Drug Stocks: Biotechnology & Pharmaceutical Sectors - Discussion: IMCL : ImClone Systems

» Jen_ - IMCL : ImClone Systems

In response to message posted by ACousins:

Oh My - this story just gets worse and worse ... from 6/12 WSJ...

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Ex-ImClone CEO Waksal Faces Securities Charges

By GEETA ANAND, JERRY MARKON and CHRIS ADAMS
Staff Reporters of THE WALL STREET JOURNAL

Shortly after 6 a.m. EDT Wednesday, four FBI agents gathered in front of a building here in the upscale Soho neighborhood where Samuel Waksal lives in a large duplex loft.

Two agents positioned themselves at the front door of the five-story, red-brick building, and two at the back door to block any escape attempt. Upstairs, still asleep in his pajamas, Dr. Waksal was awakened by a phone call from the agents, asking him to let them up.

Once inside the loft, the agents arrested Dr. Waksal, who recently resigned as chief executive officer of ImClone Systems Inc., on criminal charges of trying to sell ImClone stock and tipping off family members after learning that regulators would soon reject his company's promising cancer drug.

The 54-year-old Dr. Waksal, who had given up an illustrious career as an immunologist to become a biotechnology entrepreneur, asked the agents not to handcuff him in front of his 28-year-old daughter, Aliza. Dr. Waksal was wearing the handcuffs when he left the building, after being allowed to change into street clothes.

Federal authorities charged that Dr. Waksal schemed with his father and other family members to dump ImClone stock based on inside information. In a criminal complaint filed in U.S. federal district court in Manhattan, the Federal Bureau of Investigation said that Dr. Waksal learned on Dec. 26 that the Food and Drug Administration would refuse to review the application for the cancer drug Erbitux. The FBI also said he relayed that information to certain family members that night and early the following morning. The Securities and Exchange Commission made similar allegations in a civil complaint filed in the same court.

Dr. Waksal wouldn't comment, but his lawyer, Mark Pomerantz, issued a brief statement in which he said Dr. Waksal would plead not guilty. "The evidence that underlies the criminal charges is circumstantial," Mr. Pomerantz said. "The government misread that evidence and it overreacted in deciding to" arrest Dr. Waksal.

Looking at 'Everyone'

Federal officials said they are still looking at "everyone" involved in ImClone trading who might be connected to Dr. Waksal. One investor under scrutiny: home-decor doyenne Martha Stewart, a close friend of Dr. Waksal who sold 3,928 shares of ImClone on the afternoon of Dec. 27, the day before ImClone announced the FDA's rejection of the drug. "She sold a lot of shares right about the same time and she's a friend of his," a person familiar with the case said. "Anybody who didn't look at it carefully would be derelict."

Ms. Stewart issued a statement Wednesday declaring her innocence. "In placing my trade I had no improper information. My transaction was entirely lawful," she said. "After directing my broker to sell, I placed a call to Dr. Waksal's office to inquire about ImClone. I did not reach Dr. Waksal and he did not return my call." Wednesday, shares of Martha Stewart Living Omnimedia Inc. were down $2.10, or 12.3%, at $15 in 4 p.m. New York Stock Exchange composite trading on concerns about its namesake's ImClone stock sales.

Dr. Waksal's arrest rocked the biotechnology world, where just a short while ago, ImClone was a rising star with a hot cancer drug. ImClone's troubles have shaken investor confidence in an industry that has long struggled to prove it can develop drugs and become profitable.

The mounting crisis at ImClone is also intensifying criticism of the FDA and its handling of the company's drug application. A congressional hearing Thursday will delve into a contentious public-policy issue: whether the FDA should be more open about its private communications with drug companies concerning the chances that their products will win approval. Critics complain that the FDA's secrecy gives drug companies such as ImClone too much latitude to spin investors about how its drugs are faring with regulators.

