ImClone Systems Inc.

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ImClone Systems Inc.

180 Varick Street
New York, New York 10014
U.S.A.
Telephone: (212) 645-1405
Fax: (212) 645-2054
Web site: http://www.imclone.com

Public Company
Incorporated: 1984
Employees: 399
Sales: $60 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: IMCLE
NAIC: 325414 Biological Product (Except Diagnostic Manufacturing)

ImClone Systems Inc., a biotech company based in New York City, is best known for a highly publicized stock scandal that involved its founder and longtime CEO, Samuel Waksal, and his celebrity friend Martha Stewart. The company has never produced a profit and for many years continually shifted the focus of its research before turning in the 1990s to the development of a drug called Erbitux, a genetically engineered protein used to slow the spread of cancer. Difficulty winning approval from the Federal Drug Administration (FDA) triggered the scandal that brought to light many of the past dealings of Waksal and his younger brother Harlan, ultimately forcing them to resign from ImClone. The company has enjoyed greater success in Europe in its attempts to gain approval to sell Erbitux.

Waksal Brothers’ Immigration to the United States in the 1950

Samuel and Harlan Waksal emigrated with their parents from Europe to Dayton, Ohio, in the early 1950s. Their mother had survived the horrors of the Auschwitz concentration camp while their father had fought for the Polish underground. The elder Waksal supported his family in the United States by going into the scrap metal business. Both of the sons were drawn to study science, with Samuel attending the Ohio State University, where in 1969 he earned an undergraduate degree, then in 1974 a Ph.D. in immunology. Harlan became a pathologist, receiving a medical degree from Tufts University School of Medicine in 1979. In the years preceding the founding of ImClone, Samuel Waksal achieved an academic reputation that took on a different character after his life received greater scrutiny during the media frenzy surrounding the company’s 2002 stock scandal.

Following a postdoctoral fellowship in Israel, Samuel Waksal was able to secure a prestigious position at Stanford University, championed by Dr. Irv Weissman, a Stanford professor who had met Waksal during a visit to the Ohio State laboratory. Although impressing his new colleagues with both his brilliance and charm, Waksal was soon asked to leave the Stanford lab after its head, Dr. Leonard Herzenberg, became convinced that the young researcher had repeatedly lied about acquiring prized antibodies from the Sloan-Kettering Institute. According to the Wall Street Journal, Waksal later called to apologize and said “he was seeking psychiatric help and had changed.”

Waksal then went to work at the National Cancer Institute under a temporary research position, one that would not be renewed. “The reason was a disturbing pattern in Dr. Waksal’s research,” according to the Wall Street Journal “Dr. Waksal was involved in a large number of projects with other scientists, recalls Dr. Terry [in charge of NCI hiring]. ’When the critical time came to deliver his part of the collaboration, there would be a catastrophe of some sort—a tissue culture would become contaminated or the mice would develop an infection and have to be killed.’ “Despite NCI’s decision not to offer him a permanent position, Waksal was able to secure employment at Tufts. As had been the case at his previous stops, the effects of the charismatic Waksal soon wore off and his superiors grew suspicious about his work: some experiments were not conducted on time and, more troubling, others appeared to be purely fictional. It was at this point, in February 1981, that Harlan Waksal, a medical resident at Tufts, was arrested in the Fort Lauderdale International Airport with more than two pounds of cocaine stashed in his underwear and carry-on bag. According to rumors reported by the press, Sam Waksal attempted to cover for Harlan by impersonating his brother and making his rounds at the New England Medical Center. According to Sam Waksal, as told to Barron’s, “There was a patient of Harlan’s who was a very nice lady who spoke only Yiddish. And Harlan, when he wasn’t in town at one point, wanted me to go talk to her because she loved him. So I went and talked to her. That was the scope of it.” Whatever the truth of the situation, this story would periodically crop up, along with questions about Sam Waksal’s academic background, causing some investors to shy away from ImClone. There was no ambiguity about what happened to Harlan Waksal, however. In April 1982 he was found guilty of possession of cocaine with intent to distribute and sentenced to a nine-year prison term. A year later, however, the conviction was overturned on a technicality. The search that led to the discovery of the drugs was deemed illegal because it lacked valid consent.

