FDA Tells ImClone to Take a Chill Pill

Sam Waksal, CEO of ImClone Systems , has predicted many times in public that his company's highly publicized but still experimental cancer drug, Erbitux, "is going to be one of the biggest drugs in the history of oncology."

Friday night, that boast was put on ice -- at least temporarily.

In a stunning rebuke to Imclone and its partner Bristol-Myers Squibb , the Food and Drug Administration refused to accept the application for approval of Erbitux, which the companies filed on Oct. 31.

The approval and launch of Erbitux to treat colon cancer patients was ballyhooed as the biggest biotech success story of early 2002. Not anymore. The FDA has thrown that timeline out the window, raising the real possibility that this potential blockbuster of a drug doesn't see pharmacy shelves until well into 2003 or beyond.

ImClone issued a public statement about the FDA rejection at 7:14 p.m. EST Friday night, confirming almost two weeks of negative rumors that had driven shares of the biotech company lower by 21%.

ImClone closed Friday at $55.25 per share. The stock fell another $5.25, or 9.5%, to $50 per share, in after-hours trading.

Waksal was quick to start damage control, telling Reuters Friday night that the FDA refused to accept the Erbitux application because the agency wanted more "annotation and measurement" information about how Imclone conducted its clinical trials.

Specifically, Waksal told Reuters, the FDA wants ImClone to shed more light on how the company verified that patients in its clinical trials had failed previous drug therapies. Regulators also want to verify that Erbitux was actually responsible for shrinking patients' tumors.

Waksal insisted that Erbitux's safety and efficacy are not being called into question, and that the additional information will take only six weeks to 10 weeks to compile. The company's hoped for April 2002 approval and subsequent May launch of the drug will now likely be delayed only until the third quarter, he told Reuters. (Company officials did not return calls for comment from TheStreet.com Friday night.)

But all this might be wishful thinking on Waksal's part.

The ImClone CEO has been very vocal about not only Erbitux's potential as a multibillion dollar drug, but in how quickly the FDA would issue an approval. Beginning in June, ImClone filed what is known as a Rolling Biologic License Application for Erbitux, meaning the company submitted its application piecemeal as each section was completed. By doing that, ImClone executives told TheStreet.com at that time, the company would get continuous feedback from the FDA on the status of the application, thereby avoiding unforeseen problems and speeding up the approval process.

But if ImClone was working so closely with the FDA on Erbitux's application, why are regulators now surprising ImClone and its shareholders with new requests for information?

Waksal's statement that the FDA is now looking deeper into the way ImClone conducted its clinical trial for Erbitux and apparently questioning the company's results, suggests regulators are, in fact, concerned about Erbitux's safety and efficacy. Simply put, the FDA wants to make sure that Erbitux does what ImClone claims it does.

This supports the long-standing bear case against the drug. ImClone critics concede Erbitux appears to be a real drug, but they say the company has taken short cuts in its clinical trials and hasn't provided enough evidence to support its approval. The FDA, they believe, is likely to ask Imclone to submit additional testing data for Erbitux, a process that could dramatically delay the drug's approval.

One hedge fund manager who's been shorting ImClone says his sources tell him that there's a power struggle within the FDA concerning Erbitux. More risk-tolerant regulators within the agency were pushing to accept the drug's application as-is, but their risk-averse colleagues were not impressed and wanted to wait until ImClone completed more extensive and robust clinical trials of Erbitux, some of which have started, and others which are expected to start soon.

"[Friday's] decision by the FDA lends credence to what I was hearing, and tells me that the slow-moving, bureaucratic side of the FDA won out," he says. "This could be very bad for Imclone," he adds, because regardless of what the FDA requests from Imclone to get its application accepted, regulators could be signaling that they will want still more clinical trial data before they actually approve the drug.

If that happens, Erbitux might not be approved until well into 2003 or beyond.

And, of course, what's bad for ImClone is bad for Bristol-Myers Squibb, the struggling drug giant that bet $2 billion on Erbitux in September to resurrect its flagging cancer drug franchise. Bristol-Myers took a 20% stake in ImClone and secured marketing rights to Erbitux, giving it 40% of the drug's eventual profits. Some Wall Street drug analysts questioned the high cost of the deal when it was announced, but Bristol-Myers defended the move, insisting that its own due diligence led it to believe that Erbitux would be approved early in 2002.

Oh well, so much for that due diligence.

"How stupid does Bristol-Myers look now," says another hedge fund manager. "Investors believed that Bristol-Myers and ImClone were going to stroll right into the FDA and get Erbitux approved without any questions. Well, what the FDA made clear [Friday] is that it's not about to just bend over." This hedge fund manager is short ImClone and has no position in Bristol-Myers.

As ImClone shares sink because of the Erbitux delay -- no matter how long it ends up being -- investors who are losing money also are going to be reminded that Sam Waksal, his brother and company COO Harlan Waksal, as well as other Imclone executives, already have hit the best kind of jackpot -- tens of millions of dollars in cash that isn't impacted one bit by Erbitux's problems.

As part of Bristol-Myers' tender offer for 20% of ImClone, the company's executives were able to cash out a significant portion of their shares -- something first reported by TheStreet.com in September. Sam Waksal's take: approximately $36 million, according to company documents filed by the SEC. Harlan Waksal cashed out to the tune of $54 million, while company chairman Robert Goldhammer netted $25.5 million.

Ordinary investors also won because they were able to sell roughly 20% of their ImClone stake to Bristol-Myers, and at a healthy premium. But investors didn't get their ImClone shares for free, as did the Waksal brothers and other company executives -- who benefited mightily from stock purchases last summer financed with loans from the company -- at the same time they were negotiating the Bristol-Myers deal.

ImClone executives scheduled a conference call for analysts and investors Monday morning to discuss the Erbitux delay in more detail, and hopefully, to end the rampant speculation that has dogged the company for two weeks.

CIBC World Markets biotech analyst Matt Geller said he believes any delay will be short and will not require additional clinical trials. Of course, Geller said earlier that he believed the FDA would accept the Erbitux application. (Geller rates ImClone a strong buy and his firm hasn't done underwriting for the company.)

Merrill Lynch biotech analyst Eric Hecht also downplayed problems. In a research note written Thursday, Hecht said FDA "refuse to file" letters are common and that any problems ImClone might be having would likely be minor and easily corrected. (Hecht rates Imclone buy and his firm has done underwriting for the company.)

Another source -- someone familiar with the Erbitux clinical trials and who correctly predicted the delay before the rumors hit Wall Street -- told TheStreet.com he also believes the delay is relatively minor. The source has no position in Imclone.

"ImClone was not able to audit some of its clinical trial data on time, as it was supposed to be," he says. The company can get this done relatively quickly, which should satisfy FDA concerns and allow the Erbitux application to be accepted, he added.