ImClone Systems Inc. (Nasdaq:IMCL) is a biopharmaceutical company that develops therapies for cancer and cancer-related disorders. Its only commercial product is Erbitux™ (Cetuximab), which belongs to a class of drugs that targets cancer cells with a high level specificity but leaves surrounding cells largely unharmed. Erbitux was initially approved for cancers of the colon, rectum, and appendix, otherwise known as colorectal cancer. After being approved by the FDA for colorectal cancer in 2004, it has subsequently been approved for squamous cell carcinoma of the head and neck , a type of cancer that composes 90% of all head and neck cancers. 
The company's prospects for continued growth depend largely on its ability to gain approval for the use of Erbitux in the treatment of lung cancer. As of April 2008, Erbitux has been mainly used as a third line therapy for colorecteral cancer--therapies used after initial and secondary treatment regimens with other drugs have failed. The third line market for cancer is much smaller than first line market and Erbitux' sales growth began to slow considerably by 2005, as a result of increasing competition. The company has already tried with limited success to increase the first-line use of Erbitux and has an outstanding application to have the indication for its drug expanded to include non-small cell lung cancer, the most common type of lung cancer. Imclone will release results for a pivotal lung cancer trial at the American Society for Clinical Oncology session in June of 2008.
ImClone earns revenues from royalties on drug sales. ImClone manufactures Erbitux directly but depends on agreements with larger companies to sell it around the globe. Bristol-Myers Squibb Company (BMY) sells the drug in the US and Canada, while Merck KGaA, a German company (not to be confused with Merck (MRK)) has exclusive rights to market it in the rest of the world, excluding Japan. In Japan, the world’s second-largest market for pharmaceuticals, ImClone, Bristol-Myers Squibb, and Merck KGaA have entered into a co-commercialization and co-promotion agreement and submitted Erbitux to the Pharmaceuticals and Medical Devices Agency. ImClone has been profitable since 2004, but net income is highly variable. The company received a 2009 milestone payment of $112.7 million. In 2007, however, the company was forced to pay $110 million in patent litigation settlements.
Despite the large drop in net income in 2007, Erbitux sales worldwide grew by about 25% to cross $1.4 billion. Also, while R&D as a percentage of sales, a key measure for biotech and pharmaceutical firms, has fluctuated with revenue, R&D spending has increased steadily year over year.
Oncology is one of the fastest growing markets in the pharmaceutical sector. The World Health Organization predicted a 50% rise in the incidence of cancer between 2000 and 2020, and in addition to the 14% growth in the oncology drug market in 2007, oncology drug costs are growing at 20% a year. This is in stark contrast to pharmaceutical sales overall, which grew by just 3.8% last year, the lowest growth rate since 1961. However, there are large differences in the growth rate of markets for various cancers. Analysts expect the colorectal cancer market to shrink from 63% ($418 million) of Erbitux sales to 44%($383 million) by 2009, due to a combination of increased competition and the entry of generic versions of older drugs such as Eloxatin and Elplat. However, ImClone has been aggressive about expanding Erbitux approvals into other promising indications. Lung cancer is a large market, with nearly 50% of patients ineligible for Avastin, making for a roughly $2 billion market for Erbitux where Avastin does not compete. Lung cancer overall is a $4 billion market, and ImClone is confident it can make inroads with Avastin-eligible patients as well. Erbitux does have a better safety and tolerability profile than Avastin, which will also play a role in its attempt to break into the lung cancer market.
As a result of the fast-growing field and the potential for large profits, competition in oncology is heating up. Genentech and its parent Roche Pharmaceuticals (RHHBY) are the dominant company in oncology, with a highly lucrative franchise in MabThera/Rituxan that generated $5.45 billion in sales in 2007. In contrast, ImClone’s Erbitux barely squeaks into the Top 20 with 1.4 billion in sales. Direct competitors to Erbitux include OSI Pharmaceuticals (OSIP) and Genentech’s Tarceva , a second-line therapy for non-small-cell lung cancer and part of a combination therapy for pancreatic cancer, another potential Erbitux market. ImClone hopes to break into the lung cancer market on the strength of trial results to be released in June. Another potential player in this place is AstraZeneca's Iressa, which was withdrawn from certain markets after failing to extend patient survival in confirmatory trials, but is still in further trials in various tumor types. 
Another competitor is Amgen’s Vectibix, which received FDA approval in late 2006 and European approval in 2007 for certain types of colorectal cancer. It was widely expected to steal market share from Erbitux; however, because of certain poor trial results, it has so far not hurt Erbitux sales noticeably despite being priced at a 20% discount. However, the lower pricing of Vectibix is still worrisome for ImClone, as it might herald a new generation of more efficiently produced drugs that can undercut drugs such as Erbitux and Avastin on price.
