Wheels Coming Off at ImClone Systems

Until there's more stability, stay away from the stock.
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Updated from 2:07 p.m. EDT

Recently, I received an email recently from a reader asking if

ImClone Systems

(IMCL)

is a long-term buy. The answer, quite simply, is no.

Has a lot of the bad news already been revealed? Yes, it has. And the stock, while down substantially in the past few quarters, hasn't suffered too much more damage despite the avalanche of upheaval in the past few weeks.

To review, the company announced to the world that it was up for sale, only to find no takers. Management insisted there were a few interested parties, but that was either an exaggeration or agreeable terms couldn't be reached. Any interested buyer knew that ImClone was desperate, which is not the best position from which to negotiate.

As a result, it's not hard to imagine a prospective buyer lowballing an offer that was unsatisfactory to ImClone's management and board and then walking away from the table.

ImClone's board is the stuff of headlines. Billionaire financier Carl Icahn has taken an activist stake in the company. He and his team now have four out of 12 seats on the board. But Icahn, who has a 14% stake in the company, isn't finished.

He has tried unsuccessfully to force out Chairman David Kies, and immediately after joining the board, he called for a vote for his ouster. The proposal was voted down by the non-Icahn affiliated directors.

Still, Icahn isn't retreating. On Thursday, he said he would attempt to remove six directors and add another of his associates to the board. Icahn recently caused headaches for the boards of

Blockbuster

(BBI) - Get Report

and

Time Warner

(TWX)

. Now he's starting to make noise at

Federated Department Stores

.

Icahn's activism could eventually unlock some value in ImClone or bring about necessary changes to turn the company around. However, in the near term, it will likely act as a distraction for a management team that's already had a difficult time keeping its eye on the ball.

After the close of trading, Kies released a statement saying: "We are disappointed that Carl Icahn, a minority shareholder and director, is trying to seize control of the company without paying a control premium to all ImClone Systems shareholders. Despite our best efforts to avoid this kind of distraction by giving Mr. Icahn disproportionate representation on the board, he has chosen to proceed with this attempt to take control of the company."

Kies went on to say that it would be "a significant mistake to dismiss half of the directors elected by shareholders less than ten days ago, as each of them has made valuable contributions during their tenures as representatives of all of our shareholders."

A recent blow came when the company lost a dispute earlier this month over a patent that factors heavily into ImClone's only commercial product, Erbitux. Most handicappers assumed the ruling would only be a partial victory for Israel's Yeda Research & Development, but the judge determined that it was the sole owner of the patent, opening up the potential for more competition for ImClone's colorectal cancer drug.

Speaking of competition, the much anticipated approval of

Amgen's

(AMGN) - Get Report

own colorectal cancer drug, Vectibix, occurred Wednesday. While the Food and Drug Administration's decision wasn't a surprise, Wall Street eagerly anticipated Amgen's decision on pricing. Amgen is aggressively pricing the drug to be competitive right out of the gate.

The drug will cost $8,000 a month, or $2,000 less than Erbitux, and that discount may increase. Merrill Lynch's Eric Ende expects Amgen to discount the drug by another 5% to 7%, "to provide oncologists with an added profit incentive to use Vectibix," he wrote in a research report. Amgen also disclosed plans for a financial-assistance program to help uninsured patients pay for Vectibix.

Some analysts believe Vectibix could take as much as 60% of Erbitux's market share. Merrill slashed its sales estimates for Erbitux to $689 million from $782 million in 2007 and to $632 million from $804 million in 2008. Of course, it's possible that ImClone could lower the price to match Vectibix. While that may save some sales, margins would likely be squeezed, lowering earnings.

There aren't too many potential positives for the company any time soon. If Icahn gets his way and restructures the board, that could be perceived as a good start. Erbitux is in phase III trials for a few other indications, which should boost sales after an approval. But most of ImClone's pipeline is in the early stages of development and it could be years before another drug is brought to market.

Notice that I haven't even mentioned valuation. Just like a strong momentum stock, I don't believe valuation matters right now for ImClone. Some day it will. But as long as the future of the board and ImClone's lead product are uncertain, leave the stock alone. When the chaos is over, there will be plenty of time to get in if the prospects change. Investing in biotech is all about managing risk, and the risk in ImClone is too high.

In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback;

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