SAN FRANCISCO -- ImClone Systems ( IMCL) knew as early as 1999 that U.S. drug regulators had concerns about its approval application for its highly anticipated Erbitux cancer drug but did nothing to address the issues.

This acknowledgment of a massive blunder was the highlight of ImClone CEO Sam Waksal's presentation to a packed house of Wall Street fund managers at the JPMorgan H&Q health care conference Wednesday morning.

Bottom line: ImClone is trying its best to fix theErbitux mess, but it has no confidence it can do so.If everything goes right, the biotech could refile itsErbitux application in a few months. If not, thecompany will have to start from scratch, forcing adelay of at least a year.

If that sounds exactly like what Waksal said nearly two weeks ago, you're right. That's why some fund managers who attended a presentation and breakout session were dissatisfied.

"It was a complete circus," said one hedge fundmanager who has no position in ImClone right now."It's clear they don't know what they're doing."

Said another fund manager, someone who until recently was an ImClone bull but has sold his stake: "ImClone still hasn't come clean; they're stillglossing over major issues."

Shares of ImClone fell $5, or 13.6%, to $31.85 Wednesday. ImClone was trading fairly flat until the presentation began at 1:30 pm EST, then the stock sold off aggressively.

A tired-looking Waksal cracked a few jokes during his 30-minute presentation but acknowledged sleeping little since the Food and Drug Administration rejected Erbitux on Dec. 28. And who can blame him when you have to stand up in front of thousands of professional investors (there were two overflow rooms where the presentation was piped in) and say: "We put together a faulty BLA biologic license application package, and we screwed up."

Waksal says the FDA issued its refuse-to-file letter for Erbitux because the agency was not provided with complete documentation -- mainly annotated patientX-rays -- that would conclusively prove that coloncancer patients in its clinical trial were refractory, that is, that other drug therapies had failed them.

This disclosure wasn't new, but what followed was:Waksal acknowledged the FDA made it very clear toImClone -- as early as 1999 when the company wasgetting ready to start its pivotal clinical trial --that the absence of this documentation of patient"refractory-ness" (Waksal's term) was anabsolute deal-breaker. In other words, if ImClonedidn't provide this information, the FDA was not goingto accept the Erbitux application.

ImClone began its clinical trial in the third quarterof 1999 and completed it in March 2001. Butinstead of making sure ImClone's doctors and anindependent panel of radiologists and oncologists puttogether the necessary documentation for the FDA, thecompany did nothing.

ImClone had several follow-up conversations with theFDA, starting in August 2000, during which this issue cameup, says Waksal. But again, ImClone did nothing.

The Crucial Question

Why? Waksal didn't say.

The lack of that answer is whathas fund managers scratching their heads -- and sellingImClone stock. The company had ample warning and time tomake sure that it could satisfy FDA regulators, but, for some mysterious reason, it failed to do so.

Waksal, instead, tried to explain how ImClone is goingto fix the problem.

First, the company expects to meetwith the FDA within the month to clarify all theoutstanding issues. Then it will attempt toreconstruct the necessary documentation from the rawfiles, says Waksal. A new panel of independent doctorswill go over the original X-rays and determine whetherpatients were refractory to existing chemo treatments,and whether they actually responded to Erbitux.

But Waksal made it clear that ImClone was notsure this backward approach was possible, or if theFDA would allow it.

"If we can't put together the information that the FDArequires, we will have to do new clinical trials," hesaid.

This raises the possibility that ImClonewill be forced to drop its plan to get Erbituxapproved for colon cancer patients. Instead, thecompany could use data from completed trials in headand neck cancer to file an entirely new approvalapplication with the FDA. But if this alternate planbecomes necessary, ImClone won't be in a positionto refile until the end of 2002.

During ImClone's breakout session with fund managers,Waksal was asked about this scenario. He didn't ruleit out, although he said the company's focus now wason trying to fix the Erbitux application for coloncancer.

The 30-minute breakout session was jammed, andfund managers were clearly ready to challenge Waksal'sstatements. Questions were asked about the role of Bristol-Myers Squibb ( BMY), ImClone's Erbitux partner.

One question was whether Bristol-Myers had access to the complete approval application before it was filed; the CEO said he didn't know.

Waksal was also asked about the appropriateness of his sale of $36 million of ImClone stock as part of theBristol-Myers deal. The same questioner asked, too, about the insider-selling activities of the CEO's brother andcompany COO Harlan Waksal, who has now sold more than$100 million in ImClone shares.

Sam Waksal defended himself and his brother, callingthe stock deals "appropriate."

Harlan Waksal was not present to speak forhimself. His absence was noted by many fund managersin the audience, especially because, as ImClone's COO,he would be the executive responsible for making surethat the Erbitux application process was completedcorrectly. While Sam Waksal insisted thatBristol-Myers was still very much on board, executivesfrom the drug giant also were missing in action.

At one point during the Q&A session, the CEO peeredout into the audience and asked a questioner toidentify himself.

"Who am I talking to?" Waksal asked.

"You're talking to all of us," someone yelled out.

At this point, no one likes what they're hearing.

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