U.S. regulators on Wednesday approved ImClone Systems Inc.‘s colon cancer drug Erbitux to treat head and neck cancer in cases when surgery is not an option or standard chemotherapy fails.

Approval by the U.S. Food and Drug Administration for the additional use of Erbitux provides an immediate shot in the arm for ImClone as it triggers a $250 million milestone payment to the biotechnology company from marketing partner Bristol-Myers Squibb Co. as part of their 2001 deal.

It also marks the first new therapy for head and neck cancer since the 1950s.

“We consider this approval an important advance in the treatment of head and neck cancer because it has been shown to help some patients live longer,” said Steven Galson, head of the FDA’s drug division. “Patients need as many effective treatment options as possible.”

The agency estimates about 29,000 new cases of the cancer occur each year in the United States.

German Merck, which sells Erbitux in Europe under a licensing agreement with ImClone, said last week it expects European regulators to also approve the drug to treat head and neck cancers.

ImClone, which last month said it was exploring the possibility of selling the company, reported fourth-quarter Erbitux sales of $121.2 million. Under terms of its deal with Bristol, ImClone gets about 39 percent of Erbitux sales revenue, analysts said.

Brian Rye, an analyst for Janney Montgomery Scott, estimated head and neck cancer will bring additional annual sales of between $300 million and $400 million within four or five years.

“Head and neck is a smaller indication than colorectal cancer, but it’s a sizable market and there’s not a lot out there in terms of novel treatments,” Rye said.

Erbitux has faced fierce competition from Genentech Inc.‘s colon cancer drug Avastin, which has seen sales far surpass those for the ImClone drug. Avastin had fourth-quarter U.S. sales of $359.1 million.

The FDA said it based its decision on a study that showed Erbitux with chemotherapy could help some patients live 20 months longer than with radiation alone.

On its own, Erbitux helped shrink tumors by 13 percent for an average of six months.

The drug was approved in combination with chemotherapy for when surgery is not an option, and as a stand-alone treatment in cases in which chemotherapy has failed, the FDA said.

While some analysts said the milestone payment and additional approval was a boost for beleaguered ImClone, it was widely expected and shares of the biotech company slipped more than 2 percent to $38 in after-hours trading on Inet from their Nasdaq close at $39.

Bristol-Myers shares edged up 13 cents in extended trading to $22.90 from their $22.77 New York Stock Exchange close.

Bristol, which owns about 17 percent of ImClone, said last month it had no plans to acquire the New York biotech company but would cooperate with ImClone on any sale or merger.