This Ex-Con’s Startup Is Drowning in Debt. So Why Are People Investing? by Damian Garde @FortuneMagazine July 26, 2016, 1:51 PM EDT E-mail Tweet Facebook Linkedin Share icons This piece originally appeared on STATnews.com. Its founder did time in federal prison for his role in the insider trading scandal that put Martha Stewart in handcuffs. Its CEO has a decades-old drug trafficking charge on his résumé. The company is also laden with debt and burning through cash at a rate that threatens to bankrupt it by year’s end. Yet biotech startup Kadmon has convinced investors to back an initial public offering that values the company at more than $800 million. It’s expected to raise $100 million on the New York Stock Exchange this week. “It doesn’t make much sense to me,” said one longtime biotech investor who has steered clear of the company. “Are there really enough suckers out there?” Headquartered in New York City, Kadmon is developing a trio of treatments it believes can treat cancer, autoimmune disease, and rare disorders. But a peek at its balance sheet reveals a leaky ship, hemorrhaging funds and beset by lawsuits that accuse the company of scamming investors. The biotech industry in general has been stumbling, forcing dozens of young drug companies to delay or abandon their plans to go public. So how is Kadmon, with its rap sheets and red ink, succeeding where so many have failed? The company’s allure boils down to one figure: founder Sam Waksal. Friends and former colleagues describe him as an eloquent, charismatic polymath with an eye for groundbreaking science — but they also call him a deceitful, arrogant victim of his own hubris. ‘A larger-than life character’ Waksal, an immunologist by training, rose to fame amid biotech’s millennial bubble, when his previous company, ImClone, had a promising treatment for colorectal cancer moving through the pipeline. Bristol-Myers Squibb bmy bought into the drug in what was then biotech’s biggest-ever deal, and Waksal became the sector’s most visible executive. For more on biotech, watch this Fortune video: “He was a larger-than-life character,” recalls one biotech analyst who has covered the industry for more than four decades. Waksal, who declined to talk to STAT, hosted Wildean salons and extravagant parties at his 5,800-square-foot SoHo loft, decorated with paintings by Mark Rothko and pieces of Etruscan pottery. He claims to have composed two novels, a memoir, and various works of poetry, and he dots his interviews with references to Sophocles, Omar Khayyam, and Marquis de Sade. Oliver Stone, who sought Waksal’s counsel before shooting the sequel to “Wall Street,” described him as “a dynamo” to the New York Times. Waksal, now 68, reached his socio-cultural zenith in late 2001, at a decadent Christmas party in his home. The CEO mingled with celebrity guests including close friend Stewart, Mick Jagger, and MTV’s Serena Altschul, as one former ImClone investor remembers, holding court between the columns in his living room and telling all who would listen that his company’s wonder drug, Erbitux, was a sure-fire blockbuster. And he was right. Erbitux eventually won approval to treat colorectal cancer and now brings in revenue of about $1.5 billion a year. Pharma giant Eli Lilly later acquired ImClone for $6.5 billion. But if Waksal celebrated those victories, he did so from federal prison, where he spent five years for his role in an insider trading scandal that tarnished his reputation and imperiled his company. ‘Running around in your underwear’ Days after the glitz of that 2001 party, Waksal got some bad news: The Food and Drug Administration was about to reject Erbitux’s initial application for approval because ImClone had submitted insufficient data. Waksal knew the news would tank ImClone’s stock price. But it wouldn’t become public until two days later. So Waksal tipped his family members to begin unloading their shares. He tried to dump about $5 million of his own ImClone stock, too, but was thwarted by a pair of brokers who refused to execute the trades. It was sloppy stuff, and federal investigators quickly picked up on Waksal’s trail. “It was incredibly dumb, obviously, to just try and dump that much stock on the eve of an important decision,” then-US attorney James Comey told CBS in 2003. “It was like running around in your underwear, in broad daylight.” The ensuing months brought a locus of scrutiny down on Waksal, as former scientific colleagues came forward with tales of doctored test results, brash carelessness, and outright fabrication spanning three decades. In 2003, Waksal was convicted of securities fraud, bank fraud, obstruction