Fallout for Bristol

The mess at ImClone continues to have big fallout for its partner, Bristol-Myers Squibb Co., and that company's chairman, Peter Dolan. Bristol-Myers agreed last fall to invest $2 billion in ImClone in exchange for a 20% stake in the company and a share of the U.S. rights to Erbitux.

The Waksal arrest creates doubts as to whether Bristol-Myers will maintain its current arrangement with ImClone. The pharmaceutical maker now is expected to consider two alternatives: canceling the $2 billion deal it struck in September or making a tender offer for all of ImClone. With ImClone's share price so depressed, a takeover might be the cheaper alternative.

Meanwhile, Bristol-Myers has asked its investment banker, Goldman Sachs, to explore a host of alternative strategies that might help the company fill some of the looming gaps in its new-drug pipeline. Among those alternatives are a sale of the entire company, a merger of equals, a major acquisition or the purchase of a sizable equity stake in a promising smaller rival such as occurred with ImClone, according to someone close to Bristol-Myers.

Until Dec. 28, ImClone and Dr. Waksal were the toast of the biotechnology community and of New York City society. Mick Jagger attended the executive's Christmas party. The Doobie Brothers performed at ImClone's party at the biggest gathering of cancer specialists in 2001. Dr. Waksal partied with Ms. Stewart and actress Lorraine Bracco, and had dated Ms. Stewart's daughter.

Erbitux, the drug at the center of the controversy, is one of a class of treatments believed to be at the vanguard of a new era in cancer treatment. Erbitux has shown promise in the treatment of colorectal and other hard-to-treat cancers. The company had reported positive clinical results at a meeting of cancer doctors last year, raising great expectations among investors and patients. ImClone officials, principally Dr. Waksal, had repeatedly reassured investors that the drug was on track at the FDA.

When the FDA refused to accept the application in late December, citing deficiencies in the clinical trial that made it difficult to tell how well the drug worked, the stock tanked. The drug still has the possibility of being approved, but the FDA told the company it had a long way to go before actually establishing the drug's effectiveness.

In early December, the stock reached an all-time high of $75.45. From there, it fell steadily until Dec. 31, the first day of trading after ImClone announced the FDA decision, when the price plummeted 16% to $46.46. Wednesday, the stock ended 4 p.m. trading on the Nasdaq Stock Market at $7.83, up 28 cents, or 3.7%

Dr. Waksal was arrested on two counts of conspiracy to commit securities fraud, six counts of securities fraud and one count of perjury relating to his testimony before the Securities and Exchange Commission. When the market opened on Dec. 27, family members sold more than $9 million in ImClone stock, prosecutors and the SEC said.

Starting the night of Dec. 26 and continuing through Dec. 28, federal authorities say, Dr. Waksal himself tried to sell nearly $5 million of stock. They say he was unable to do so only because two different broker-dealers, Merrill Lynch & Co. and Banc of America Securities, wouldn't execute the orders. Dr. Waksal, described by prosecutors as being laden with more than $80 million in debt -- of which more than $65 million was "margin debt" secured by his ImClone shares -- was charged with trying to sell nearly 80,000 of his own shares.

Dr. Waksal didn't enter a plea during a brief bail hearing in federal court in Manhattan and was released on a $10 million personal-recognizance bond.

At the insistence of prosecutors, Dr. Waksal is also required as a condition of his bail to return to the U.S. by Friday any assets held abroad. His attorney told U.S. Magistrate Judge Frank Maas that he isn't "sure there are any assets held abroad," but prosecutors said Dr. Waksal has directed transfers of more than 120,000 ImClone shares to a Swiss bank account held in the name of a British Virgin Islands corporation.

Federal authorities moved to arrest Dr. Waksal Wednesday because of concern he might flee, said a person familiar with the case. This person said Dr. Waksal had been moving funds -- both direct cash transfers and transfers of his shares of ImClone stock -- to offshore bank accounts in recent days.