The regulatory environment is always of great concern to drug companies, and ImClone has endured more than its share of legal battles. Intellectual property rights are a hotly debated issue, especially in the extremely expensive realm of oncology, where drugs such as Avastin and Erbitux cost tens of thousands of dollars a year. For example, as a result of losing the court battle over key patents on Erbitux, ImClone pays royalties to the University of California, Sanofi-Aventis SA (SNY), and Yeda Research and Development Co., an Israeli company. Moreover, the FDA has yet to establish policies for the approval of biogenerics and biosimilars, so there is a possibility of significant upheaval in the regulatory sphere. IMS expects 'more limited claims for newly approved medicines, the application of more “black box” warnings on labels, more clinical evidence required by regulators, and slower approvals.' 
Oncology drugs are especially likely to get hit by a renewed emphasis on the marginal benefits of a drug. Many expensive drugs provide patients with a few additional weeks of survival, but do little to cure cancer. As a result, unless a drug produces extremely convincing results of improved survival, it is unlikely to get approval in many countries. While the FDA does not emphasize this in the drug approval process, the Centers for Medicare and Medicaid Services are expected to closely analyze whether they are receiving “value for money” for spending on Part D and other government-funded programs. Erbitux has not always been on the right side of this trend. For example, it was initially rejected by the United Kingdom’s National Institute for Clinical Excellence, which decides which drugs to prescribe on the state health service. NICE felt that the price was too high in comparison to its benefits (Erbitux extends survival in colorectal cancer patients by a median of 4.1 months). The decision was partly reversed, and a final decision is expected in June 2008. Erbitux is still unavailable in Canada, despite approval from Health Canada in 2005, because the Patent Medicine Prices Review Board (PMPRB), the Canadian agency that determines prices for drugs under patent, determined that Erbitux prices in Canada were too high relative to its value to patients. As a result, Bristol-Myers Squibb does not provide the medicine in Canada. A typical course of treatment with Erbitux costs around $10,000 per month and lasts four months, which is still substantially less then Avastin, which costs more than $110,000 a year, but more than Vectibix at $8000 a month.
ImClone’s Erbitux faces competition from Genentech's Avastin and Amgen’s Vectibix in the colorectal cancer market. Market share information follows, but it should be noted that Erbitux focuses on a different line of therapy than Avastin. Avastin also has a slightly different mechanism of action from Erbitux or Vectibix, which result in efficacy, safety, and tolerability differences. Side-effects associated with the receptor targeted by Erbitux and Vectibix are generally less serious than those associated with Avastin.  Vectibix was expected to hurt Erbitux sales, as it was predicted to have better clinical trial results and a better safety profile, in addition to being priced at a 20% discount to Erbitux. However, an important study showed that it worsened the progression of colon cancer when used in combination with Avastin. Many other companies are believed to have drug candidates in development that target the same cancers as Erbitux. These companies include Pfizer, GlaxoSmithKline, Novartis, Wyeth, Medarex, and YM Bioscience.
|in millions of $||ImClone||Genentech||Amgen|
|Net Profit Margin||6.77%||23.62%||21.43%|
|Return on Assets||5.16%||16.78%||9.93%|
|Return on Equity||2.80%||25.90%||17.19%|
Erbitux commands a 13.3% share of the overall metastatic colorectal cancer market, and a much larger share in third line therapy of approximately 30%. In cancer of the head and neck, Erbitux has an overall market share of 35.6%, and 35.4% in the first-line setting. Much of Avastin’s sales are generated in the first-line market, however, while Erbitux is targeted at third-line patients and patients ineligible for Avastin and other first and second-line therapies. First-line therapies are those initially used to treat a condition, while third-line therapies are prescribed when first and second-line therapies do not work or stop working.
The first-line market tends to be the largest and most profitable, and Avastin has dominated this market, with 62.5% market share, although that represents a decline from earlier periods. Moreover, Avastin also has a 66% share of the second-line market, a big lead over ImClone. Avastin also leads by a smaller margin in third-line therapy, where it holds a 36% share. Erbitux was originally only approved for second and third-line therapy, and ImClone has since conducted studies and filed for European Medicines Agency approval for the first-line as well. It is conducting further studies aimed at acquiring first-line approval in the colorectal cancer market. Decision Resources, a pharmaceutical research and advisory firm, notes that doctors will give Erbitux the edge if approved in first-line therapy for its safety and tolerability relative to competitors such as Avastin. .