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A Beat-Up ImClone Looks Good

By Amy Tsao July 21 must have seemed like deja vu all over again for ImClone (IMCL) investors. Its shares slumped 20% that day after the New York City-based biotech company announced second-quarter sales numbers that fell short of analysts' expectations. ImClone reported earnings of $24.3 million, or 29 cents a share, on revenues of $71.5 million. Even though it beat consensus earnings-per-share and revenues forecasts of 25 cents and $69 million, respectively, Wall Street secretly hoped ImClone would come closer to "whisper numbers" on sales of between $75 million and $80 million.

ImClone is no stranger to sharp sell-offs given its history of disappointments and scandals in recent years. Remember what happened in December, 2001, when the Food & Drug Administration rejected the company's application for its colorectal cancer drug Erbitux. Not soon after, former CEO Sam Waksal and pal Martha Stewart became the focus of insider-trading scandals related to ImClone stock, which fell as low as $7 in late 2002.

"OVERBLOWN." History may be a poor guide here, however. The stock now trades in the $66 range -- down from $80. At the current price, considering the blockbuster prospects for Erbitux, investors may have a prime buying opportunity. "The second-quarter results have been completely overblown and really reflects the market's current nervousness, which will abate in time," says Geoff Porges, biotech analyst at Bernstein Research. "There's no reason for ImClone to lose 20% of its value." (Porges doesn't own the stock. At any time, Bernstein may hold the stock, but Porges has no oversight or impact on those positions.)

Indeed, many are calling the decline excessive because it's still the early days for Erbitux, which was approved this February. The latest earnings report reflects only the first full quarter the drug has been on the market. Analysts, by and large, figure that Erbitux, which ImClone shares with Bristol-Myers Squibb (BMY), will be generating at least $2 billion in annual sales by decade's end. Standard & Poor's analyst Frank DiLorenzo sees peak annual sales for Erbitux at $2.3 billion by 2012. (He doesn't own the stock.)

DiLorenzo thinks ImClone is still among just a handful of profitable biotechs that have strong growth potential. He figures the stock trades at a price-earnings ratio of 25 times his 2005 EPS estimate of $2.71. "Overall, it was a very good quarter, and this will be a strong year," he figures, expecting that ImClone will report EPS of $1.74 on revenues of $258 million in 2004. His assessment: The stock could reach $94 over the next 12 months.

TRIPPED UP. That's not to say climbing such heights will be easy. ImClone doesn't give sales forecasts. Management's reason: Sales are hard to predict with any authority during the first year of a drug rollout. And a dearth of guidance will continue to frustrate many investors and keep some out of ImClone stock entirely, says Ilya Kravets, analyst at New York-based Mehta Partners.

"Investors are very edgy around launch times. They're looking for any sign that will add to volatility," he says. Still, Kravets figures the stock should perform well over the next year. (Kravets doesn't own the stock, and neither does Mehta in its hedge fund.)

That Erbitux sales fell short of estimates by a few million dollars in the quarter wasn't the only thing that tripped up investors. Wall Street seemed to be following another whisper expectation -- that ImClone would file an application with the FDA to use Erbitux in head and neck cancer before yearend. Instead, management explained that it planned to file the application in the second quarter of 2005.

DATA DROUGHT. Certainly, adding to Erbitux' list of approved uses is important, but a filing next year instead of this year doesn't dampen ImClone's longer-term outlook. Says Weidong Huang, analyst at TimesSquare Asset Management in New York: "It's reasonable that the filing would take longer because there will be 27 different studies in the filing." (Huang doesn't own the stock, and neither does his firm.)

Dozens of studies of the drug's impact on various cancers and use in combination with other treatments are ongoing, and data could be scarce at least until the fall, when medical conference season ramps back up. Nonetheless, Erbitux "will probably find uses in [treating] other cancers," says Dr. Leonard Saltz, attending physician at Memorial Sloan-Kettering Cancer Center in New York City who was one of the original investigators to study Erbitux. "But I can't tell you how it will be used or how other therapies will compete with it." (Saltz has no financial ties to ImClone.)

Some suspect that the high price tag ($30,000 for a course of treatment) for Erbitux and other so-called targeted cancer therapies may eventually come down. But price drops aren't likely for years, and additional new approvals for Erbitux are expected to well offset any decline in pricing.

In the big scheme of things, Erbitux holds a lot of promise, and it should continue to be a useful tool in treating cancer for a long time to come. And with ImClone having put its biggest troubles behind it for now, that should be good news for the stock. Tsao is a reporter for BusinessWeek Online in New York

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