Princeton-based biotech company investigated by SEC and U.S. Attorney’s Office
By: Lauren Otis
Medarex Inc., a Princeton-based biotechnology company whose visibility has been helped by the fact that its chief executive officer, Donald Drakeman, chairs the New Jersey Commission on Science and Technology, has come under a regulatory cloud of late, with its stock option practices under scrutiny.
According to Securities and Exchange Commission filings, Medarex’s stock option practices are being investigated by the SEC and the U.S. Attorney’s ofFice in New Jersey, the company is the subject of private shareholder lawsuits, and is in noncompliance with Nasdaq exchange requirements and is subject to delisting on the exchange.
Stock analysts who follow Medarex have noted that, while the developments are not positive, they are not likely to affect Medarex’s positive long-term prospects as a developer of monoclonal antibodies for the treatment of life-threatening and debilitating diseases.
Most recently, Medarex received a notice of default from Citadel Equity Fund Ltd. relating to a $150 million issue of Medarex notes because of a failure to file a recent 10-Q report. Citadel, which owns over 25 percent of the notes, could force Medarex to pay off the full principal immediately if it does not file a 10-Q report by Oct. 24. Medarex has appointed one of its outside directors to investigate the company’s historical stock option practices and related accounting treatment, and has said it cannot file the 10-Q report until this investigation is complete. Medarex has also announced that it will restate its annual financial statements from 2000 to the present.
A week before Medarex’s initial May 24 notice of the SEC investigation, an SEC filing by Mr. Drakeman reported that, on May 17 and 18, his spouse exercised options to acquire 258,000 shares of Medarex stock at prices below $4 a share, and then sold 288,000 shares at market prices above $11 a share.
Jean Mantuano, a spokeswoman for Medarex, said "because everything is ongoing I can’t provide anything further," other than Medarex’s SEC filings and news releases. Ms. Mantuano said she could not give any indication as to when the Medarex outside director will complete their investigation.
The chronology of the Medarex stock option problems follows:
On May 24, a public Medarex SEC filing stated the company had "received a letter of informal inquiry from the Securities and Exchange Commission (SEC) requesting documents related to Medarex’s stock option grants and practices."
On June 15, a Medarex SEC filing stated that the company had received a grand jury subpoena from the U.S. Attorney’s office in New Jersey seeking information about its option practices. Medarex also stated it had received notice that "two shareholder derivative lawsuits have been filed in New Jersey state court" alleging "breach of fiduciary duty associated with Medarex’s options grant practices, as well as violations of federal securities laws in connection with public statements made by Medarex in its SEC filings relating to its stock option practices and related accounting."
The June 15 filing also announced that Medarex had initiated its own investigation of its options practices overseen by an outside director.
An Aug. 10 SEC filing by Medarex stated the company would not be able to file its June 30, 2006 Form 10-Q quarterly results report in a timely fashion.
An Aug. 18 SEC filing by Medarex stated that the Nasdaq exchange had notified it on Aug. 14 that it was in noncompliance and could be delisted because of its failure to file a timely 10-Q report.
On Aug. 31, a Medarex filing with the SEC described receiving notice of default on its notes from Citadel Equity. The filing stated: "Medarex held approximately $424.4 million in cash, cash equivalents, marketable securities and segregated cash…and the Notes currently have an aggregate outstanding principal amount of $150 million. Medarex believes that after any required repayment of the Notes, its existing resources will be adequate to fund its currently planned working capital requirements for both the short and long term."
Brian D. Rye, a stock analyst with Janney Montgomery Scott in Philadelphia who follows Medarex, noted in recent research updates following Medarex’s disclosures that the SEC request for information "comes on the heels of a flurry of similar requests to more than 20 companies," and he saw no "clear-cut evidence of any systemic efforts by the various boards of directors to grant options for executives only during troughs for their respective stocks."
Mr. Rye wrote that for Medarex, only one grant "struck us as being a bit curious" when in March 2003 the Medarex board awarded Mr. Drakeman 107,000 Medarex stock options when the stock was trading under $3 a share "close to its unequivocal low for that period."
The series of events "does not change our investment thesis regarding Medarex," which is to continue to recommend investors buy the stock, Mr. Rye wrote, in another update. The stock option issue will continue to "hang over the stock until it is resolved," he wrote, adding "we believe Medarex possesses multiple routes to long-term success."
Karen Andersen, a stock analyst with Morningstar, in a Sept. 1 update, stated "Medarex is not scoring any points in corporate stewardship, and it still isn’t clear when the company will be able to complete its 10-Q filing and planned historical restatements." She added, "we believe the possibility of a Nasdaq delisting is remote and that Medarex has enough cash on hand to pay off its debt if required."
Medarex stock recently trading between $10 and $11 a share.

