Congress to Put ImClone Under Scrutiny - TheStreet

Congress to Put ImClone Under Scrutiny

The House panel investigating Enron has launched an inquiry into the ImClone debacle.
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Updated from 2:29 p.m. EST

One of the congressional committees investigating

Enron's

(ENRNQ)

business irregularities has started an inquiry into

ImClone's

(IMCL)

handling of its cancer drug Erbitux.

In another stunning chapter to the ImClone saga, a committee of the U.S. House of Representatives said Friday that it is starting an investigation into the beleaguered biotech firm and the way it conducted clinical testing for the experimental cancer drug.

And now, sources close to the company say partner

Bristol-Myers Squibb

(BMY) - Get Report

, which owns 20% of ImClone and is angered by the Erbitux debacle, is beginning to exert more influence over ImClone's management. One rumor making the rounds is that Bristol-Myers may go as far as asking ImClone COO Harlan Waksal to resign. A company spokesman denies this, stating that "there are no senior-level departures."

Trading was halted in ImClone when news of the congressional investigation was released. When trading resumed, shares plummeted Friday to close down $8.93, or 30%, to $21.15. After hours, the stock fell another $1.71, to $19.28

The House Energy and Commerce Committee, led by Reps. Billy Tauzin (R., La.) and James Greenwood (R., Pa.), is asking many of the same questions of ImClone that investors have been asking since Dec. 28, when the Food and Drug Administration rejected the approval application for Erbitux.

Formal letters of inquiry from the House panel were sent Friday to ImClone, its partner Bristol-Myers Squibb and the Food and Drug Administration.

Questions About Waksals' Role

According to the letters, the congressmen -- who are also involved in the Enron investigations -- want to know whether ImClone CEO Sam Waksal and his brother and COO Harlan Waksal knew about the FDA

concerns with Erbitux all along but failed to disclose the information to investors or to Bristol-Myers.

In shades of the Enron investigation, the congressmen are concerned that the Waksals were offered sweetheart loans from the company last summer to purchase low-priced shares of ImClone stock. At the same time, the Waksals were negotiating a partnership with Bristol-Myers that allowed them to sell that stock for tens of millions of dollars. The Waksals'

windfall was reported first by

TheStreet.com

in September, when the ImClone-Bristol-Myers deal was announced.

But as first reported by the

Cancer Letter

, a Washington, D.C.-based cancer newsletter, the "refuse to file" letter sent by the FDA to ImClone on Dec. 28 says that regulators expressed serious concerns with Erbitux as early as August 2000. Specifically, the FDA told ImClone on several occasions that the clinical trial for Erbitux was "not adequate and well-controlled."

ImClone didn't disclose this information publicly until last week, when Sam Waksal made a presentation at the JPMorgan H&Q health care conference. And even when he did, he downplayed the FDA concerns, as reported in the

Cancer Letter

, insisting that Erbitux was an effective and safe drug and that ImClone would be able to address the FDA issues promptly.

One of the thrusts of the congressional inquiry will be to determine whether ImClone misled the public -- and investors -- into believing that all was well with Erbitux when in fact it was not.

Sharing Information With SEC

And in what could spell even more bad news for ImClone, the House panel is asking why the FDA shouldn't be able to share information with the

Securities and Exchange Commission

if the agency believes a company is not being truthful with the public.

"We have several serious concerns. Available information seems to conflict with ImClone's description of the contents of FDA's RTF letter and its clinical research. ... Without the

Cancer Letter

article, investors would have had to rely on ImClone's questionable descriptions of the RTF letter," states the congressional letter of inquiry sent to the FDA.

"The FDA's statute and regulations appear to inhibit the agency on its own from disclosing some, if not all, of the RTF letter or other similar, relevant information to the Securities and Exchange Commission when there are concerns about the accuracy and completeness of company's descriptions of FDA actions," the letter continues.

More than a dozen private class-action lawsuits have been filed against ImClone alleging that the company, indeed, did mislead investors.

The congressional panel is asking for all records relating to the FDA's rejection of the Erbitux approval application, as well as all records relating to meetings held between ImClone and the FDA concerning Erbitux.

Most interestingly, however, the panel wants to know "whether the FDA has had contact with the SEC on the ImClone/Erbitux matter, and, if there was contact, appropriate details about the nature of the contact," according to the letters of inquiry.

ImClone, Bristol-Myers and the FDA have until the end of January to comply with the House panel's request.

Meanwhile, sources close to ImClone say that Harlan Waksal could be resigning from the company. Waksal has come under intense scrutiny because, as the company's COO, he is ultimately responsible for shepherding the Erbitux approval application through the FDA.

But on Dec. 6, just three weeks before the FDA rejection, Waksal sold $50 million in company stock. ImClone defended the sale, explaining that Waksal needed to sell the stock to pay taxes, but investors, angry about the steep decline in ImClone's stock price, have questioned whether Waksal benefited from insider information.

While other ImClone executives, including Sam Waksal, have come to Harlan Waksal's defense, he has not made any public statements and was conspicuously absent from the JPMorgan H&Q health care conference last week.

A source familiar with the situation says Waksal might be considering resigning from ImClone, possibly spurred by pressure from Bristol-Myers. Waksal could be replaced by a Bristol-Myers executive or someone handpicked by Bristol-Myers.

ImClone executives could not be reached for comment. In a public statement, the company said it was cooperating with the congressional inquiry.