An Early Erbitux story from the archives

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Feb 6, 2002

Bristol-Myers Clashes With ImClone

After Cancer Drug Hits Roadblock

By RON WINSLOW and GEETA ANAND

Staff Reporters of THE WALL STREET JOURNAL

NEW YORK -- A high-stakes clash between the pharmaceutical giant

Bristol-Myers Squibb Co. and upstart biotechnology company ImClone

Systems Inc. has escalated. Wednesday, ImClone was preparing to

reject Bristol-Myers's stinging demand to restructure the companies'

$2 billion partnership to develop a potential blockbuster cancer drug.

" It's very hard for me to see any reasons why any aspect of any of

this proposal would be of any interest to ImClone, " a person close to

the embattled biotech company said.

While ImClone's board hasn't yet met to make a decision, this

knowledgeable person indicated that ImClone thinks the terms dictated

by Bristol-Myers are so onerous that they could seriously harm

ImClone and undermine any effort to get the cancer drug approved by

the Food and Drug Administration.

On Tuesday, Dolan, Bristol-Myers's chairman, demanded the

temporary removal of ImClone's top two officers and total control of

the development of the drug, Erbitux. Bristol also wants to change

the economic terms of the agreement, sharply reducing the $800

million in payments it owes ImClone if the drug gets approved and

also reducing any eventual royalty payments, according to the person

close to ImClone.

The struggle between ImClone and Bristol-Myers is an extreme example

of the sort of culture clash that is cropping up between major

pharmaceutical companies and tiny biotechnology outfits. The giants

need biotech products to fill their own meager pipelines, as patents

on existing high-profit medicines expire. But the big companies are

often uneasy about the risks smaller partners are willing to take to

get drugs to market quickly.

Mr. Dolan had personally championed last September's agreement with

ImClone as part of his strategy to revive his company's earnings and

restore its reputation as a premier drug developer. But in December,

the FDA refused to review Erbitux, citing important deficiencies in

clinical-testing data. ImClone's stock plummeted, while Bristol-

Myers's has fallen off, though much less severely. Wednesday, Bristol-

Myers shares fell 90 cents, or 2%, to $42.80 a share in 4 p.m. New

York Stock Exchange composite trading. ImClone shares fell $1.53, or

9%, to $15.45 a share on the Nasdaq Stock Market.

Shareholder Lawsuits

Shareholders launched lawsuits against ImClone alleging

misrepresentation. Congress, the Justice Department and securities

regulators all started investigations of ImClone. Some Wall Street

analysts attacked Bristol-Myers and Mr. Dolan personally for failing

to discover seeds of the problem before plunging into the $2 billion

deal, one of the biggest of its kind.

Bristol-Myers officials were caught by surprise by the FDA's

rejection and now are worried that ImClone lacks the experience and

heft to satisfy the agency and get Erbitux approved, according to

people familiar with the situation. The demand for the removal of

Waksal, ImClone's 54-year-old chief executive, and his

brother, Harlan, 48, the chief operating officer, reflects Bristol-

Myers's conclusion that the pair are too distracted by litigation and

other aspects of the controversy to focus on the FDA problem.

The Waksals had repeatedly assured Bristol-Myers and other investors

that Erbitux, one of a new class of cancer treatments, was on track

to clear regulatory hurdles and would be on the market by early

spring. Following the FDA's refusal even to review ImClone's small,

unusually designed clinical trial, however, Bristol-Myers officials

feared that the Waksals would take a confrontational approach in

future meetings with the agency, rather than searching for a way to

reassure regulators.

Paperwork Problem

ImClone officials have said they have been forthright and accurate in

their public statements about Erbitux and its prospects for FDA

approval. The agency's concern isn't the design of ImClone's novel

clinical trial, company officials have said. Instead, they have said,

the main problem is one of paperwork -- documenting information

regulators need to judge how well the drug was working. ImClone has

said it believes it can produce the required documentation but that

it is possible additional trials will be necessary.

A cancer newsletter in Washington, C.C., has published excerpts from

the confidential FDA decision that indicate the FDA's objections are

broader and more serious. But the agency, as is its practice, has

declined to say publicly why it refused to assess Erbitux.