Sam Waksal’s difficulties at Tufts led to his departure in 1982, but he was soon hired by New York’s Mount Sinai School of Medicine to run an immunology lab. According to the Wall Street Journal, Waksal’s supervisor at Tufts said “that he didn’t warn anyone at Mount Sinai about Dr. Waksal because no one called to ask his opinion.” As had been the case with his previous positions since graduating from Ohio State, Waksal’s stay at Mount Sinai was brief and ended in controversy. The Wall Street Journal interviewed Alexandra Bona who worked for Waksal: “’One day in 1985, the Waksal lab imploded,’ she recalls. Returning from lunch, Dr. Bona found ’everyone crying and Sam was out of his mind.’ He and a few technicians had been asked to leave immediately, she says…. His file is legally sealed under a confidentiality agreement he reached with Mount Sinai. But a person familiar with the situation says Mount Sinai asked Dr. Waksal to leave because of evidence he had falsified data.” A 1993 Barron’s profile cites two former colleagues at Mount Sinai who maintained that “Waksal departed under a cloud of dispute over his division’s financial condition and ownership of some molecular modeling technology that ImClone later pursued.”

Founding ImClone in 1984

As the situation at Mount Sinai soured for Waksal, he took a leave of absence in 1984 to establish ImClone, an endeavor to which he would devote all his energy after exiting Mount Sinai. Harlan Waksal told Business Week in 2001, some months before ImClone became engulfed in controversy, that he and his brother “started kicking around some fun ideas about how to start a company. We thought we’d focus on infectious diseases, cancer, and diagnostics, make some products, get rich, and retire early.” To launch the business, the Waksal brothers secured $4 million in venture capital. It was during a flight to Denver to meet with venture capitalists that they coined the ImClone name by fusing the types of the businesses they planned to pursue: immunology, DNA cloning, and medical information systems. Investor Tom Rosse was a key early backer, supplying an initial $250,000 needed to complete a business plan, then providing entry to other major investors. Also of significant importance to landing investors was Sam Waksal’s resume, which listed a number of prestigious institutions and appeared impressive, at least on the surface.

At first, ImClone operated essentially as a holding company for the scientists whose work they funded, focusing initially on immunology-based diagnostics and infectious disease vaccines. The hope was that the company had the potential to develop vaccines for the Hepatitis B virus and AIDS. ImClone soon introduced a product that brought in some revenue, a battery of tests to detect Hepatitis B., but the company’s ambitions and need for cash far exceeded the expectations for this diagnostic business. In 1986 ImClone opened its own laboratories, located in Manhattan’s SoHo district on the site of a bankrupt shoe factory. A year later the company prepared to go public, but was forced to pull the offering in the wake of the October 1987 stock crash. According to Business Week, “Over the next few years, Sam engineered several funding deals to keep ImClone alive until the company went through with its IPO in 1991. ImClone still had not decided on a lead product, however, and its research was unfocused.” The company went public at $14 a share and despite little demonstrable success in its research efforts grew in value, reaching a high of $27 before the biotech category fell out of favor with investors.

While ImClone may have struggled to succeed and was in constant need of fresh cash to fund its research, Sam Waksal, now divorced from his high school sweetheart, was becoming a fixture of the social scene in New York and the Hamptons, often mentioned in the gossip columns of the New York tabloids. “By all external appearances, Dr. Waksal had made it big,” wrote the Wall Street Journal. “He counted among his friends and business partners Ms. [Martha] Stewart and financier Carl Icahn, both of whom invested in ImClone. He became chairman of the New York Council for the Humanities and hosted monthly soirees in his swank Soho loft, where guests were invited to discuss current issues of intellectual interest. … While living a lavish lifestyle, Dr. Waksal was borrowing heavily from his companies. In the early 1990s he borrowed about $300,000 from ImClone.” Waksal played at being a film producer as well as a restaurateur, co-producing two movies and co-owning a pair of eateries, one of them with Alexis Stewart, Martha Stewart’s daughter and Waksal’s girlfriend of four years. He also had occasional difficulties meeting his debts. According to a 2002 New York Times profile, “Dr. Waksal has been sued several times for not paying his bills. An auction house got a judgment against him in 1994 after a check for nearly $58,000 bounced. Charles Antrell, an ImClone investor, sued Dr. Waksal in 1993 for failure to pay back $100,000 he had borrowed. … The Internal Revenue Service and New York State have both filed tax liens against Mr. Waksal several times, in some cases for more than $100,000.”

