For several years, ImClone, a biotechnology company, was a darling of Wall Street. Its stock price rose from less than $1 per share in 1994 to $72 a share in November 2001. “The whole time it was producing nothing for sale. It did generate some revenue through licensing agreements with other drug companies—signs that the pharmaceutical industry did think ImClone was on to something.” ImClone focused on developing a cancer treatment drug called Erbitux. Erbitux is intended to make cancer treatment more effective by “targeting a protein called epidermal growth factor receptor (EGFR), which exists on the surface of cancer cells and plays a role in their proliferation.”

In its 10-K Annual Report for the fiscal year ending December 31, 2001, ImClone described Erbitux as the company’s “lead product candidate” and indicated that Erbitux had been shown in early-stage clinical trials to cause tumor reduction in certain cases. ImClone had planned to market the drug in the United States and Canada with its development partner, Bristol-Myers Squibb. On September 19, 2001, ImClone announced that Bristol-Myers Squibb had paid $2 billion for the marketing rights to Erbitux and would codevelop and copromote Erbitux with ImClone.

ImClone was one of at least five pharmaceutical companies with EGFR drugs in mid- to late-stage testing. The winners at commercialization of a new drug class— such as EGFR—are the “companies that beat their rivals to market, since doctors tend to embrace the initial entries.” Under this pressure, ImClone took a testing shortcut, using what is known as a single-armed study—one that is conducted without a control group. ImClone’s use of the single-armed study failed to meet U.S. Food and Drug Administration (FDA) rigorous criteria for using the methodology. 

Samuel Waksal, ImClone’s cofounder and CEO at the time, was directly involved in coordinating and publicizing ImClone’s efforts to develop Erbitux and to obtain FDA approval for it. On June 28, 2001, ImClone began the process of submitting a rolling application—called a Biologics License Application (BLA)— seeking FDA approval for Erbitux. On October 31, 2001, ImClone submitted to the FDA the final substantial portion of its BLA. The FDA had a 60-day period within which a decision had to be made concerning whether to accept the BLA for filing. The FDA had three options: (1) accept ImClone’s BLA for filing; (2) accept the BLA for filing but simultaneously issue a disciplinary review letter notifying ImClone that the BLA still had serious deficiencies that would need to be corrected before the BLA could be approved; or (3) refuse to approve the drug by issuing a Refusal to File (RTF) letter. When the FDA issues an RTF, the applicant must file a new BLA to start the process over.

Samuel Waksal’s Reaction to the Impending Refusal to File

On December 25, 2001, Bristol-Myers Squibb learned from a source at the FDA that the federal agency would issue an RTF letter on December 28, 2001. On the evening of December 26, 2001, Waksal learned of the FDA’s decision and attempted to sell 79,797 shares of ImClone stock that were held in his brokerage account with Merrill Lynch. He initially told his agent to transfer the shares to his daughter’s account. The following morning he instructed his agent to sell the shares. When Waksal’s agent called Merrill Lynch to sell the shares, the agent was told that the shares were restricted and could not be sold without the approval of ImClone’s legal counsel. When Merrill Lynch refused to conduct the transaction, Waksal ordered his agent to transfer the shares to Bank of America and then sell them. Bank of America also refused to conduct the transaction, and the shares were never sold. 

On December 26, 2001, Waksal contacted his father, Jack Waksal, informing him of the impending RTF. The next morning, Jack Waksal placed an order to sell 110,000 shares of ImClone stock. Jack Waksal also called Prudential Securities and placed an order to sell 1,336 shares of ImClone stock from the account of his daughter, Patti Waksal. On December 28, Jack Waksal sold another 25,000 shares of ImClone stock. When questioned by the staff of the Securities and Exchange Commission (SEC), Jack Waksal provided false and misleading explanations for these trades. 

On the morning of December 27, 2001, before the stock market opened, Samuel Waksal had a telephone conversation with his daughter Aliza. At that time, Waksal was Aliza’s only means of support, and he had control of her bank and brokerage accounts. During their conversation, he directed her to sell all her ImClone shares. Immediately after talking to her father, Aliza placed an order at 9 a.m. to sell 39,472 shares of ImClone stock. By selling her shares at that moment in time, she avoided $630,295 in trading losses.

On December 28, 2001, Waksal purchased 210 ImClone put option contracts, buying them through an account at Discount Bank and Trust AG in Switzerland. He sold all 210 put option contracts on January 4, 2002, which resulted in a profit of $130,130. Waksal also failed to file a statement disclosing a change of ownership of his ImClone securities as required by Section 16(a) of the Exchange Act and Rule 16a-3. 

According to the SEC, Waksal violated several sections of the Securities Act when he attempted to sell his own ImClone stock, when he illegally tipped his father about the FDA decision, when he caused Aliza to sell her shares of ImClone stock, and when he purchased ImClone put option contracts.

The Outcome for Samuel Waksal and ImClone

Waksal resigned as ImClone’s CEO on May 21, 2002, and on June 12 he was arrested for securities fraud and perjury. Two months later he was indicted for bank fraud, securities fraud, and perjury. On October 15, 2002, Waksal pleaded guilty to all of the counts in the indictment, except those counts based on allegations that he passed material, nonpublic information to his father. On March 3, 2003, he also pleaded guilty to tax-evasion charges for failing to pay New York State sales tax on pieces of art he had purchased. On June 10, 2003, Waksal was sentenced to 87 months in prison and was ordered to pay a $3 million fine and $1.2 million in restitution to the New York State Sales Tax Commission. Waksal began serving his prison sentence on July 23, 2003.

Despite Waksal’s actions, ImClone appears to have survived the scandal. Under the leadership of Daniel Lynch, ImClone’s former chief financial officer and its current CEO, the company has staged a remarkable turnaround. Most of ImClone’s 440 employees stayed with the company and helped Lynch revive it. Lynch says the employees stayed for one overpowering reason—they believed in Erbitux. As for himself, Lynch asserted that “what motivated me to get up in the morning was knowing that if I could get this drug approved, it would improve the lives of patients with cancer.” Based on a clinical trial by Merck KGaA, ImClone’s European marketing partner, the FDA on February 12, 2004 “approved Erbitux for treating patients with advanced colon cancer that has spread to other parts of the body.” Thus, Erbitux became ImClone’s first commercial product...... 

Questions for Discussion

1. What might motivate an individual or a company to shortcut drug testing that is crucial for FDA approval?

2. Why did Samuel Waksal react as he did pursuant to learning that the FDA would not approve Erbitux?

3. Why were Samuel Waksal’s actions unethical?