Companies such as Bristol-Myers now routinely find themselves

operating uncomfortably in a biotech world typified by outsized

personalities, entrepreneurial risk-taking and brash marketing.

Bristol-Myers has its headquarters on Park Avenue, in elegant offices

with rich wood paneling and plush carpeting. ImClone's offices in the

trendy Soho neighborhood in downtown New York are on the sixth floor

of a former shoe company. Waksal is known for hosting lavish

parties and counts as his friends Martha and actress Lorraine

Bracco. He has dated Ms. 's daughter, is, and started a

restaurant with actress Mariel Hemingway.

The Waksals have received media attention for multimillion-dollar

loans they have taken from the company they founded. The loans

include millions they and other company officials borrowed last

summer so they could exercise stock options for shares they then sold

to Bristol-Myers. Even though Waksal's small company has

reported limited revenue and consistent losses, surviving primarily

on investor funds, the company pays him and his brother handsomely.

Together they earned $2.7 million in salaries and bonuses in 2000.

The friction over Erbitux is unusually vitriolic but not unique.

Bayer AG, the large German drug company, bailed out of its

development deal with Scios Inc. after the heart-failure drug they

were jointly developing was turned down by the FDA in 1999. The drug,

Natrecor, was approved last year, and Scios is marketing it.

Even successful biotechnology relationships, such as that between

Genentech Inc. of South San Francisco and the Swiss giant Roche

Holding AG, have been hindered by culture clashes at times. Roche

years ago resisted Genentech's aggressive marketing strategy, which

has since moderated, according to people involved in the partnership.

Gold-Rush Atmosphere

Like many biotech companies, ImClone has never brought a product to

market and is heavily focused on a single drug that has generated

great excitement among cancer doctors. In the gold-rush biotech

atmosphere, executives routinely bet the company on the early promise

of a medication like Erbitux and then try to persuade the world they

can get FDA approval.

Impatient investors and sick people want promising drugs quickly, as

do executives who dream of producing a super-successful medicine that

will make them rich. But drug development is slow, expensive and

unpredictable. Despite the pressure to move swiftly, drug makers must

obey the rigorous demands of science, enforced by the FDA.

ImClone has spent at least five years building enthusiasm for

Erbitux. Until just a few months ago, though, blockbuster

expectations for the drug were fueled by dramatic results for just

one patient, Kellum. At age 28, the Florida woman had colon

cancer that didn't respond to the only two chemotherapy regimens

available. As it happened, her doctor knew about ImClone's drug and

obtained it from the company.

The Kellum case was the topic of a presentation at the May 2000

annual meeting of the American Society of Clinical Oncology. Two

large tumors, the size of a grapefruit and an orange, had grown in

Ms. Kellum's liver, Dr. Waksal has said. But treated with Erbitux,

the tumors had shrunk in six weeks to about the size of a pea. What

remained was removed surgically. " She was out of the hospital and

back at work in two months, " Dr. Waksal said in an interview.

The results were the talk of the ASCO meeting, and news reports of

the findings provoked a deluge of interest in Erbitux. Within the

next 10 months, ImClone received more than 10,000 requests on behalf

of patients seeking " compassionate use " of the medicine, an FDA-

sanctioned way desperately ill people can get promising drugs before

they are approved.

Then, at a big ASCO meeting last May, researchers unveiled the

ImClone study that the FDA subsequently would decline to review. The

120-patient trial showed Erbitux helped 22.5% of patients who had

failed to respond to all other treatments. These results were good

enough for the drug to share the limelight at the meeting with

Novartis AG's novel cancer drug Gleevec, which had just been approved

by the FDA in record time.

In September, Bristol-Myers gave ImClone and Erbitux a big vote of

confidence when it announced the $2 billion investment. Some

skeptical investors became believers, assuming that Bristol-Myers had

thoroughly vetted the ImClone trial and its communication with the

FDA.

