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Storytelling In The News: #134

Seeing through "bad news" stories: ImClone and Icahn

April 29, 2004

Earlier in the week, we noted, in connection with the Google IPO, the Nobel-Prize-winning economist Daniel Kahneman's insights into the difficulties that people have in learning the long-term lessons of negative stories when everyone else is tellling positive stories.

Today, we note the opposite phenomenon: the difficulty that people have in not over-reacting to apparently bad news when everyone else is panicking. One can think of all those people who stopped traveling in airplanes for a period after 9/11, before the passage of time persuaded them that such behavior was irrational. What's interesting in the financial arena is that the stock market neatly generates measures of the tendency.

Susan Pulliam in the Wall Street Journal notes that when bad news struck ImClone Systems -- the FDA rejection of its application for approval of Erbitux -- most of the world, including owners of the company and Martha Stewart, rushed to unload their shares. Financier Carl Icahn however zigged while others zagged: he bought large quantities of Imclone's shares and is now $250 million richer than he would otherwise have been.

After the FDA rejected Erbitux in December 2001, Imclone's share price fell from around $70 before the news, to below $10 in the summer of 2002. Mr. Icahn then began buying large quantities of ImClone shares, adding 3.6 million shares to his holdings. He bought the stock again earlier this year, picking up another 1.63 million shares. That purchase brought his average purchase price to $19.58, according to the SEC filing.

Early in 2004, the FDA reversed its ruling and approved Erbitux for marketing as a drug for fighting colon cancer. As a result, ImClone's shares are now back at around $70 each, the level where they were before the scandal hit. So Icahn stands to make a profit of around $250 million.

Pulliam comments: "So much for the value of a tip from a broker. Ms. Stewart was recently convicted on criminal charges of lying to prosecutors about the facts surrounding her sale of ImClone stock, which she sold at about $58. Her lawyers have asked for a new trial on the grounds that one of the jurors lied on his courtroom questionnaire. Mr. Waksal, meanwhile, is serving a seven-year jail sentence after pleading guilty to insider-trading charges."

The difficulty of seeing through "bad news" stories

Was Icahn especially prescient? Was it a wild gamble based on instinct? Or did Icahn have a reason for making the gamble he did?

For one thing, a large and competent pharmaceutical company (Bristol Myers-Squibb) had looked into the prospects of Erbitux making it to market and had made a large investment, suggesting that some savvy scientists believed in the drug.

For another, a careful look at the FDA's initial rejection showed that it was related in part to poor record keeping in connection with drug trials.

If this were the only background, Icahn's surmise that the record-keeping problem would be solved and that the original promise of the drug would be realized would not have been a particularly difficult judgement to make.

However that is only part of the background against which Icahn's decision was made. What made the decision very difficult to make was that the fact that everyone else was telling negative stories about ImClone, about Erbitux, and about Bristol Myers-Squibb.

Bottom line

Against a background where everyone else is telling negative stories, it is very difficult to believe in -- and act on -- a positive story.

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