Wednesday, October 04, 2006

Color on news: Imclone Systems (NASDAQ:IMCL)

Couple of tier-1 firms are commenting on Imclone Systems (NASDAQ:IMCL) after Dow Jones said dissident shareholder Carl Icahn refused to support an all-stock, $36-a-share offer made by a "major international pharmaceutical co" in September:

- Goldman Sachs notes they expect the dispute between Mr. Icahn and the Imclone board will continue for some time which could lead to negative investor sentiment and potential departure of key Imclone employees. Nevertheless, the firm believes the intrinsic value of Imclone, supported by Erbitux, approximates $27/share. Future share appreciation will be largely dependent on sales growth and clinical results. With the closing price of $27.07 on 10/3/06, there is essentially no value assigned to the potential new indications of Erbitux with combined potential over $1 Billion as well as the pipeline with 6 products in Phase 1 or 2 trials.

Imclone shares may react positively to the disclosure that there was a bid of $36. However, significant share appreciation will depend largely on data from ongoing Phase 3 studies to expand the indications of Erbitux. They expect Phase 3 data on refractory and second-line colorectal cancer (CRC) in 4Q2006 and first-line CRC in 1Q2007. Phase 3 data on Erbitux for first line lung cancer ($1.0 Billion potential) and pancreatic cancer ($0.3 Billion potential) are also expected in 2007.

- Morgan Stanley continues to be cautious on IMCL saying the disclosure of an outside bidder may give the stock short-term support, but given that this offer appears no longer on the table, and according to the disclosure, it was the highest bid and likely predated several recent negative events for Erbitux, they suspect that short-term negative pressure on the stock may continue.

Overhangs for the stock include: 1) the launch of Amgen's Vectibix, 2) management uncertainty, 3) board controversy, 4) Yeda patent overhang, 5) risk of losing a patent case with Repligen, and 6.) weak Erbitux IMS trends going into 3Q. The rejection of a $36 bid suggests to us that investors will need to wait for more clinical trial data (CRYSTAL trial is next potential positive catalyst in early 1Q) before seeing positive returns.

Maintains Equal Weight and $38 tgt.

Notablecalls: Morgan Stanley Steven Harr makes an excellent point regarding the timing of the bid and recent negative events. But on the other hand, we must assume Mr. Icahn knew what he was doing when he rejected the $36 offer. Think the stock will gap up today by 1-2 pts and then have tough time keeping the gains over the next couple of days. Possible shorting oppy.

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