Isaly, a money manager for OrbiMed Advisors LLC, said that

after refraining from buying ImClone stock because of concern about

the size and method of the Erbitux study, the Bristol-Myers

investment caused him to change his mind and invest on behalf of

biotech and pharmaceutical funds he runs. Bristol-Myers predicted

Erbitux would top $1 billion in annual sales.

Then, with the whir of a fax machine in ImClone's offices on Dec. 28,

the FDA's letter arrived, rejecting the ballyhooed Erbitux trial and

casting doubt over the drug's future.

Erbitux is one of a class of drugs called epidermal-growth-factor-

receptor blockers that are at the vanguard of a new era in cancer

treatment. These are among a variety of agents just beginning to

reach the market that attack cancer by disrupting the biochemical

switches that turn normal cells into malignant ones.

The approach represents a significant departure from chemotherapy and

radiation, long the workhorse cancer remedies. The traditional

treatments aren't very effective against advanced disease and come

with harsh side effects. The new drugs seem to have fewer and less

severe side effects.

Erbitux was discovered in the early 1980s by Mendelsohn and his

colleagues at the University of California at San Diego. His group

focused on recent discoveries suggesting that many types of cancer

cells recruit certain proteins to receptors on their surfaces to

promote tumor growth. The proteins fit into the receptors like a key

in a lock and set off signals telling the cells to proliferate. Dr.

Mendelsohn's group genetically engineered a version of the culprit

proteins that would occupy the receptor and prevent the signals. " The

approach we took was to put chewing gum in the lock, " Dr. Mendelsohn

said.

In the early 1990s, he was introduced to Waksal, who

immediately grasped the potential of Erbitux. " Sam said, 'I want that

molecule,' " recalls Dr. Mendelsohn, now president of M.D.

Cancer Center in Houston and a board member of ImClone. (Separately,

Dr. Mendelsohn has been in the news lately because of his membership

on the board of embattled Enron Corp.)

By 1993, ImClone had acquired the license and taken over development

of the drug. Dr. Waksal and his brother had founded ImClone in the

mid-1980s and set up headquarters in Soho. Previously an immunologist

at Mount Sinai Medical Center in New York, Waksal set out to

develop new vaccines for meningitis and other infectious diseases,

among other projects. ImClone went public in 1991.

Money to develop Erbitux was hard to come by. A handful of high-

profile biotech flameouts had cast a pall over the entire industry.

This is one reason small biotech companies often need the backing of

big pharmaceutical companies and their steady cash flows from

established products. At the end of 1994, Dr. Waksal has recalled,

" we had zero dollars in the bank, " and ImClone's stock was trading

under $2.

The experience of Ms. Kellum, the colon cancer patient, prompted the

company to seek FDA approval for Erbitux for the lucrative colorectal

cancer market. But ImClone had to prove that her experience wasn't

just an anomaly. The company launched an unusual study in which

patients were given Erbitux in combination with irinotecan, another

chemotherapy drug, but only after they had failed to respond to

irinotecan. Dr. Mendelsohn said the company saw this as the fastest

way to prove Erbitux worked.

ImClone ran the trial without a " control " group of patients who

received a placebo or nothing at all. Such a comparison group is

usually thought necessary to prove that the drug being studied is

associated with any improvement. ImClone's position was that it

didn't need a traditional control group because the patients in its

trial had already failed to respond to the traditional chemotherapy

drug.

Without committing itself to ultimate approval, the FDA in February

2001 granted Erbitux " fast-track " status, which allows a company to

seek regulatory clearance for a potentially life-extending drug based

on small trials, instead of the more traditional larger ones. But

there was a significant risk: No other drug had ever won fast-track

approval without being tested on its own, as a single agent.

The company recruited Leonard B. Saltz, a respected researcher at

Sloan-Kettering, to serve as principal investigator and began

enrolling patients at several centers around the U.S. In August 2000,

with enrollment of the 120-patient study essentially complete, the

company met with the FDA to determine whether the trial would be

sufficient for approval under the fast-track program.

