Why All the ImClone Interest? Its Pipeline

Eli Lilly, hungry to bulk up in better-protected oncology drugs, outbid Bristol-Myers Squibb for Carl Icahn's hot property

ImClone Systems (IMCL) is finally escaping its scandal-plagued past to become biotech's most desirable property, at least for the moment. That may seem odd, given that its sole product on the market—the cancer drug Erbitux—has not lived up to initial expectations. But industry experts say takeover interest from Eli Lilly (LLY), which on Oct. 6 said it will pay $6.5 billion in cash, is ImClone's future, not its past.

Lilly, like earlier suitor Bristol-Myers Squibb (BMY), wants to get its hands on the five drugs ImClone is in the midst of developing. "ImClone has one of the strongest oncology pipelines in the business," says Cowen & Co. (COWN) biotech analyst Eric Schmidt. Of course, developing these drugs will take years, and there is no guarantee that any will make it to the market. But large pharmaceutical companies, facing patent expirations on their biggest blockbusters, are scrambling to expand their cancer drug portfolios, and buying a pipeline is a lot more efficient than building one from scratch.

Big Pharma companies have generally left cancer to the biotech industry, but that's all changing now. Look at Pfizer (PFE): On Sept. 30 it announced that it was getting out of the heart-drug market it has long dominated to focus on treatments for cancer, Alzheimer's disease, and diabetes. Pfizer and its peers realize that it has become much more difficult to win Food and Drug Administration approval for such so-called lifestyle drugs as statins, sleeping aids, or diet pills used by millions of people. But regulators will tolerate greater side effects for a cancer drug that could potentially save lives.

Icahn Trumpets a Bigger Bid

In addition, marketing costs are relatively low for cancer drugs, because oncologists are generally very knowledgeable about the latest treatments. "You don't need thousands of sales reps to sell a cancer drug, you just need good data," says Lazard Capital Markets analyst Gene Mack.

ImClone Chairman Carl Icahn, who owns 16% of the company, has been trying to cash in on ImClone's leading position in oncology since he announced that the company was for sale earlier this year. Icahn negotiated with Lilly to secure an offer worth $70 a share that trumps the $62-a-share bid currently on the table (BusinessWeek.com, 8/1/08) from Bristol-Myers, which already holds a 17% stake in ImClone and owns 60% of the North American marketing rights to Erbitux. Icahn dismissed Bristol-Myers' bid as inadequate and announced last week that an unnamed large pharmaceutical company was interested in buying his firm. Neither Lilly nor ImClone would comment on the reports.

Five Drugs in Clinical Trials

On its own, Erbitux would not likely warrant a $6 billion offer. The drug, introduced in 2004, is used to treat cancers of the colon, head and neck, and lung. Sales of the drug totaled $1.3 billion in 2007. Erbitux faces competition in each of its therapeutic areas, particularly from Genentech's (DNA) Avastin, also introduced in 2004, which pulled in $2.45 billion last year. Also, Merck KGaA of Germany (no relation to the U.S.-based Merck (MRK)) holds 90% of the overseas rights to Erbitux.

ImClone has a promising successor to Erbitux in development: IMC-11F8. Although Bristol-Myers claims it holds rights to that drug as well, ImClone disputes the claim. At any rate, IMC-11F8 is only in midstage of the clinical trial process, so a regulatory-approval filing is years away. The star of ImClone's pipeline, however, is a drug that starves tumors by blocking blood vessel growth to cancer cells, the same mechanism employed by Avastin. The compound, called IMC-1121B, just started a phase III clinical trial for breast cancer patients, and is in phase II trials in patients with melanoma (skin cancer) and kidney and liver cancers. The company has yet another drug in phase II trials, and two others in phase I. "They've been very good about moving their drugs through the development process" says Schmidt.

All of these drugs are antibodies—large molecules made from bits of protein—which get extra patent protection. Most drugs made by large pharmaceuticals are small chemical molecules that can be easily duplicated by generic drugmakers once they go off patent. Lilly, for example, will almost certainly face major competition for its best-selling drug, the anti-psychotic Zyprexa, the day it comes off patent in 2011. A steady income from a stable of oncology drugs would go a long way toward easing the pain.

Before it's here, it's on the Bloomberg Terminal.