Company Perspectives

ImClone Systems’ goal is to become a fully-integrated bio-pharmaceutical company that has the capability and resources to take its novel pipeline compounds and develop them from the research and development stage through to commercial manufacture, marketing and sales.

Erbitux Trials Beginning in 1994

ImClone was in desperate need of a lead product in the early 1990s when it became involved with the targeted cancer drug Erbitux, originally dubbed IMC-C225, the result of research first conducted by Dr. John Mendelsohn at the University of California at San Diego in 1980. Mendelsohn struggled for years to find someone willing to back his efforts to see the drug reach the market. While others hesitated, Sam Waksal believed in the potential of the drug and convinced Mendelsohn to strike a deal with ImClone. To move into clinical trials as soon as possible the Waksals bought a former New Jersey computer-chip factory and retrofitted it to produce the drug, which began to be tested on human patients in 1994, the same year that the biotech stocks suffered another crash. The company was pushed to the brink of bankruptcy, with a third of its employees laid off. Rather than license Erbitux to a giant pharmaceutical for a nominal amount of money, the Waksals decided to scrape by in hopes that positive Phase I results would lead to fresh investments. In the spring of 1995 ImClone reached a major turning point when two patients with head and neck cancer showed some tumor shrinkage while using Erbitux. As a result, the price of ImClone stock rebounded and the Waksals received licensing offers as well as takeover bids. The only deal they decided to accept was a co-marketing agreement with the German drug maker Merck KgaA for European rights.

Still working with limited funds, ImClone opted to focus on head and neck cancer patients. That emphasis would shift in 1999 when Erbitux was used on a patient named Shannon Kellum, who had colon cancer that spread to her liver and abdomen. By chance her doctor had earlier worked with Mendelsohn, studying the effects of C225 on colon cancer, and was able to convince ImClone to supply the substance for her use. Erbitux was used in conjunction with another round of chemotherapy and Kellum’s tumors shrank so much that they could be removed surgically. Due to this case, ImClone now decided to test Erbitux on colon cancer. The initial 125-patient study launched in 1999 was another gamble for the company, limited to patients who had already failed irinotecan treatment. They were now given another round of chemotherapy, but this time with Erbitux. Failure could have scuttled the entire project, but in November 2000 the early results were strong enough for ImClone to gain fast-track status from the FDA for the drug to be used as an advanced treatment of colon cancer. Good results continued to be announced in 2001, with Erbitux showing promise not only with colon cancer and head and neck cancer, but also pancreatic cancer, which was particularly resistant to treatment and usually killed patients in a short period of time. In the end, the trial produced a 22.5 percent favorable response rate among patients, a very high number for a cancer treatment.

Strong Phase 2 results for Erbitux caused management to file for drug approval from the FDA, which generally required a three-stage trial. It also translated into an escalating stock price for ImClone in 2001. While Erbitux continued in the next phase of its clinical trials, the high-flying company was in a position to now cut a lucrative deal with a major pharmaceutical. In September 2001 Bristol-Myers Squibb Co. agreed to pay up to $2 billion for a 40 percent share of the profits in Erbitux. The terms of the transaction called for $1 billion in upfront payments, $200 million immediately, followed by two payments of $300 million and $500 million, triggered by steps in the FDA approval process. In addition, Bristol-Myers agreed to pay purchase and copromotion fees and share some of ImClone’s research expenses and, more important, buy 19.9 percent of ImClone’s stock for another $1 billion. In return, Bristol-Myers received two seats on the ImClone board, exclusive rights to market Erbitux in the United States and Canada, an equal share of selling rights in Japan, and first rights to the products in ImClone’s pipeline for the next five years. It was a rich deal for ImClone, one that would soon be the cause of buyer’s remorse among the upper tier of Bristol-Myers management.

