Why Investors are Still Throwing Cash at Debt-Ridden Kadmon, a NYC Biotech Founded By Ex-Con Sam Waksal
July 26, 2016
By Mark Terry, BioSpace.com Breaking News Staff
Kadmon Corporation, based in New York, registered in June with the U.S. Securities and Exchange Commission (SEC) for an initial public offering (IPO) to raise $115 million. Now that the IPO is about to launch, investors have to balance the potential science of the company with its questionable finances and the colorful and crooked history of its founders.
Despite its science, Kadmon is better known for its founder, Sam Waksal. Waksal is best known not for his former company, ImClone, but for the insider trading scandal that put both him and Martha Stewart in prison. And one of the peculiarities of the IPO is that Sam Waksal, because of his five-year prison sentence, had to resign from the company because he has a lifelong ban from serving as an officer in a public company.
The company is currently being run by Sam’s brother Harlan Waksal, who is president and chief executive officer. Sam Waksal received $3 million in severance, and is eligible for up to $6.75 million in milestone payments, and up to $15 million as part of various development deals.
But with the IPO scheduled for this week, a number of analysts seem to be incredulous, at best. In an article in STAT, a number of unidentified biotech investors expressed their dismay. “It doesn’t make much sense to me,” one told STAT. “Are there really enough suckers out there?”
In 2001, Sam Waksal received news from the U.S. Food and Drug Administration (FDA) that ImClone’s application for cancer drug Erbitux, was being rejected. He then attempted to unload company stock and told various family members and friends that they should, too. Martha Stewart sold off shares of her ImClone stock based on illegally obtained information from her broker. She served five months in federal prison and some time on house arrest.
Waksal, sentenced in 2003, got out of prison in 2009. Eli Lilly and Company acquired ImClone in 2008 for $6.5 billion. Erbitux was approved by the FDA in 2004 and went on eventually to be a blockbuster drug.
Kadmon has three products in its pipeline, KD025, which is being investigated in a number of disorders, including psoriasis, idiopathic pulmonary fibrosis, chronic graft-versus-host disease, and arthritis; tesevatinib, being studied for oncology indications and polycystic kidney disease; and KD034 in Wilson’s Disease.
STAT writes, “Kadmon’s commercial business is a fraying operation that relies almost entirely on sales of ribavirin, an aging treatment for hepatitis C. The drug is rapidly becoming obsolete as far more effective therapies come on the market. Kadmon’s sales plummeted from $63.5 million in 2014 to $29.3 million last year, and, in documents filed with the SEC, Kadmon acknowledges that its current drugs will ‘contribute insignificantly to revenue in 2017 and beyond.’”
A lot depends on the success of the IPO. The company has a very high debt level and its cash burn rate could push it into bankruptcy by the end of the year. Maxim Jacobs, director of healthcare research at investment group, Edison, told STAT, “They’re burning cash like it’s 1999 here.”
The strategy, apparently, is to prop up lackluster commercial part of the company’s operations until its pipeline can get approved. But the $100 million+ it’s trying to raise will only last through next year. Its top drug candidates are only in Phase I or II trials, years from possible approval.
Although Sam Waksal has proven adept in finding promising drugs—at least once, anyway—investors should probably be leery over his criminal record and tendency to exaggerate, what STAT refers to as “hyperbolic cheerleading.”
Kadmon and Sam Waksal are also being sued by several people, including Anastasios “Tommy” Belesis, former head of John Thomas Financial, who has been permanently barred from trading securities. Another lawsuit awaiting trial indicates that Waksal made a deal with investors for a 6 percent stake in the company, then did not fulfill his part of it after they held up their end.
Although Kadmon and Waksal make for a colorful story, in terms of investors and this IPO, it clearly seems: Let the buyer beware.