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ImClone Could Be Facing More Trials -- and Tribulations

Belief is growing that the biotech may have to do new clinical trials before the FDA approves Erbitux.

Shares of

ImClone Systems

(IMCL)

fell another 7% Wednesday on fears that the company's revised time line for its delayed cancer drug Erbitux is unrealistic.

On a Monday morning conference call, ImClone executives were

cautiously optimistic that the company could satisfy the concerns of the Food and Drug Administration by the end of the first quarter without conducting new clinical trials. If that happens, Erbitux could be approved by October or November, instead of April, as previously expected.

But there's another, nastier scenario, that is picking up steam. As first discussed by

TheStreet.com

last week, ImClone's problems with the FDA could run much

deeper than what's being disclosed. Drug regulators could ultimately ask ImClone to provide new clinical data for Erbitux. That would force ImClone to essentially redo its entire approval application and resubmit at the end of 2002. If that happens, the FDA wouldn't approve Erbitux until the middle of 2003.

ImClone shares were off $3.12, or 6.8%, to $43.33 in recent trading. The stock has now fallen almost 40% since rumors of trouble surfaced in the middle of December.

Wednesday morning, Stephens biotech analyst Jason Zhang downgraded ImClone to outperform from buy, based on his belief that the latter scenario is a real possibility. Zhang's research note does a good job of explaining the issues at hand and the further risk to ImClone and its shareholders. (Zhang's firm doesn't have a banking relationship with ImClone.)

Scrutinizing the Study

The key issue: Were patients in the Erbitux clinical trial truly as sick as ImClone claims? If they weren't, then claims about Erbitux's efficacy will be called into question.

"The key to analyzing

Erbitux data lies in defining whether patients admitted to the trial are truly refractory to first-line therapy," Zhang writes, referring to patients who had failed all previous chemotherapy treatments. "The

FDA clearly considered it fundamental and that is probably why it refused to conduct further analysis of the data when this question cannot be properly assessed without proper documentation of hard evidence."

ImClone executives insist that patients in its trial were refractory to other colon cancer drugs, and that each patient's worsening medical condition was essentially triple-checked and confirmed by their own researchers as well as an independent radiology group. The problem is that the documentation to support these conclusions -- mainly annotated patient X-rays -- was not provided to the FDA, says ImClone.

But Zhang believes that the FDA, when it gets these patient X-rays and has new doctors take a look at them, might come to different conclusions. Some patients could be disqualified from the study, which would reduce the percentage of patients who respond to Erbitux.

"As always, the FDA's analysis of clinical data will be more stringent than a drug sponsor's. We also expect

ImClone to hold the standard even higher when it redocuments the hard evidence," he says. "These two factors may lead to a final count of responses lower than the previously reported 22.5%, making approval of this drug less likely. As such, we have lowered our prediction of approval from a previously larger than 50% to less than 50%."

If the FDA rejects Erbitux, ImClone will have to refile its approval application with new test data from clinical trials that are currently under way. But this new filing wouldn't be ready until the end of 2002, giving the FDA until the middle of 2003 before it makes a decision, Zhang believes.

At this point, ImClone investors are probably wondering what's going on. After all, ImClone has been a Wall Street darling for almost all of 2001, rising from $38 one year ago to nearly $74 in early December. Erbitux and its potential as a billion-dollar blockbuster made the cover of

Business Week

; the drug was also featured on a segment of

TST Recommends

CBS'

"60 Minutes."

But in reality, the risk was always there, it was just buried under the promotion. From the outset, ImClone gambled with Erbitux by trying to get the drug approved based primarily on the results from a single, uncontrolled and open-label study enrolling relatively few patients.

Erbitux is designed for use in colon cancer with irinotecan, an existing chemotherapy drug. This combination therapy was used on all patients in the clinical trial because the company claims that patients were not responding to irinotecan alone. But if patients were, in fact, responding to irinotecan, then there's no way of proving just how big an impact Erbitux had on response rates.

This is why most drug companies base their approval strategies on the results of more stringent, controlled studies that can answer these questions. Drug companies also generally test experimental drugs alone, to make sure they indeed have an effect.

ImClone is not the first drug company to employ this approach and, in fact, the FDA has approved other cancer drugs submitted in this way. But ImClone took the strategy to its outer limits, and that gamble might be haunting it now.

One hedge fund manager, who's been long ImClone, believes the FDA is concerned that ImClone is essentially lowering the bar on the requirements for drug approval. The agency's decision to refuse to accept the Erbitux approval application was a signal to ImClone -- and to other biotech companies hoping to follow in its path -- that regulators are going to expect extremely compelling and strong data before they approve any drugs in this way.

"The FDA is in a box because it signed off on ImClone's strategy," he says. "Now that they realize they made a mistake, the only thing they could do was to issue a

refuse to file letter and make ImClone come back with stronger documentation."

ImClone has conducted a test of Erbitux alone in colon cancer patients to bolster its case with the FDA. But while company executives say results of that test were submitted to the agency, the results have never been made public.

That strikes many biotech observers as odd because a positive showing in this "single-agent" trial would help allay concerns that Erbitux isn't much more than a placebo.

Another worry is the lack, so far, of any supportive comments from ImClone's partner,

Bristol-Myers Squibb

(BMY) - Get Report

. Again, ImClone executives insist that Bristol-Myers is still very much committed to Erbitux, but executives from the drug giant were absent from ImClone's Monday morning conference call.

A Very Timely Sale

Also on that call, a contrite ImClone CEO Sam Waksal pledged to rebuild credibility with investors and Wall Street. But despite this promise, his brother and company COO, Harlan Waksal, raised eyebrows by selling a huge stake in the company just weeks before the bad news came down from the FDA.

Harlan Waksal filed a Form 144 with the

Securities and Exchange Commission

on Dec. 6, announcing his intention to sell 700,000 shares of ImClone stock. The stock was valued at just under $50 million at the time of the filing.

ImClone spokeswoman Andrea Rabney says Waksal is being forced to sell his shares to come up with enough cash to pay substantial taxes racked up from his prior exercise of stock options and his tendering of shares to Bristol-Myers, which netted him $54 million in October.

And because Waksal didn't want to sell his shares, Rabney explains, he entered into a forward sales contract that gives him a percentage of the cash value of the shares up front but still allows him to control the shares and defer tax payments for another two years. Simply put, Waksal gets less than what the stock is worth today, but he also limits the downside risk if ImClone stock price drops.

But that's precisely why this deal, while perfectly legal, smells funny. Waksal filed to sell his shares on the same day that ImClone hit its 52-week high of $75.45. It's been downhill from there, with the FDA delay pushing shares below $44. The timing of the filing is especially worrisome because by the first week of December, ImClone and its investors were anticipating a response from the FDA.

Rabney acknowledges that investors might speculate about the timing of Waksal's stock sale, but she says that neither he, nor anyone else at ImClone, had any prior knowledge of the FDA decision before it was announced on Dec. 28.

As originally published, this story contained an error. Please see

Corrections and Clarifications.