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Is That Daylight for ImClone?

ImClone Systems' long slog out of the wilderness may finally be near the end. On Nov. 13, the drugmaker's European partner, Merck KGaA, announced that Switzerland has approved ImClone's controversial colon-cancer-fighting drug Erbitux -- the first country in the world to give the drug the green light for sales.

Switzerland is a tiny market, of course, and ImClone (IMCL) itself will receive only 7% to 8% of the drug's sales there under its agreement with Merck. But the approval helps to refurbish Erbitux's reputation, after the U.S. Food & Drug Administration refused to consider the drug for approval two years ago. That unexpected refusal -- and the stock's sudden drop -- led to charges of insider trading involving company founder Samuel Waksal and his friend Martha Stewart.

In a statement, the company called the Swiss decision "a significant achievement for ImClone Systems." Final approval is expected within 30 days, ImClone added. Swiss doctors will be able to administer Erbitux in combination with the standard chemotherapy drug irinotecan. "Financially, this isn't that big of a deal for ImClone," says analyst Brian Rye of Janney Montgomery Scott. "It's a lot more important to them psychologically."

MILESTONE REWARDS. The Swiss news came on the same day that ImClone announced a 57% increase in third-quarter revenues, to $23.6 million. ImClone has no products on the market but receives revenues in the form of payments from Merck and Bristol-Myers Squibb (BMY) when its drugs hit certain milestones on the path to approval.

It also earns licensing royalties for some of its technology. And although ImClone has never reported a profit, its third-quarter loss was smaller than Wall Street had been expecting. It was in the red for $16.5 million, compared with $42 million in the same period a year ago.

The earnings news and the Swiss approval combined to send ImClone's stock up almost 6%, closign at $37.50 on Nov. 13. The same day, Standard & Poor's announced it will maintain its buy rating on ImClone stock.

Will the U.S. be next to approve Erbitux? Hard to tell. The FDA accepted the Erbitux application on an expedited basis in October, meaning it must reach a decision within six months. But the agency publicly insists that it doesn't consider approvals in other countries when considering an application, and drugs have sometimes been available for years in Europe before winning approval in the U.S.

NEWS IN REVIEW. However, the agency is under tremendous pressure from patients and clinicians who want access to the drug. Colon cancer is the second-biggest cancer killer in the U.S. after lung cancer, and the current chemotherapy regimen for late-stage patients is extremely harsh.

Erbitux is one of the first of a new generation of targeted therapies meant to kill off tumor cells without serious side effects. Cancer specialists and investors both had high hopes for the drug until December, 2001, when the FDA refused to consider ImClone's first approval application for Erbitux, saying the clinical trial data was incomplete. The news sent the stock into a spiral -- dropping from $70 to less than $10 in a matter of months. The Justice Dept. later charged both founder Waksal and domestic doyenne Stewart with selling shares before the FDA rejection became public.

Waksal pleaded guilty and started serving a seven-year jail term this summer, while Stewart, who has maintained her innocence, is slated to go on trial on obstruction-of-justice charges in January.

MIXED SIGNALS. Yet, ImClone and U.S. Erbitux partner Bristol-Myers Squibb were able to rehabilitate their application after submitting data from clinical trials conducted in Europe. Analysts are now scrutinizing the FDA's every move regarding the drug, trying to divine its intentions. The trouble is, the signals have been anything but clear.

One of the most confusing was the agency's announcement on Nov. 4 that Erbitux won't be considered when the agency's advisory panel of outside cancer experts convenes in December. Sounds bad on its face, but analysts point out that this could also mean that the FDA believes that the clinical trial data for Erbitux is already so strong that no panel consideration is necessary.

That was the case with Millenium Pharmaceutical's (MLNM) Velcade, a multiple myeloma drug approved earlier this year. But Janney's Rye cautions that it would be unusual for the FDA not to rely on its advisory panel for guidance a radically new drug, and it may just want more time to evaluate the application. "That said, we do believe the drug should win approval in the first quarter of next year," he adds.

If not, patients could travel to Switzerland, where Merck says the drug will be available by January. But if FDA approval isn't far off, ImClone's fortunes and reputation may be in for a turnaround in 2004. By Catherine Arnst in New York

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