of justice, and perjury. He admitted lying to his board, to his investors, and to the Securities and Exchange Commission. Waksal would spend five years in prison — a period he called his “interregnum”in New York Magazine. Now he’s getting a second chance with Kadmon. ‘Burning cash like it’s 1999’ Waksal founded Kadmon, which borrows its name from the Kabbalah concept of “primordial man,” in 2009 and has spent the ensuing years piecing together a patchwork drug company. First, Kadmon bought a private drug manufacturer for $100 million in 2010, and then it paid $14 million to license an investigational cancer therapy passed over by GlaxoSmithKline gsk and shelved by the biotech Exelixis exel . Kadmon later picked up an anti-inflammatory treatment from a company called Surface Logix for just $900,000 plus a percentage of future sales. Its third drug is a generic called trientine, which the company hopes to reformulate and sell as a treatment for a rare kidney disease. 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.” But despite dwindling returns, Kadmon spent about $140 million last year to keep the doors open, maintaining a staff of 138 people and paying its CEO more than $16 million in cash and stock. Meanwhile, the company has amassed more than $218 million in debt. “They’re burning cash like it’s 1999 here,” said Maxim Jacobs, director of healthcare research at the investment group Edison. The idea, according to Kadmon’s federal filings, is to keep the commercial arm up and running until the company can win marketing approval for its pipeline treatments, at which point it will become a fully integrated drug maker. But Kadmon acknowledges that its IPO, which seeks to raise about $100 million, will only get the company through 2017. At that point, its top drug candidates will remain years away from approval. Kadmon’s first big bet, a lung cancer drug called tesevatinib, has already come up short twice in clinical trials, forcing the company to pivot. The treatment is designed to fight lung cancer by blocking a protein called EGFR, which plays a role in tumor growth. But there are eight other drugs on the market that already do that for various cancers, including Erbitux. Kadmon tested its drug in lung cancer patients who had relapsed after other treatments; just 1 in 41 of them saw tumors shrink. The company’s new plan: using tesevatinib to treat lung cancer that has spread to the brain after patients have tried other EGFR inhibitors. There’s no proof yet that it’ll work; Kadmon is trying to recruit patients for a clinical trials. ‘I wouldn’t trust anything he would tell me’ But Waksal won’t be steering those efforts from the board room — because, legally, he can’t. The terms of his settlement with the SEC include a permanent ban on ever serving as a director of a publicly traded company. So Waksal quietly stepped down from Kadmon in February — but not without compensation. He is promised a $3 million severance payment, and that sum could balloon to nearly $25 million over the next three years if the company succeeds. He also retains about 76,500 shares in Kadmon and a 12.7 percent stake in the shell corporation that is the company’s majority owner. Now serving as Kadmon’s CEO is his younger brother, Harlan, who worked alongside Sam at ImClone for 19 years. But despite the shakeup in the C-suite, insiders say Kadmon is by all means a Sam Waksal endeavor. As one longtime biotech investor put it: “This is sort of like if Elon Musk stepped down from Tesla and his brother became the CEO. Do you really think it’s no longer an Elon Musk company?” As such, Kadmon is viewed on Wall Street in the context of its founder, a brilliant entrepreneur with a well-established penchant for untruths. On the one hand, no one disputes his ingenuity in identifying Erbitux’s potential, and ImClone’s investors did quite well for themselves while Waksal was in prison. On the other hand, Waksal went to prison. “Here’s a guy who can pick the right targets, and he knows the right investigators to do the right trials, but if something were to go wrong, I wouldn’t trust anything he would tell me,” a member of the biotech investment community said. Like many others, the insider spoke on condition of anonymity to preserve relationships within the industry. And that’s the Waksal paradox, one longtime friend said. He is adept at identifying promising drugs that others would pass over, but the combination of his criminal record and hyperbolic cheerleading leads people to doubt whether he’s telling the truth. Others, however, say the stint in prison has tamped down some of Waksal’s dicier tendencies to