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SAC's InterMune Trade Probe May Reveal Corrupted FDA Drug Review

BOSTON ( TheStreet) -- A U.S. probe into SAC Capital Advisors trading in InterMune (ITMN)raises the possibility that the U.S. Food and Drug Administration drug-review process was corrupted.

The FBI and SEC are reviewing InterMune trades in the first half of 2010 made by SAC, the $14 billion hedge fund managed by Steven Cohen, reports Reuters and Bloomberg, each citing anonymous sources.

SAC owned 1.9 million shares of InterMune at the end of the first quarter 2010, a new holding for the hedge fund, according to a regulatory filing. By the end of the second quarter 2010, SAC had reduced its InterMune stake to 10,983 shares, according to a regulatory filing.

These SAC trades bracketed a volatile three-month period for InterMune shares during which the company was seeking FDA approval for Esbriet, a new treatment for the progressive and fatal lung disease idiopathic pulmonary fibrosis. Esbriet was known as pirfenidone at that time.

Could SAC have received an insider tip about pirfenidone from someone at InterMune? Or did an FDA official working on the drug's review, or possibly an outside advisor to FDA, provide early, non-public information to a trader at the hedge fund?

FBI and SEC officials aren't disclosing details of their InterMune trading probe and no one connected with SAC has been charged with any wrongdoing in this matter.

But let's take a look back at the crazy March-May 2010 time period for InterMune to see how an investor might gain access to insider information about the secretive FDA drug-review and approval process.

Investors were largely skeptical about InterMune and pirfenidone at the start of 2010. The company had conducted two clinical trials in IPF patients that yielded mixed results and many questions about the drug's benefit, if any.

InterMune shares traded in a narrow $13-15 range through the first two months of 2010, ahead of a scheduled March 9 FDA advisory panel. At this panel, outside experts chosen by FDA would review pirfenidone efficacy and safety data and vote on whether or not to recommend the drug's approval.

On March 4, InterMune shares soared more than 60% from $14 to $23 after the FDA made public "briefing documents" in advance of the pirfenidone advisory panel meeting. These documents included the FDA's own clinical review of pirfenidone that was far less critical than investors had expected.

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