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.

This is what I wrote on the morning of March 4, 2010 with InterMune shares surging:

U.S. drug regulators kept the long knives in their scabbards when reviewing InterMune's lung drug pirfenidone, raising the odds for the drug's approval and sending the company's shares sharply higher Friday...

FDA staff, in a review posted to the agency's web site, questioned whether one positive and one negative study of pirfenidone in patients idiopathic pulmonary fibrosis (IPF) is enough to prove "substantial evidence" of efficacy enough to support the drug's approval.

Yet the FDA review didn't raise any new concerns with pirfenidone's efficacy or safety unanticipated by investors and acknowledged that IPF is a fatal disease with no effective treatments.

The FDA generally makes briefing documents, including the agency's internal drug review, available to the drug sponsor two or three weeks before the scheduled advisory panel. Likewise, the FDA also provides advanced copies of briefing documents to the outside experts invited to participate on the panel.

Obviously, these FDA materials contain valuable and stock-moving information, particularly in the hands of a trader who could appreciate how investors would react to a relatively benign FDA review of pirfenidone.

SAC hasn't been charged with any wrongdoing in connection with its InterMune trades so we don't know if the FBI and SEC are investigating if, for example, an SAC trader might have paid an expert sitting on the pirfenidone panel for early access to the FDA's briefing documents.

The SEC has charged Mathew Martoma, a portfolio manager with an SAC-affiliated hedge fund, with obtaining illegal insider information about the Elan and Johnson & Johnson Alzheimer's drug bapineuzumab from a doctor involved in a clinical trial.

We also don't know exactly when during the first quarter 2010 SAC purchased its InterMune stake. The fund's quarterly SEC filings only list stock holdings at the end of each quarter. Although presumably, the FBI and SEC have more insight into the timing of SAC's InterMune trades.

The FDA advisory panel met on March 9, 2010 and voted 9-3 to recommend the approval of pirfenidone for the treatment of IPF. The vote was considered tight and not altogether definitive, particularly since panelists were less sanguine with pirfenidone's efficacy. By just a 7-5 margin, the panelists voted to endorse the drug's benefit as clinically meaningful.

InterMune shares rallied further following the positive FDA panel vote. The stock rose another 60% to $38.39 on March 10. InterMune shares closed the first quarter at $44.57, valuing SAC's stake in the company at $84.7 million. The average cost basis for SAC's stake is not known.

FDA often but doesn't always concur with the recommendations made by its advisory panels. On May 5, 2010, FDA announced a decision to reject pirfenidone, asking InterMune to conduct another clinical trial before considering the drug as an IPF therapy.

InterMune shares slid hard, losing 75% of their value and closing at $11 per share on May 5, 2010.

At some point between March 31 and June 30, SAC sold slightly less than 1.9 million shares of InterMune, or roughly 99% of its position. If SAC sold the shares before May 5, the fund avoided a big loss since at no point in the first quarter did InterMune shares trade as low as $11 per share.

Only SAC -- and perhaps the Feds -- know if SAC's InterMune trading was the result or skill, luck or something more sinister.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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