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Red flags at ImClone
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January 25, 2002: 4:00 p.m. ET
Research firm says company knew Erbitux was ineffective as early as August.
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NEW YORK (CNN/Money) - As shares of embattled drugmaker ImClone Systems Inc. plunged even further Friday, a research firm specializing in health care and biotechnology said ImClone knew its proposed cancer drug was ineffective months before regulators rejected its approval application.
According to Sterling Financial Investment Group, clinical trial data showed the colorectal cancer drug, expected to be marketed as Erbitux, did not have the patient response required for Food and Drug Administration approval but was still being touted as a blockbuster by the company and Wall Street analysts.
Steve Kirsch, who leads institutional equities sales at Sterling, said according to data obtained by Sterling, the drug showed no complete responses - no patients went into remission - and 15 percent partial responses.
Kirsch said a typical approval would have 2.5 percent complete responses and more than 35 percent partial responses.
"We believe the FDA told them [of the problems] in August, yet the company kept on going, stating to the sell-side analysts that things were on track," he said.
Sterling published a investment report on ImClone with a "sell" rating on Oct. 30. The application for Erbitux was rejected on Dec. 28.
Shares of ImClone (IMCL: down $3.08 to $16.50, Research, Estimates) dropped more than 14 percent in Friday trading after ImClone confirmed informal federal investigations and that one of its newest board members had left the company. The shares have lost more than 60 percent of their value since the day before the FDA rejection of the drug's application.
The company said in a regulatory filing that it had "received an informal inquiry from the Securities and Exchange Commission and inquiries from the Justice Department and the [U.S. House] Subcommittee on Oversight and Investigations of the Committee on Energy and Commerce."
ImClone said it is cooperating in all the investigations. The company had already acknowledged the congressional investigation on Jan. 18.
ImClone also said in an SEC filing that Peter Peterson, chairman of New York investment bank Blackstone Group and a recent board member, had resigned his position with the drug company.
The company had no further comment on either filing and did not immediately return calls seeking a response to Sterling's comments.
Misleading statements?
The week of Jan. 7 ImClone was hit by a barrage of lawsuits contending the company made false statements about the reasons for Erbitux's rejection.
Seven suits came on Jan. 9 after the company's presentation at a health care conference, where ImClone CEO Samuel Waksal told analysts and investors the rejection was "not an insignificant problem," that certain data did not exist and that the company "screwed up."
But on Dec. 31, just after the rejection, Waksal had said in a conference call the problem with Erbitux was mainly documentation, not a reflection of the effectiveness of the drug, and the company still planned to resubmit the application in the fourth quarter of 2002.
"The moment Sam Waksal said in his conference call it was more or less a paper trail, documentation that was the problem, we said, 'We've got this guy, he's completely lying,'" Sterling's Kirsch said.
"This is why there are investigations, because these guys are lying," he said.
Waksal said on Jan. 9 he disclosed all the FDA's major concerns soon after receiving the bad news.
But a Jan. 4 report in the Cancer Letter detailed excerpts of the FDA's refuse-to-file letter, which contained a list of "concerns that went far beyond record keeping," the letter stated. The FDA's concerns included Erbitux's effectiveness in combination with Campostar, another cancer drug, and the number of patient deaths following treatment with Erbitux. The company reported that only three patients died within a month of their last Erbitux treatment. The FDA found that 21 patients died within a month of their last use, according to the letter.
Complicating the company's Erbitux application and subsequent reaction are concerns of insider selling. ImClone's chief operating officer, Harlan Waksal, shed 700,000 company shares at about $71 per share, or a total of $50 million, weeks before the FDA issued the refuse-to-file response, the letter stated. The company submitted its application for Erbitux on Oct. 30, 2001. A day before, company executives sold a combined 2.1 million shares to Bristol-Myers Squibb for $150 million, as part of its agreement to market Erbitux with Bristol-Myers. Sam Waksal sold 814,674 shares and Harlan Waksal sold 776,450 shares on Oct. 29, more than 20 percent of each of their holdings, and the first sale by either executive since the mid-1990s, the letter stated.
The ImClone trouble is also bad news for drugmaker Bristol-Myers Squibb, which made a $1 billion investment in the company for 20 percent of the stock and was expected to co-market Erbitux.
"I think you can surmise Bristol-Myers didn't do all the due diligence that they should have," Kirsch said.
The company could now be looking to cut its losses and back out of the ImClone situation.
Thursday Bristol-Myers (BMY: down $0.61 to $46.24, Research, Estimates) told the Wall Street Journal that $735 million in charges that it took in the fourth quarter were to write down the value of that investment, and that the company will study whether further charges will be needed.
Bristol-Myers did not return calls requesting comment. 
-- from staff and wire reports
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