ImClone's Potential Could Be Worth the Risk

Nadine Wong is the editor, publisher and co-founder of the monthly <I>BioTech Sage Report</I>. Wong writes a weekly column that appears on this page as part of her business relationship with TheStreet.com.
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What a way for the biotech sector to end the year.

ImClone Systems

(IMCL)

announced that the Food and Drug Administration

declined to accept its biological-license application to market its colon cancer drug, Erbitux. Its share price took a severe beating, to say the least.

Wall Street had pumped up ImClone as one of the next great success stories in biotechnology, especially because its lead product Erbitux has demonstrated impressive efficacy in treating colorectal cancer, as well as head and neck cancer. Erbitux targets the EGF receptor found uniquely on one-third of all solid tissue cancers. The drug significantly reduces tumors, so its potential market may expand well beyond colorectal and head and neck cancers.

Because of the drug's vast potential, ImClone's share price has had a good run the past quarter, with investors anticipating favorable news on the company's FDA application for Erbitux. But with the release of the FDA decision, investors dumped shares in a hurry. ImClone's down about 34% since the news came out.

The big question now is whether ImClone can rebound to its 52-week high. Remember, here's a company with no product revenue to support earnings, though prior to the setback, the company was trading in the $70s. It's hard to justify ImClone's valuation when it was trading at its peak price with good news already built into its shares. It was certainly pricey and risky for new investors.

To put it simply, biotech stocks are evaluated mostly on anticipation and hope, and they often rise on optimism about the clinical progress of a drug. Bad news, on the other hand, will send a company stock price tumbling.

But there is an opportunity here, if you are willing to take the chance and can tolerate the risk.

The FDA refused ImClone's application for Erbitux because the clinical data were in a "raw format" that could not be easily reviewed to determine the safety and efficacy of Erbitux, the regulatory agency said.

In its Dec. 31 conference call, ImClone said that the clinical data generated so far are not deficient and that the drug has met its clinical endpoints. But for the FDA to review Erbitux, ImClone must transform the raw data into an analytical format to show the drug's safety and effectiveness.

This is the first time ImClone's management has submitted a biological-license application with the FDA, and it is obviously inexperienced at it.

Bristol-Myers Squibb

(BMY) - Get Report

has invested a considerable sum in ImClone, and it's unlikely it will abandon ImClone because Bristol-Myers' specialty is in developing cancer therapeutics.

The drugmaker's experience and talent should be able to assist ImClone in submitting an acceptable package for FDA review. With Bristol-Myers' help, ImClone and Erbitux should succeed.

Bristol-Myers and ImClone probably will have a discussion with the FDA within the next 30 days, and if the outcome is positive, look for ImClone's share price to regain its momentum. Until then, ImClone's share price likely will bottom out. At that point, aggressive investors should consider the potential for ImClone's share price to appreciate, which could outweigh the risk of investing in it.

Though Wall Street took ImClone down a few pegs last week, it's more than likely the stock will recover. This year should prove to be very interesting for ImClone.

Nadine Wong is the editor, publisher and co-founder of the

BioTech Sage Report

and contributes a weekly biotech column to this site. At the time of publication, Wong had no position in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While she cannot provide investment advice or recommendations, Wong invites you to send comments on her column to

Nadine Wong.

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