Samuel Waksal's crisis of confidence.

Samuel Waksal's crisis of confidence.

Samuel Waksal's crisis of confidence.

Moneybox
Commentary about business and finance.
Dec. 2 2003 3:03 PM

Drug Jitters

What Samuel Waksal needed was a dose of confidence.

Illustration by Robert Neubecker

Yesterday Swissmedic, the Swiss authority for therapeutic products, approved the colon-cancer-fighting drug Erbitux for use in Switzerland. Ordinarily, gaining potential access to the Swiss market, with 7.3 million people, wouldn't be cause for celebration. But it was good news for Merck, the German pharmaceutical company (no relation to U.S. pharmaceutical giant Merck) that is marketing the drug, and for Imclone, the U.S. biotechnology company that discovered it. And when the news penetrates the walls of the Schuylkill Federal Correctional Institution in Minersville, Pa., Samuel Waksal, one of the few truly contrite corporate villains of recent years, will probably kick himself again.

Waksal's fear that Erbitux would have a difficult time passing regulatory muster led to one of the most egregious and storied examples of insider trading in the past decade. According to the Securities and Exchange Commission's complaint against Waksal, the socially prominent founder and chief executive officer of ImClone panicked on Dec. 26, 2001 when he got wind that the U.S. Food and Drug Administration was poised to reject an application for Erbitux's approval. Over the next two days, before the news was made public, he dumped shares and advised family members to do the same. Waksal was one of the few malefactors of great wealth sent to jail for his misdeeds. And the saga isn't over. The trial of erstwhile pal Martha Stewart, who allegedly dumped ImClone shares after receiving a tip, has just started.

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Historically, episodes of crude and hasty insider selling—illegal or legal—at high-flying companies have been inspired by well-founded fears that the company is going down for the count. And stockholders typically regard news of a founder dumping shares en masse as an indication that something is fundamentally wrong. Why would insiders and company founders jeopardize their reputations, their fortunes, and potentially their freedom to save a few bucks unless the situation were dire? In hindsight, selling by top executives at companies like Global Crossing, HealthSouth, and Enron was a clear sign that there would soon be nothing of value left to sell.

But in the case of ImClone, Waksal's call to abandon ship was clearly a false alarm. Bringing a proprietary drug to market is a process of trial and error that can take years to bear fruit. Biotech companies like ImClone are notoriously volatile in the short term. Before it comes to market, a drug like Erbitux must pass multiple stages of regulatory approval in different countries. News of each phase or trial, or of each interim regulatory action, can deliver either a massive boost or a seemingly devastating blow to the company—and to its stock. ImClone, whose fortunes rested almost entirely on Erbitux, was essentially a highly concentrated, long-odds bet.

Today ImClone's founder may be in jail. But unlike many of the scandal-plagued firms of 2000 and 2001, the company is not only solvent—it also seems remarkably healthy. It sports a market capitalization of $3 billion, $138 million in cash, and a manageable debt load. The news of the Swiss approval pushed the stock to nearly 43—almost exactly the price it closed at on Dec. 31, 2001. So far in 2003, ImClone's stock has more than tripled.

Investors are clearly optimistic. After all, ImClone's flagship drug has been approved for use—in combination with a chemotherapy drug—in a developed market not known for rubber-stamping newfangled cures. European Union regulators are expected to rule on Erbitux next year, and the company anticipates hearing from the U.S. FDA in February as to whether it will receive accelerated approval.

Had Waksal and Stewart held on to ImClone through the inevitable valleys, they'd still be enjoying life at the peak. Waksal would still be wealthy and free to rub shoulders with his swell friends. He'd be reveling in the attention of society rather than paying a debt to it. Stewart would be free to pursue her visions of domestic perfection without having to deal with a potentially ruinous trial.

Waksal was guilty not simply of bad judgment and poor ethics, but of something almost more fatal for a CEO of a startup—a lack of faith in his company's main product. As he serves his 87-month sentence, he'll have plenty of time to consider the irony. And he might take a measure of satisfaction that the product he helped create may soon be doing some work in the therapeutic world.