By Debbie Strickland

Special To BioWorld Financial Watch

September saw its share of biotech setbacks, with Phase III problems for AutoImmune Inc., Chiron Corp. and Xoma Ltd.

The reaction of Xoma's investors was typical ­ the Berkeley, Calif., firm's shares (NASDAQ:XOMA) dropped by more than half in late September when the company stopped enrollment in a Phase III trial of Neuprex in trauma patients with severe blood loss.

September also was marked by AutoImmune Inc.'s Colloral failing to beat placebo in a Phase III rheumatoid arthritis trial. The news sent that company's shares (NASDAQ:AIMM) tumbling 74 percent. With dwindling cash reserves ($11.8 million at the end of the second quarter), AutoImmune had no choice but to slash staff in a move similar to one taken in 1997, when the Lexington, Mass.-based company's multiple sclerosis drug, Myloral, failed in Phase III.

"I don't think AutoImmune has any options," said Carl Gordon, an analyst at OrbiMed Advisors LLC in New York. "Obviously, their programs have failed."

An asset sale or a merger with a stronger firm is likely, said Gordon, but AutoImmune also is exploring the possibility of marketing Colloral, an oral formulation of Type II collagen, directly to consumers as a nutritional supplement. A page on the company website (www.autoimmuneinc.com) seeks names and contact information of RA sufferers who would be interested in purchasing the product as a supplement.

The move would not be unprecedented. Shaman Botanicals, the main operating division of Shaman Pharmaceuticals Inc., is now selling directly to consumers its SB Normal Stool Formula, an anti-diarrhea product based on the standardized extract from the sap of the Croton lechleri tree. As a traditional pharmaceutical candidate called Provir, the drug succeeded all the way through Phase III trials in AIDS-related diarrhea. But the South San Francisco company shifted gears following a pre-NDA meeting with the FDA in which the agency urged the company to do another clinical trial.

"Given the external conditions for raising money for biotech, and the fact that it would take $20 milllion to $40 million to do another trial, we decided to fully embrace [the Botanicals] division and immediately put our products out," said Lisa Conte, president and CEO. "Patients were clamoring for this product, and we were able to provide relief earlier."

In late August, the company completed a $10.7 million rights offering to assist product launch via the website, www.shamanbotanicals.com, and a toll-free phone order line.

Major Players Can Absorb Setbacks

Toward the end of the month, Chiron Corp., of Emeryville, Calif., reported that enrollment had stopped in a Phase III trial of Regranex (becaplermin) Gel for pressure ulcers based on interim data that did not confirm positive Phase II results. The product, whose active ingredient is recombinant platelet-derived growth factor, already is approved for diabetic foot ulcers and marketed by Ortho McNeil Pharmaceutical, a Johnson & Johnson subsidiary based in Raritan N.J.

Chiron's shares were down 11 percent on the day of the announcement, but the movement was negligible considering the stock had already slid from the mid-$30s level achieved earlier in the month.

While Chiron is big enough to take a late-stage hit and keep moving, for smaller biotechnology firms a product setback or outright failure can mean the end of the business, and companies sometimes take creative approaches to skirt the endgame. Cambridge, Mass.-based Procept Inc., for example, signed a letter of intent last month to merge with an Internet-based funeral services company that in effect swapped cash for a Nasdaq listing. Procept was down to its last $6 million following setbacks with PRO 2000 gel, a topical vaginal microbicide still in development.

Then there is the case of Amylin Pharmaceuticals Inc., which has suffered Phase III failures with a diabetes drug called pramlintide. Last fall, data showed drug beat placebo in two out of three treatment arms, but failed in the highest dose, which also was the one on which the San Diego firm had hoped to base an NDA. Partner Johnson & Johnson had exited six months earlier after spending $175 million on the project. Analysts who followed the company said the product was doomed.

But Amylin has stayed afloat through a $15 million private placement of preferred shares in late March that converted last month after the company's stock had stayed above $2.40 for 30 consecutive days. The company raised another $18.5 million last week on the heels of a positive Phase III trial in Type II diabetes for pramlintide, now branded Symlin. Another Phase III, in Type I diabetes, is on track to wrap in the fourth quarter and an NDA filing is slated for the first quarter of 2000.

The drug's target population has been narrowed to diabetes patients who inject insulin multiple times per day, and the best dosing regimen in the earlier trials has been selected. Some refinements should have been done much earlier in the development process, admitted Joseph Cook, chairman and CEO.

"In retrospect, it would have been better to have spent more time in Phase II really, really locking down [the optimal protocol] with precision," he said. The company is taking such an approach with AC2993, now in Phase II for Type II diabetes, Cook noted.

The mistake of rushing into Phase III trials too early and its consequences ­ going back to the drawing board with a moribund stock price ­ are all too common and often avoidable, according to Joseph Zammit-Lucia, CEO of Cambridge Pharma Consultancy and an advisor to pharmaceutical and biotechnology companies.

"Over the past few years, the big focus has been on getting products to the market quickly, and the inevitable consequence is that people take shortcuts, " Zammit-Lucia said. Spending more time in less-expensive Phase I and Phase II trials, rather than jumping into a costly Phase III, could soften the financial blow of a setback or outright failure.

"The other driving force has been the blockbuster mentality," he said, noting that a company usually is making a mistake by pushing development of a product with a billion-dollar market potential and only a 10 percent chance of success instead of a product that can generate only $100 million in sales but has a much higher chance of success.

Companies ­ and by extension, investors ­ could better manage their risk by looking upon investments as opportunities to acquire information, a briefing from Zammit-Lucia's firm advises. Such an approach does not rule out projects with a low chance of success if their most likely outcome ­ failure ­ can be accomplished "cheaply and quickly."

Which leads to another of Zammit-Lucia's points: "Investors need to be educated not to punish stocks whose products fail quickly. Killing a project particularly early is defined as a setback but it may be a good thing. It's when it fails late in the day that you've lost a lot of money." *