ImClone: A Real Blowup in Biotech

It was flying high until it ran afoul of the FDA

Is ImClone Systems Inc. (IMCL ) another Enron? After all, damaging disclosures about the high-flying biotech company's new cancer drug directly contradicted statements by its CEO. The stock nosedived, from $75 a share to $20 in the past month, after top executives made multiple millions by selling their shares near the peak. And on Jan. 18, the same congressional committee that's investigating Enron Corp. (ENE ) announced it is looking into the ImClone mess. On top of all that, the companies share a director, Dr. John Mendelsohn, president of MD Anderson Cancer Center in Houston and creator of the ImClone drug.

Here, however, the resemblances end. Far from being a showcase for accounting trickery, ImClone is a case study of the risky business that is biotech--and the arrogance and possible incompetence of a management team that underestimated those risks. In biotech, such failings aren't unusual. In the first two weeks of January, eight other biotech companies saw their stock prices tank after setbacks to key drugs. But because ImClone's Erbitux looked to be the most important new drug approval of 2002, its decline is the most dramatic.

ImClone still has one key factor in its favor: Virtually no doctors familiar with the drug call it a failure. "If you talk to the oncology community, the people who use it in trials for head and neck cancer will say this drug works," says Dr. Ronald Garren, publisher of the Biotech Insight investment newsletter and an oncologist who was involved in an Erbitux head and neck trial.

Also, no one is questioning the reputation of the doctors testing the drug. "These trials were conducted by the leading cancer centers in the world and the leading investigators in the world," says Gruntal & Co. analyst Cory Kasparov. The lead physician in the colon cancer trial submitted to the Food & Drug Administration, Dr. Leonard Saltz of Memorial Sloan-Kettering Cancer Center in New York, developed the standard chemotherapy treatment for colon cancer used around the world, commonly called the Saltz regimen. To protect his objectivity, Saltz from the start has refused to own ImClone stock.

In order to guard trade secrets it may be privy to, the FDA does not comment on products it is considering or the companies that make them. But for much of the past year, Erbitux' effectiveness has been praised by the cancer research community as the harbinger of a revolution in treatment--a shift toward targeted therapies that home in on cancer cells without harming healthy tissue. In preliminary clinical trial results reported by Saltz last May, 22.5% of colon cancer patients who had failed all other treatments responded to a combination of Erbitux and chemotherapy. Based on those results, the FDA granted Erbitux expedited review status. The data looked just as promising to Bristol-Myers Squibb Co.: In October, it paid $1 billion--$70 a share--for a 20% stake in ImClone.

These facts are well-established, but the intentions of ImClone CEO Samuel D. Waksal and his brother, COO Harlan W. Waksal, are harder to pin down. The company rushed to file a new drug application last year based on Saltz's second-stage clinical trial, although the FDA requires three stages of trials for most drug approvals. When the FDA announced on Dec. 28 that it would not accept ImClone's application, Sam Waksal said he was as shocked as the company's investors. This even though the agency had apparently been telling ImClone for months that it was concerned about the structure of the Phase 2 trial. "We thought any questions they might have we could answer during the review process," says Waksal.

Bad assumption. But it's not an unusual one, according to FDA staffers who decline to be quoted. They complain that drug companies often turn in sloppy applications. Indeed, many a drug review has been delayed because the FDA asked for more data. However, it is unusual for the application filing itself to be refused.

Waksal says the FDA wants more information on how doctors determined that the patients in their trials couldn't be helped with standard chemotherapy alone. That information is available, he says, but the company deemed it unnecessary to include it in the application. Wall Street now wants to know why he would think that. Waksal's judgment and credibility came under withering scrutiny when the FDA's letter detailing the reasons it refused the application was leaked to an industry newsletter. That missive, as reported in The Cancer Letter, stressed the need for thorough documentation of the treatment history of each patient. Plus, it said the clinical trial was not "adequate and well-controlled," even though Waksal had told analysts and reporters that the FDA had signed off on the trial. More worrisome still, the agency suggested new clinical trials might be needed to determine if Erbitux works on its own.

On this final point, though, it is the FDA's stance that doctors find worrisome. Erbitux was designed from the start to be used in combination with chemo, on the theory that the two together would work better than either one alone. Granted, a small trial of the drug as a stand-alone treatment reportedly had a response rate of 10.5%, high for a cancer drug. But that's still much lower than the 22.5% response rate when Erbitux is used in combination with the drug irinotecan. "The FDA usually insists that a drug show single-agent activity, but a lot of these new [cancer therapies] aren't designed to do that," says Garren.

Ultimately, most industry analysts believe Erbitux will be approved, though perhaps not in 2002. ImClone will meet with the FDA--most likely in late January--to discuss the problems with its application, and there is a faint hope that the problems will turn out to be easily remedied. But whatever happens, Waksal seems destined to put in an appearance in the chief executive Hall of Blame.

By Catherine Arnst in New York

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