Rumors Over Erbitux Efficacy Still Hurting ImClone Systems

While most

ImClone Systems

(IMCL)

investors slept Tuesday night, some bad news was breaking in Europe. The company's German partner,

Merck KGaA

, was announcing a short delay in its plans to seek European approval for the cancer drug Erbitux.

So it didn't surprise ImClone investors to see their shares trading about 4% lower for most of Wednesday, especially on yet another weak day in the biotech sector. But then, just before 3 p.m. EDT, ImClone fell off a cliff, closing the day down almost 12% to $17.42 -- its lowest close since the end of February. In recent trading, ImClone had gained back 50 cents, or 2.9%.

What happened? Enter financial news network

CNBC

, which aired publicly a tidy nugget of negative news about Erbitux that has been making the rounds, quietly, among some of Wall Street's more aggressive biotech traders for the past two weeks.

CNBC

reported that doctors have gone back and reanalyzed Erbitux's ability to shrink tumors in patients suffering from head and neck cancer. And to their surprise, they found Erbitux to be much less effective than previously reported. The response rates are so poor, in fact, that real doubts are being raised about Erbitux's ability to gain approval as a head and neck cancer treatment.

Is

CNBC's

report true? Well, investors won't know for sure until the upcoming meeting of the American Society of Clinical Oncology. There, ImClone will report final results from a phase II study that tested a combination of Erbitux and the chemo drug cisplatin in patients suffering from advanced stages of head and neck cancer.

TheStreet.com

first got whiff of this "revised" analysis of the Erbitux head and neck cancer data two weeks ago as researchers gathered in San Francisco to attend a meeting of the American Association for Cancer Research. At the time, the hot Erbitux tip was secondhand, albeit from a very reliable biotech fund manager, and someone with no position in ImClone at that time. But the bad news couldn't be confirmed, so it was socked away in the rumor drawer.

And there it stayed, until

CNBC

aired its report Wednesday afternoon. ImClone bulls were stung badly, and here's why:

Knowledgeable ImClone investors should recognize the above-mentioned Erbitux study in head and neck cancer because preliminary results were released at last year's ASCO meeting. Early findings from 22 patients were impressive -- a 23% response rate. What made the Erbitux results look even better was that these 22 patients had failed two previous courses of chemotherapy. In medical lingo, these patients were refractory to existing chemo treatments and their cancer was getting worse.

The Food and Drug Administration in late December rejected ImClone's approval application for Erbitux as a treatment for colon cancer. When the FDA's refuse-to-file letter was made public in January, it was revealed that regulators had major concerns with the way ImClone classified some of the patients in its key colon cancer clinical trial.

Simply put, some patients deemed refractory to previous chemo treatments by ImClone and its researchers may not have been refractory after all. This made it impossible for the FDA to evaluate Erbitux's benefit separately from the other drugs given to patients. ImClone is now going back to reconstruct patient records in an attempt to prove that all its colon cancer patients had, indeed, failed previous chemo treatments.

But while ImClone works to salvage its Erbitux approval application for colon cancer, the company also has reportedly gone back and re-examined patients in its head and neck trial. And this is where the current troubles might be cropping up.

A significant number of patients could have been thrown out of the head and neck cancer study. As a result, the final Erbitux response rate in truly refractory patients might be approximately 11%, not 23% as previously reported in the earlier sampling, sources tell

TheStreet.com

.

And an 11% response rate is no great shakes, especially because ImClone has said previously that the minimum bar for approval is a response rate closer to 15%.

That could explain the big selloff in ImClone on Wednesday. It's also likely a partial factor in the 25% fall in ImClone's value since the second week of April, when the chatter began spreading about the reduced Erbitux response rates.

Some Wall Street biotech mavens are extrapolating further, figuring that if Erbitux is not proving to be as effective in head and neck cancer, there also stands a good chance that the drug is showing similarly reduced efficacy in colon cancer patients.

But again, is all the talk true? Or, are skittish investors dumping ImClone stock erroneously on bad information? No one can be 100% sure until the ASCO meeting begins on May 18.

ImClone's European partner, Merck KGaA, is also testing Erbitux in head and neck cancer, with final results to be unveiled at this year's ASCO meeting. Merck's phase II study is very similar to the one performed by ImClone, except that it was larger and enrolled patients with more chemo-resistant cancer.

Merck's ASCO research abstract is still under wraps, covered by the medical association's embargo.

TheStreet

has learned from several Wall Street sources who have seen it that the preliminary response rate is within a hair of the 15% response rate threshold. Final results will be made public next month at the ASCO meeting.

ImClone investors, understandably nervous, will just have to wait another three weeks before the rumors and gossip end, and real fact-finding begins.