In November and December 2001 communications from the FDA about the Erbitux application grew negative in tone, prompting some concern at ImClone. Then on December 20 ImClone and Bristol-Myers were informed that the FDA had made its decision, which would be communicated on December 28. According to the Wall Street Journal, “On Christmas Day, a Bristol-Myers official reached Harlan Waksal on vacation in Colorado to tell him the application looked doomed, based on a conversation with an FDA official. Harlan Waksal began calling his brother on the morning of Dec. 26, and they attempted to stave off the FDA action. … According to the SEC complaint [that would ultimately be filed], Samuel Waksal began relaying the information to family members. On the night of Dec. 26 and early the next morning, it says, he telephoned family members to alert them that ImClone would be receiving this bad news. Within hours of learning about the impending FDA action, the criminal complaint charges, Dr. Waksal directed that 79,797 of his own ImClone shares, valued at about $4.9 million, be transferred to a person the complaint didn’t name but was later identified as his daughter Aliza, calling the transfer ’urgent’ and ’imperative.’ After transferring the shares, Dr. Waksal directed that they be sold. … Federal authorities say several Waksal family members were able to sell a total of $10 million of ImClone stock on Dec. 27 and Dec. 28.”

ImClone stock plunged on word that the FDA had refused the Erbitux application. Sam Waksal initially maintained that the FDA’s concerns were simply a matter of documentation and that the marketing of the drug would be delayed until the third quarter of 2002. The Cancer Letters, a Washington newsletter, obtained a copy of the FDA letter, however, and it became clear that problems with the study went much deeper. The price of ImClone stock continued to slide, causing great concern at Bristol-Myers, which watched its $1 billion investment in ImClone decrease in value by about two-thirds.

Key Dates

1984:: The company is incorporated.
1991:: ImClone makes its initial public offering of stock.
1994:: Erbitux is first administered to patients on trial basis.
2001:: ImClone signs a deal with Bristol-Myers Squibb.
2002:: CEO Samuel Waksal pleads guilty to insider trading charges.
2003:: Harlan Waksal resigns as CEO.

In light of the Enron scandal and other prominent examples of corporate malfeasance, a great deal of scrutiny was paid to the affairs of ImClone, and the questionable backgrounds of the Waksal brothers were recounted in the media. In January 2002 the House Energy and Commerce Committee called for hearings into the matter. Moreover, the SEC began to investigate charges of possible insider trading activity involving the Waksal family and friends, which resulted in Martha Stewart becoming swept up into the controversy and even more media coverage of the ImClone story.

Sam Waksal attempted to hang tough but in May he resigned as ImClone’s CEO, replaced by his brother Harlan. In the early morning hours of June 12, 2002, four FBI agents visited Sam Waksal’s Soho loft, arrested him, and led him away in handcuffs. Facing a string of insider trading and other charges he began negotiating with authorities on a plea bargain. He finally pleaded guilty to six of the 13 counts against him in the apparent hope that the prosecutors would drop the remaining charges and cease to pursue cases against his elderly father and daughter. In May 2003 he settled with the SEC on civil charges, agreeing to pay some $800,000. In June 2003 he was sentenced to 87 months in prison and ordered to pay $3 million in fines. A short time later Martha Stewart was indicted on charges of obstructing justice.

Following the arrest of Sam Waksal, the fallout continued at ImClone. The company’s general counsel, John B. Landes, resigned in October 2002. In 2003 it came to light that Harlan Waksal and other company officials, including Chairman Robert Goldhammer, had attempted to obtain a legal opinion that they did not owe taxes on some stock warrants and options they exercised. According to the Wall Street Journal, they were unsuccessful yet “decided they didn’t owe the money, and ImClone didn’t withhold it.” As a result of this revelation, both Harlan Waksal and Goldhammer resigned, although Harlan stayed on as chief scientist overseeing the ongoing development of Erbitux.

Despite all the controversy surrounding the company, ImClone’s fortunes, as well as the price of its stock, began to rebound in 2003, mostly on the strength of continuing efforts by Merck KgaA to gain approval for Erbitux in Europe. In June 2003 the results of a European study were released, mirroring those found in the trials sponsored by ImClone in the United States. More important, the new study was more thorough and appeared to answer the concerns raised by the FDA. Merck was encouraged enough by the results to announce that it would seek European approval for the drug and might have it on the market by the end of the year. ImClone also planned to seek the FDA’s opinion on the study in hopes of rekindling the company’s plan to gain domestic approval for Erbitux.