At the meeting, the agency and ImClone officials had a lengthy

discussion about the design of the trial, according to a person

familiar with the matter. The FDA declined to comment. Ultimately,

though, both sides agreed that the trial would have to establish

three main things: that patients had tumors that had progressed

despite taking irinotecan; that at least 15% of the patients

responded to the combined regimen of irinotecan and Erbitux, with at

least a 50% reduction in tumor size; and that the findings met

certain statistical requirements. Based on that meeting, the company

has said that the FDA approved its trial design.

In May, Dr. Saltz reported that 22.5% of patients responded to the

combination treatment. Given that their cancers hadn't responded to

any other treatments, he called the findings " knock-your-socks-off

exciting. " ImClone celebrated the results by staging a Doobie

Brothers concert for attendees of the May ASCO conference.

Just a month before the ASCO session, Dr. Waksal received word that

Bristol-Myers was interested in striking a " strategic alliance " with

ImClone. A year earlier, in the summer of 2000, he had approached

Bristol-Myers with a similar plan. The big pharmaceutical concern had

looked into the idea, but after some " due diligence " investigation of

ImClone, it rebuffed Dr. Waksal.

But by last spring, Bristol-Myers was worried. It anticipated patents

expiring on several existing drugs, including its hugely successful

cancer treatment Taxol. Bristol-Myers badly needed a hot product to

fill its sparse pipeline. The company particularly wanted to shore up

its franchise as a leader in cancer treatment and feared that it

wouldn't have a competitor as the latest wave of cancer drugs hit the

market.

Sketching a Deal

Dr. Waksal agreed to reopen discussions. On May 3, he had lunch in

New York with Markison and Ringrose, two top Bristol-

Myers executives. With the aid of investment bankers from Lehman

Brothers Inc. and Stanley & Co., the three men sketched a deal

under which the drug company would pay a big premium above ImClone's

$37 stock price to acquire a majority interest in the smaller company.

But Bristol-Myers's board balked at the size of the stake. After

further discussions, the companies struck a deal on Sept. 19. Under

the terms, Bristol-Myers would acquire a 19.9% stake for $70 a share,

or about $1 billion, Bristol-Myers also agreed to pay ImClone $200

million upon signing the deal, and another $800 million as Erbitux

reached certain critical milestones on the way to the market. At the

end of October, ImClone completed the filing of its application to

the FDA. And in early December, its shares climbed above $75 as

investors anticipated approval by early spring.

A few months earlier, ImClone had lent money to the Waksals, as well

as the company's chairman and another director, totaling $35.2

million, so they could exercise stock options while talks with

Bristol-Myers were under way. Each of the Waksals exercised options

to acquire 2.1 million shares in July at about $8 a share. In

October, in connection with the Bristol-Myers tender offer made to

all shareholders, the Waksals sold hundreds of thousands of shares at

$70 each, reflecting the 19.9% ImClone stake that Bristol acquired.

They have said that they were required to sell this stock by the

terms of the agreement with Bristol-Myers. They retained the vast

majority of their holdings.

Then came the FDA's decision. The rejection was based heavily on the

failure of ImClone to document that patients in the study hadn't

responded to chemotherapy, the company has said. Dr. Waksal has

acknowledged that without such assurance, the trial couldn't

demonstrate the effectiveness of the drug.

The Waksals have said they can come up with the necessary

documentation, and the company has been scrambling to gather the

necessary data.

But in early January, the Cancer Letter, a Washington-based

newsletter, published excerpts from the FDA's letter, which was

confidential. The excerpts suggested the agency has long had concerns

about the study and that additional studies will probably be required

to gain approval for Erbitux. Dr. Mendelsohn has said the company was

aware of some of these broader objections but hadn't realized they

were make-or-break issues.

The published excerpts have provided fuel for the shareholder suits

accusing the Waksals of misleading investors -- perhaps including

Bristol-Myers -- about the status of its application and its

prospects for approval.

Bristol-Myers' ultimatum this week has added yet another dip to

Erbitux's roller-coaster ride from discovery to market. But a host of

securities analysts, oncologists and others are convinced the drug

will get there eventually. " Do we think, and does the world think,

that this is a real product? " asks Marina Bozilenko, head of biotech

investment banking at Banc of America. " Absolutely. "