Dr. Waksal's attorney, Mr. Pomerantz, said he knew of the authorities' concern that Dr. Waksal might be a flight risk. In a bid to allay those fears, Mr. Pomerantz said he had already taken possession of Dr. Waksal's passport. Mr. Pomerantz says Dr. Waksal had transferred no money to offshore accounts since November.

The relatives of Dr. Waksal who sold shares -- his younger daughter, Aliza, and his father, Jack -- are also under investigation, though it was unclear if charges would be brought against them. Aliza Waksal's attorney, Stephen E. Kaufman, declined to comment.

Charles Stillman, attorney for Jack Waksal, said, "His reaction is absolutely, totally and unequivocally that he did not trade on any inside information from anybody, let alone his son."

The office of U.S. Attorney James Comey said ImClone is cooperating with the investigation.

According to a person familiar with the case, federal prosecutors began their own investigation of Dr. Waksal in January nearly simultaneously with the start of the SEC investigation. The evidence isn't likely to include testimony from any cooperating witnesses. Instead, prosecutors are likely to rely on documentary evidence of the trading activity of Dr. Waksal and his family, along with his own admission to the SEC that he learned on Dec. 26 that the FDA was going to reject the application.

The arrest marks a stunning downfall for Dr. Waksal, the son of a Holocaust survivor, who founded ImClone in 1984. He brought his physician brother, Harlan, on board soon after to help run the company. They struggled along until the early 1990s, when they made a deal with cancer scientist John Mendelsohn to develop his targeted cancer treatment, now called Erbitux.

While others were skeptical, the Waksal brothers recognized the potential of the drug. ImClone has spent five years building enthusiasm for Erbitux. Until last year, though, the blockbuster expectations were fueled largely by its dramatic results on just one patient, Shannon Kellum, a 28-year-old Florida woman who showed almost miraculous recovery from colon cancer that didn't respond to the only two chemotherapy drug regimens available.

In May 2001, ImClone was the center of attention at the annual meeting of the American Society of Clinical Oncology. Doctors there were encouraged by ImClone's data from a small clinical trial showing that Erbitux, combined with chemotherapy, reduced the size of certain human cancer tumors by at least 50%.

In September, Bristol-Myers gave ImClone and Erbitux a big vote of confidence with its $2 billion investment. Samuel Waksal told investors on Sept. 19 that he had a great relationship with the FDA and the drug was almost certain to be on the market the following spring.

Turn for the Worse

Later that fall, things apparently began to take a turn for the worse as the company began to receive discouraging signals from the FDA.

Two people familiar with the FDA's review of the matter said that there were regular meetings or teleconferences between the FDA and members of either ImClone or its marketing partner, Bristol-Myers, during late November and early December. There were specific communications on Dec. 4, Dec. 12, and Dec. 20, during which the FDA conveyed discouraging news about the application's prospects, these people said. One of the people familiar with the FDA's review of the drug says that during those meetings ImClone "never got encouragement," and "got no good news" from regulators.

As early as the Dec. 4 conference, the FDA had conveyed to ImClone a list of possible outcomes for the drug's application. They ranged from a sort of conditional acceptance of the application all the way to the rejection that eventually came, officially known as a refusal-to-file letter; but none of the options was an outright acceptance, according to a person familiar with the matter.

Mr. Johnson, the spokesman for the House subcommittee investigating the affair, said that FDA notes and testimony reflect that "unqualified acceptance was never mentioned." In fact, the FDA decided on Dec. 5 to issue the refusal-to-file letter, although it took three weeks for the actual decision to come down, Mr. Johnson added. Both Waksal brothers are expected to attend Thursday's subcommittee hearing.

During the course of that Dec. 4 conversation, an ImClone official asked point-blank whether the company was going to get a refusal-to-file letter. The FDA official said, "That's one of the possibilities," according to congressional investigators. The ImClone official wrote a memo that night for Harlan Waksal spelling out these concerns, congressional investigators say. A person close to the company said no such memo exists and that the ImClone official didn't believe there was a real risk that the application would be rejected.

