By David Shook The blowup at New York-based ImClone Systems (IMCL) has been called the biotech industry's mini-Enron. The tiny company's cancer drug, Erbitux, was supposed to have the pole position in an emerging field of oncological treatments -- or at least that's the way senior management described it to Wall Street and the press.
The positive buzz set off a feeding frenzy and lifted the stock from $30 a share a year ago to a high of $71 last fall. Then, when the Food & Drug Administration rejected the drug application in December, shocked investors dumped their shares in a stampede that knocked about 75% off of ImClone's market value. As of the closing bell on Feb. 13, the stock was trading around $18.
ImClone still has a shot at producing a drug that works. And some investors have been encouraged that its ongoing negotiations with Bristol-Myers Squibb (BMY), which owns about 20% of ImClone's stock and now wants management control of the company, are continuing. But for most, the ImClone story is over. Indeed, Wall Street has already anointed OSI Pharmaceuticals (OSIP) as the rising star in cancer research. Merrill Lynch, which underwrote OSI bonds, calls it the new "force in cancer therapeutics."
CROWDED FIELD. Before piling into yet another biotech stock, however, investors might want to study the lessons of the ImClone saga. More than a cautionary tale, the company's tumble also serves as something of a guide for investors contemplating the emerging crop of cancer-research outfits poised to release powerful new classes of drugs.
The first thing to note about ImClone is that it was playing in a crowded field. A number of prospective cancer treatments are strikingly similar in composition or their method of attack. "Right now, if you look at all the biotech drugs in the clinic, you could argue that there are really too many [cancer drugs] in the pipeline when you consider the number of potential patients," says Edward Saltzman, president of Defined Health, a drug-industry consulting firm in Millburn, N.J. Saltzman estimates that fully half of all biotech drugs now in clinical trials are intended to treat cancer -- a reminder of just how many companies are jostling for the same prize.
Like many of these new agents, ImClone's Erbitux is aimed at making chemotherapy more effective. These new drugs represent an important shift in cancer treatment. For much of the last 30 years, the advances have been incremental. Radiation and the tried-and-true chemo therapies each have their own toxic side effects. Recently, however, oncologists have developed ways to "sensitize" a tumor, making chemo or radiation more effective at shrinking a cancerous mass while minimizing damage to healthy cells. More than a dozen companies have created new experimental drugs to achieve this result.
RACE FOR FIRST. Erbitux is one of four or five drugs targeting a protein called epidermal growth factor receptor (EGFR), which exists on the surface of cancer cells and plays a role in their proliferation. At least five companies have EGFR drugs in mid- to late-stage testing.
Two years ago, ImClone was thought to have first-mover advantage with Erbitux, a perception that made it imperative for management to get the drug out of trials fast. In biotech, the winners are usually those companies that beat their rivals to market, since doctors tend to embrace the initial entries of a new drug class.
Facing this time pressure, ImClone took a shortcut with its Erbitux trial -- a time-saving strategy that ultimately cost the company dearly. While most cancer drugs are tested by putting half the patients in a sample on standard chemo combined with the experimental drug and the other half on chemo alone, ImClone conducted a "single arm" trial that combined Erbitux with chemo and dispensed with a chemo-only control group.
FALLING SHORT. That's not unheard of. In rare instances, the FDA has accepted single-arm studies involving cancer drugs. To be done effectively, however, these trials must yield volumes of hard evidence that the new drug represents a vast improvement over standard treatments. Moreover, single-arm trials are more appropriate when they involve patients for whom even the best-available chemo treatments have failed.
In ImClone's case, the trials didn't meet those criteria. Although Erbitux proved beneficial in extending some patients' lives, the FDA decided the single-arm trial was inadequate and refused to even consider the drug. Now, the company faces the prospect of redoing the trials, which would add years and millions of dollars to the approval process.
It sounds pretty straightforward. So where's the scandal? It has to do with ImClone not keeping investors informed. The FDA expressed concerns about the trial in letters to the company last year. But instead of disclosing the risks, management kept reassuring investors that there were no problems with the trials.
FILLING THE GAP. Now, the Securities & Exchange Commission is investigating ImClone for securities fraud. The company denies wrongdoing and says it continues to believe Erbitux will be an important drug. Citing the ongoing investigation, ImClone declined through a spokesman to discuss the controversy. Meantime, it has fallen far behind its competitors in the race to produce the first FDA-approved drug aimed at EGFR.
Two competitors in ImClone's market have rushed in to grab the lead. AstraZeneca (AZN), with its EGFR inhibitor Iressa, and OSI's drug Tarceva, which attacks the same receptor, could capitalize on ImClone's failure. Neither company's drug trials are in question. While Iressa will most likely hit the market first as a lung-cancer treatment -- possibly by yearend -- Tarceva is only a few months behind.
Both drugs may be useful against several types of cancers -- such as lung, colon, and breast. Plus, they're taken in pill form -- a huge advantage over Erbitux, which must be administered by regular injection.
Genta (GNTA) is another company in late-stage trials with a potentially important therapy. Lab studies of its lead candidate, Genasense, indicate that it can increase the effectiveness of chemo. It would be the first in a separate class of drugs designed to target another protein, known as Bcl-2, that also plays a role in tumor growth.
EXTRAORDINARY FAILURE. And what of ImClone? SunAmerica portfolio manager Brian Clifford, who sold ImClone stock before December's crash, says the company's stumble was an extraordinary failure. Marvels Clifford: "It still amazes me that this could happen."
Smart investors, take note: This kind of debacle could happen again. The intense competition among biotech companies to come up with the next blockbuster cancer drug has not abated. The stakes are high, and there's room for only one or two winners in each new class of drug.
Whatever role ImClone's aggressive management played, its market implosion serves as a reminder that, for investors, the cancer field features more land mines than miracle cures. Shook covers biotechnology issues for BusinessWeek Online. Follow The Biotech Beat every week, only on BusinessWeek Online