Ownership of Erbitux Follow-On Is Central to ImClone Takeover

The escalating squabble between Bristol-Myers Squibb (BMY) and ImClone Systems (IMCL) over ownership of the potentially valuable Erbitux follow-on, IMC-11F8, is likely to be a big factor in determining whether a third party makes a firm offer for the US biotech.

A look at the terms of the original agreement struck between the two companies suggests the rights should be split 50/50. They also provide some clues as to why BMS decided to finally make a move on its partner. However, for Mr Icahn’s solicited bid of $70 a share to turn into a firm offer, the new potential bidder will need clarity, and that might be hard to establish any time soon.

The product in question, a monoclonal antibody that like Erbitux targets the epidermal growth factor receptor [EGFR], has been the subject of controversy before. In 2006, the owner of Erbitux’s European rights, Merck KGaA, claimed that it had the rights to develop and commercialise the antibody outside the US and Canada, but an arbitrator decided in favour of ImClone.

The press release announcing the US company's victory in the case went on to state that “commercial rights to this antibody in the US, Canada and Japan fall within the scope of ImClone Systems' commercial agreement with Bristol-Myers Squibb regarding Erbitux.”

Original deal

Under the terms of the original deal struck over Erbitux in 2001, BMS and Imclone agreed not to develop any competing products, with a mechanism of action targeting EGFR, with the pact running until Sept 19, 2008. If either party did propose to start work on a potential competitor, the other side had to be offered the right to participate in the programme on a 50/50 basis.

The fact that IMC-11F8 is now in phase II trials suggests that such a partnership has been triggered. Together with the press release in 2006, it suggests that ImClone will find it hard to claim that BMS has no rights over the product.

Either way, the historical agreements between the two companies means any third party will want to look long and hard at the small print. If it looks like the dispute could end up in court, because BMS would be sure to vigorously protect any interest it is claiming, a potentially protracted legal battle would be a big deterrent for a rival bidder.

Private doubts?

While BMS may assert its rights over IMC-11F8 in public, any private doubts could have contributed to the decision to bid for ImClone in the first place. As follow-on products often offer better efficacy or safety, the company will not want anybody else getting their hands on an improved Erbitux.

Add to this the fact that the non-compete clause expires in a week today, which means other potential competing products in ImClone’s pipeline could come up for grabs, Thus the rationale for BMS making a move on its partner of seven years becomes even clearer.

Still, regardless of how strongly BMS feels the need to offer more to gain control of ImClone, unless a named third party enters the fray with a more concrete proposal, it can bide its time.

The opacity over the ownership of IMC-11F8 might actually act in its favour. The new $70 a share offer solicited by Carl Icahn is subject to due diligence, making it far from certain that a firm bid will materialise.

Disclosure: none

Comments

[nova:]

The author of the above article has no idea of what he/she is talking about.

Apparently, the author either never read the commercial agreement between Bristol and ImClone or was unable to understand it.

There is another possibility: the author of this article has been paid for it either by Bristol or its agents.

Let us review the Bristol/ImClone commercial agreement.

The commercial agreement signed by ImClone and Bristol regarding to "competing EGFr-products" is very simple:
- First, the competing EGFr-drug commercialization agreement expires on Sep. 19, 2008. It is in less than one week from today. Consequently, Bristol had to stake its claims before this date even if these claims are highly questionable.

- Next. The commercial agreement, including competing EGFr-drug development and commercialization, is only valid in "the Territory" . The "Territory" is defined as N. America (the USA and Canada).

Up to now, all 11F8 development activities were conducted exclusively OUTSIDE the "Territory". Specifically, it has been done in Europe. Consequently, Bristol claims to 11F8 are very much baseless.

- Finally, even if Bristol can prevail in participating in a competing drug development and commercialization, accordingly to the commercial agreement, ImClone can Either offer to Bristol a 50/50 participation in the development Or diversify a competing product. In other words, ImClone can at-will deny Bristol participation in 11F8 activities by simple diversifying it [selling 11F8 to any third party it chooses without any proceeds going to Bristol].

Conclusion
1. Bristol claims to 11F8 are at best very weak.

2. At this junction, ImClone does not have to be sold to anybody, specifically at prices that are totally unacceptable to the majority of its shareholders. Presently, ImClone is a highly profitable company with large cash reserves and highly promising pipeline.

3. Presently, ImClone relatively low market cap reflects inability of the Wall Street properly appreciate ImClone's real value. It is not a surprise looking at the majority of the Street investment houses whose investment decisions were/are so poor that only the US Treasury and the FED are capable of temporary keeping them out bankruptcies with extraordinary cash infusions.

2008 Sep 13 09:48 PM

[nova:]

EP Vantage wrote: "Add to this the fact that the non-compete clause expires in a week today".

This statement is totally untrue. The non-competing clause of the commercial agreement has expired 2 (two) years ago.

Once again, EP Vantage should check the facts before publishing highly inaccurate article or may be it was done purposely.

As for the past ImClone statement that 11F8 falls under the commercial agreement, it is a correct statement since both Erbitux and 11E8 are EGFr-drugs.

However, it does not mean that Bristol has any rights to 11F8 since no 11F8 development activities took place prior to Sep. 19, 2008 in the Territory when the agreement competing product clause expires.

2008 Sep 13 10:36 PM