By Dec. 20, an FDA official told Bristol-Myers and ImClone that the decision on the application had been made, that the firms should stop forwarding information and data to the agency, and that formal word would come on Dec. 28, according to people familiar with the matter.

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. One internal company document, dated Dec. 27, noted that, "Sam and Harlan are calling the FDA to try to stop RTF" letter, congressional investigators said.

A Bristol-Myers spokesman says its official didn't relay the information to anyone else at his company. But according to the SEC complaint, 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.

But Dr. Waksal's broker at Merrill Lynch refused to sell the shares without approval from ImClone's Office of General Counsel, which on Dec. 21 had issued a company-wide "blackout" on trading in ImClone stock while the FDA matter was pending. A second broker at Banc of America Securities refused the sale for the same reason.

But 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.

Almost from the start, stock sales by the Waksals have upset some investors. At the end of October, the brothers sold stock to Bristol-Myers Squibb as part of the pharmaceutical giant's tender for 20% of ImClone's stock. Harlan sold 776,450 shares, and Samuel sold 814,674, about 20% of their shares receiving, like other shareholders, $70 a share.

Sam Waksal reported in March that he had made 50 trades in ImClone stock going back as far as 1992 that should have been disclosed under SEC rules. He said his failure to do so was inadvertent.

On Dec. 6, 2001, Harlan Waksal sold $50 million in ImClone stock. When asked about this sale later, Harlan Waksal said that he had no knowledge that the FDA would reject ImClone's application, and that he sold stock to pay taxes he incurred in earlier stock and option transactions.

On Jan. 18, both Samuel and Harlan Waksal had shares called away from them to pay off a margin loan to Samuel that had been secured by their stock. Samuel had the majority of his stock holdings at the time called away, Harlan a much smaller percentage. No charges have been filed against Harlan Waksal. His attorney, Carl Loewenson, added Wednesday that Harlan Waksal hasn't received any formal notice that the SEC is likely to take action against him.

Pressed by some board members, Samuel Waksal resigned from the company last month, saying his personal life was casting a pall over the prospects for the cancer drug. Harlan Waksal took over as CEO.

Money managers said they couldn't recall another court case involving alleged insider trading based on FDA information. The case has led to calls for the FDA to be more open about its communications with drug companies.

As it stands, the FDA is greatly restricted as to what it can and can't say about a drug application or clinical trial under its review. Generally, the FDA won't even acknowledge the existence of a pending application, although it can at times confirm something a company has already reported publicly.

The culture of secrecy is so ingrained that last week, FDA officials wrote members of the congressional committee investigating the ImClone matter to ask that Thursday's hearing be conducted in executive session. Citing "FDA's longstanding and unwavering commitment to protecting ... extraordinarily valuable intellectual property," the agency said it was wary of subjecting its employees to criminal liability if they talked about ImClone's corporate secrets in the congressional hearing.

Earlier this year, Republican Reps. W.J. "Billy" Tauzin of Louisiana and James Greenwood of Pennsylvania wrote the FDA that, "for the sake of protecting patients and investors from deception," they wanted to know whether FDA laws needed to be changed to permit the FDA, on its own accord, to share nonpublic information with other federal agencies.

Any attempt would be strongly resisted by the pharmaceutical and biotech industries. Stephan E. Lawton, vice president for regulatory affairs and general counsel of the Biotechnology Industry Organization, said that, "This is an SEC issue."

A senior FDA official also made the same point, saying that, "We are not the SEC. We are 10,000 people trying to regulate products that constitute 25% of the economy. To impose upon us the regulation of statements made to the stock market as well would add a huge burden, and duplicate some of what the SEC already does. There will always be bad actors, and the way to deal with them is to punish them after the fact."

-- Joann Lublin and Peter Landers contributed to this article.

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....Jen

-- posted by Jen_