You can't keep a good clown down. What's that even mean? And how did I come to shout it across hallways and phone lines to friends and colleagues, including one who made a career of badmouthing the clown to his clients? It's a long story and one I should start at the beginning.
In my circle, the clown is ImClone Systems
Begin the begin
My dance with the clown began in 1997. At the time, I was scouring SEC filings for Bob Gabele, insider-trading guru, and obsessed with how corporate executives were dealing with their newfound paper wealth, particularly those outlandish options grants. In the late '90s, ImClone executives, unlike those at so many other "technology" companies, were acquiring shares. More importantly in my book, some pretty high up were exercising nonqualified stock options and holding on to the underlying shares.
Without delving into too much detail, when you exercise nonqualified stock options, you incur a tax liability -- regardless of whether you sell the acquired shares. If the stock subsequently goes up, and you hold for a year, your tax burden is generally lower. Moreover, if the stock heads south, you still have to pay the taxes even if they exceed (wildly) what you can get for the stock when the bill comes due. Ouch. That's why I take notice when executives exercise nonqualified options and don't turn around and sell.
And so it went at ImClone as the '90s wound down. And so it went again, in 2001, just before Bristol-Myers Squibb
A not-so-funny twist
Before you jump on the "harebrained" bandwagon, hear me out. I didn't buy ImClone on a whim. The insiders led me to the water, but Erbitux (then C225) made me drink. The guy who stumbled upon the compound, Dr. John Mendelsohn, is a lifelong cancer fighter and industry luminary. From his clinic at prestigious Memorial Sloan-Kettering, Mendelsohn was giddy with his enthusiasm, as was Leonard Saltz, among others. C225 was a first-in-class cancer drug, with stunning potential.
Which is why I was so flabbergasted when, in the wake of the FDA's RTF (refusal to file) letter to ImClone, the world turned so vehemently on Erbitux. I'm no Pollyanna when it comes to conflicts of interest, but I simply couldn't accept that all these doctors were lying simply to get their piece of the pie (heck, Saltz refused a stake in ImClone and Mendelsohn recused himself from the clinical trials because he had an equity interest). Nor could I shake the notion that Waksal and pals had loaded up on the stock because they believed in their heart of hearts that the drug worked.
As for Sam Waksal: Is insider trading wrong? Clearly. It's certainly illegal. At the same time, Mendelsohn pounded the table on (and the pavement with) C225 for years. For all their bumbling, Sam Waksal and his brother Harlan ran with it when nobody else seemed to give a damn. Was it self-interest, the interest of science, or the interest of patients? Whatever, I can't say that you or I'd have recognized the value in or staked our reputations on a fledgling Erbitux. I sure as heck can say that we didn't.
The big picture
And if you ask me, that's the beauty of our financial markets. Forget that they allow Warren Buffett and the progeny of Benjamin Graham to corral and milk underappreciated cash cows. Forget for a moment, too, that they direct precious capital to where it belongs -- though the latter is important. Isolated abuse notwithstanding, capital raised by mavericks in our public markets made Erbitux a (near) reality.
Just as it did a host of other potential cancer breakthroughs, including AstraZeneca's
Just as it will one day make possible the drug that finally licks this blasted scourge. Was this the most efficient allocation of capital? Academics might say no, but you tell me: After all, by capital raised in public markets, I mean yours and mine.
Whatever happens to Erbitux
It's been a wonderful ride. To think that spending a few hundred bucks on a stock should have opened to me so many doors. Because of ImClone, I have a lifelong interest in cancer drugs. Eavesdropping on discussion boards, I've met people I would never have otherwise -- shared daughters' and wives' and parents' struggles (and rare triumphs) with the disease. I worked for a time on a biotech newsletter.
Was any of this worth the price of my retirement, a down payment on a house, or my (as yet unconceived) kid's education? Probably not. But that's the point: If you keep your wits about you, you can keep all the important stuff tucked away safely in blue chips, dividend payers, index funds, and safety cash, and still benefit from all the intangibles stock investing has to offer.
You can't keep a good clown down. Funny the range of emotions that silly platitude conveys -- how different it sounds with my tiny handful of ImClone (two handfuls, post split) trading in the single digits in 1997, in the high-$70s in 2001, and again in the single digits early this year. What will it convey this time next year? No one can say. Erbitux lost its first-in-class status and is still yet to be approved.
But I can't wait to find out -- and I'll let you know when I do. I love this stuff.
Paul Elliott is a new Fool editor. He owns shares of ImClone, in case you missed that. The Fool is investors writing for investors. We love this stuff.