ImClone Systems Inc. (IMCL) on Thursday won U.S. approval to sell Erbitux (search), the cancer drug at the center of an insider-trading scandal that landed the company's founder in jail and put Martha Stewart (search) on trial.

The Food and Drug Administration (search) said it had approved the injectable drug for patients with colon cancer that has spread to other parts of the body. Ironically, the victory was somewhat upstaged by suspicious trading of ImClone shares.

Erbitux is the first commercial product for New York-based ImClone, whose image and share price were battered by a regulatory setback in late 2001 that led founder and former Chief Executive Sam Waksal to attempt to dump ImClone shares before the bad news was announced.

Bristol-Myers Squibb (BMY) agreed to pay ImClone $1.9 billion for U.S. rights to co-market the drug and for a stake in the biotech company. It will pay ImClone a 39 percent royalty on U.S. sales.

ImClone shares plunged 23 percent on the Nasdaq before the FDA announcement, for unexplained reasons, triggering an investigation by Nasdaq. The shares rebounded to $46.97 in after-hours trade on Thursday, above Wednesday's close of $43.10.

Bristol-Myers edged down 14 cents to $29.89 on the New York Stock Exchange, amid a slight downturn for the drug sector.

"There will be substantial demand for Erbitux, but insurers will carefully monitor its use if it is extremely expensive," said Dr. Len Lichtenfeld, deputy chief medical officer of the American Cancer Society.

Lichtenfeld said he would not be surprised if the drug is at least as expensive as Gleevec (search), a leukemia drug sold by Novartis AG that costs more than $25,000 a year. Neither Bristol-Myers nor ImClone could immediately be reached for comment on the price.

Erbitux blocks receptors to a protein called epidermal growth factor found on many types of tumor cells. It was cleared for use with Pfizer Inc.'s cancer drug Camptosar (irinotecan), or alone if patients cannot tolerate Camptosar.

When used in combination with chemotherapy, Erbitux shrank tumors in 23 percent of colon cancer patients who had exhausted all other options.

"The ultimate commercial U.S. potential for the drug is probably between $1 billion and $1.5 billion a year," said analyst Brian Rye of Janney Montgomery Scott.

Rye said his forecast assumes Erbitux will win approvals for additional uses, such as for non-small-cell lung cancer.

ImClone had sought U.S. approval for Erbitux in 2001, but the FDA refused to accept that application, calling the company's main study sloppy.

That surprising setback led to the conviction of Waksal, ImClone's chief executive at the time, for insider trading, as well as obstruction of justice charges against home-decorating trendsetter Martha Stewart, who sold her own shares.

Erbitux won approval after ImClone gave the FDA data from separate trials conducted by its European marketing partner, Merck KGaA of Germany.

During the delay for Erbitux, rival drugmakers made progress in developing medicines that selectively target proteins linked to cancer, thereby avoiding serious side effects of standard chemotherapy drugs.

U.S. regulators are expected within several months to approve Avastin, a colon cancer treatment being developed by Roche Holding AG and Genentech Inc. that cuts off nutrients to tumor cells.

Other colon cancer drugs that target the same protein as Erbitux are a pill called Tarceva from OSI Pharmaceuticals Inc and the injectable ABX-EGF being developed by Amgen Inc. and Abgenix Inc.

Some analysts, including David Moskowitz of Friedman, Billings Ramsey, think the rivals will prevent Erbitux from becoming as big a seller as once hoped.

"Erbitux will have a tough climb to the billion-dollar level because of the number of competitors," said Moskowitz, adding that many doctors may consider Avastin more effective.

ImClone also said Thursday its board had named Daniel Lynch as chief executive officer. He had served as interim CEO since last April.