embellish. “I think Sam has learned his lesson,” said Robert Schneider, a New York University associate dean who cofounded ImClone and serves as a scientific adviser to Kadmon. “His grandiosity is what gets him into trouble, but he’s really dialed that back.” And despite his sometimes misguided exuberance, Waksal is at worst a stretcher of the truth, “not a pathological liar,” a former colleague said. “He’s a good guy, but there’s a mishegas there,” the executive said with a laugh, using a Yiddish term whose definitions range from eccentric to crazy. “That word was created in Yiddish for Sam.” ‘A dramatic mistake in judgment’ Harlan, Sam’s stand-in in the Kadmon corner office, has a rap sheet of his own, though it’s not related to biotech. Back in 1981, Harlan was a physician training at Tufts Medical Center. As he waited in line at the Ft. Lauderdale airport for a trip back to Boston, a pair of federal agents spotted him nervously scanning the terminal and pulled him aside for a search. Digging through his bag, they were met with three bags of cocaine and an exclamation of “How did that get there?” In Harlan’s pants, the agents found two more baggies, affixed to his underwear. It was a kilogram in total, enough to convict Harlan of possession with intent to distribute, which came with a nine-year prison sentence. But looking nervous is not grounds for search and seizure, Harlan’s attorneys argued, and a federal court of appeals agreed. In 1983, the court ruled that the cocaine in Harlan’s luggage and trousers was inadmissible evidence, reversing his conviction and letting him walk. “It was a dramatic mistake in judgment,” Harlan told Barron’s in 1993. (Like his brother, he declined to talk to STAT.) “I did it as a favor for someone, and it’s a favor I have obviously regretted.” But it’s not a mistake that precludes him from running a biotech company, one analyst not involved in Kadmon’s IPO said — though it doesn’t look great in Google search results. It takes all types to develop new treatments for disease. “There are a lot of people in the drug business who are in the drug business, too,” the analyst said. ‘He goes out of his way to try to screw them’ While Kadmon tries to focus on the future, both the company and its founder have been hit by lawsuits that could cost them. Walking out of prison in 2009, Sam Waksal had lost a lot his industry friends, insiders said, so he had to go to considerable lengths to raise money in the early days of Kadmon. That included reaching out to Anastasios “Tommy” Belesis, the man behind a “Wolf of Wall Street”-style boiler room who has since beenpermanently barred from trading securities. That relationship soon went awry. Belesis, who ran the now-defunct John Thomas Financial, is suing Kadmon with claims that Waksal pulled off a bait-and-switch to defraud him. Belesis says Waksal owed him 1 million shares of Kadmon but handed over just 120,000. When Belesis pushed back, Waksal offered to pay him $15 million out of pocket to drop the matter, documents show, and Belesis agreed to those terms. But then Waksal’s line went dead, leaving Belesis with no shares and no cash, according to the lawsuit. According to another complaint awaiting trial, Waksal promised a pair of investors a 6 percent stake in Kadmon in exchange for helping the company raise money. They did their part, and then Waksal skated on the deal, the suit claims. “It seems there’s a pattern of him basically reaching out and finding people to help him in raising money for his ventures, and then he goes out of his way to try to screw them,” said Stuart Meissner, an attorney representing the plaintiff in the second suit. (Belesis’s lawyer, who previously represented Bernie Madoff, declined to comment.) Kadmon already expects to pay $10.4 million to a different investor to settle allegations that Waksal breached an agreement, documents show. The company says the latest two lawsuits are without merit. Though he’s turned Kadmon over to his brother, Waksal hasn’t completely left the spotlight. In June, he made an appearance on CNBC to tell a story about the value of transparency. Three years ago, Waksal said, a journalist “accosted” him and asked him about Theranos, the now-disgraced blood testing outfit that has been loath to share data on how its technology works. “And I said, ‘If someone says, “It’s a secret” when you ask a question, it’s a scam,’” Waksal said. Kadmon appears less sold on the need for transparency. STAT sent emails and calls inquiring about the company’s pipeline of drugs, financial structure, and plans for the future to multiple members of the Kadmon’s management team. No one responded.