQ: BJCT), which makes needle-free drug delivery systems, plunged by more than 56% when Amgen (NASDAQ: AMGN) abruptly decided to not pursue development of two Bioject devices. Bioject management said the move was unrelated to product performance and that the company expects to conclude one or two more development deals over the next year. The company’s needle-free injection technology works by forcing liquid medication at high speed through a hole, smaller than the diameter of a human hair, in a syringe that is held against the skin. Despite losing $3 million in revenue from Amgen in its next fiscal year, Bioject has enough cash on hand to fund operations for the next four years.

With so many biotech companies trying to develop the next blockbuster drug, there are going to be many disappointments for investors. When there is an unbalanced dependency on a single drug or partner, the swings in value will be extreme and rapid. As is always the case in competitive environments with high levels of risk, investor beware, as this will happen again…and again.

Read the past headlines.