Washington Editor

Kosan Biosciences Inc. and Roche Holding AG ended their five-year collaboration to develop and commercialize epothilones, anticancer agents that inhibit cell division.

Hayward, Calif.-based Kosan will reacquire the worldwide rights to its epothilone program after a transition period of 120 days, CEO Robert G. Johnson Jr. said Friday in a conference call.

The biotech firm also will gain full control of its clinical development program for its lead epothilone candidate KOS-1584, which currently is in Phase I clinical trials in patients with solid tumors.

The molecule has shown signs of activity in patients with non-small-cell lung, ovarian, breast, prostate, pancreatic, head-and-neck and colon cancer, Johnson noted.

The termination of the partnership, he maintained, was driven by Roche's "reprioritization" of its research and development group rather than the value of Kosan's epothilone program.

"We understand the pressures that large pharmaceutical companies face," Johnson said, and the "need for portfolio rebalancing, including the need to focus on near-term market opportunities."

The financial structures of large pharmaceutical firms, which generally operate on five-year business and 10-year strategic plans, are very different from those of small biotechs, explained Kevan Clemens, a member of Kosan's board of directors and a former Roche executive.

Firms like Basel, Switzerland-based Roche, he said, must consider the costs of all late-stage candidates in their pipelines and the overall impact to the financial bottom line if they are facing covering the costs of several late-stage products simultaneously.

"Unfortunately, we are just being a victim of that process within Roche," Clemens said.

Nonetheless, Roche's move came as a surprise to Kosan.

Until recently, Johnson said, the biotech had "Roche's full support" for KOS-1584.

"Both of our companies were pleased with the encouraging data emerging from the Phase I clinical trials of KOS-1584 and were in agreement relative to Phase II development plans," he said. "We were, therefore, not expecting Roche to initiate discussions leading to the decision to conclude the entire collaboration."

While the biotech was "initially disappointed" with the Swiss pharmaceutical firm's decision to terminate the deal, "we also quickly realized that there are some tangible benefits to reacquiring rights to our epothilone program," Johnson said. "We welcome the opportunity to be able to make clinical development decisions based on what is best for KOS-1584 and for Kosan."

The split with Roche, he said, provides the California biotech an "opportunity to initiate new partnering discussions that could potentially result in a favorable arrangement for Kosan."

Kosan, he added, also welcomed "having clarity on the situation."

From a short-term operational viewpoint, Johnson said, the impact on Kosan of the split "is likely to be minimal." He asserted that the breakup would have "no financial impact" on the biotech this year.

Gary S. Titus, Kosan's chief financial officer, said that the agreement between the two firms mandates that Roche continue to reimburse Kosan for costs of completing the Phase I clinical trial of KOS-1584 currently under way for patients enrolled as of Oct. 25.

"As our funding continues for approximately the next four months, we do not expect changes to our previously provided annual cash use and operating activities guidance of $35 million to $45 million for 2007," Titus said.

Kosan, Johnson said, will proceed with starting a Phase II program for KOS-1584 "on a time frame and in a direction that we believe is manageable and represents an appropriate way" to explore the potential of the drug candidate.

"Our control of the program permits us to determine the optimal strategy for advancing KOS-1584 into larger-scale clinical trials, potentially with a new collaborator, which we plan to actively seek," Johnson said. "In the meantime, we intend to commence a Phase II clinical program and continue to believe that KOS-1584 has best-in-class potential in the emerging epothilone market."

Given the "suddenness" of its split with Roche, he said, Kosan deferred providing any details Friday about the indications the company plans to pursue for the Phase II study.

However, Johnson said, the company will "share some information" about the Phase II trial on Oct. 31.

Johnson noted that New York-based Bristol-Myers Squibb Co. received approval by the FDA on Oct. 16 for its epothilone product Ixempra (ixabepilone) to treat metastatic or locally advanced breast cancer.

That approval, he said, provides "important proof of concept for this compound class. Finally, it appears that the market is waking up to the promise of epothilones."

The epothilone market, Johnson contended, will be large enough to accommodate multiple players.

"When Ixempra was approved, we thought that interest would begin to grow in the promise of our next-generation epothilone KOS-1584, as we believe it has the best-in-class possibilities and the potential for better safety," he declared. "We see no reason why interest should not continue to grow in KOS-1584 as we advance into Phase II."

All of Kosan's other clinical development programs, Johnson asserted, "remain solidly on track."

Kosan is testing Tanespimycin (KOS-953) in combination with Velcade (bortezomib), which is made by Cambridge, Mass.-based Millennium Pharmaceuticals Inc., in patients with multiple myeloma in a registration program called TIME.

Tanespimycin also is being studied in HER-2-positive metastatic breast cancer in combination with Herceptin (trastuzumab), which is marketed by South San Francisco-based Genentech Inc., and as monotherapy in metastatic melanoma.

Intravenous and oral formulations of Kosan's second-generation Hsp90 inhibitor, alvespimycin (KOS-1022), are being evaluated in Phase I clinical trials in hematological cancers and in HER-2-positive metastatic breast cancer.

Kosan's motilin agonist compound, KOS-2187, licensed to New York-based Pfizer Inc., is in a Phase I safety trial, with plans to pursue development in gastroesophageal reflux disease.

Shares of Kosan (NASDAQ: KOSN) rose 3 cents Friday to close at $5.68.