In the first of two moves planned to broaden its cancer pipeline, Cell Therapeutics Inc. acquired privately held oncology company Systems Medicine Inc. (SMi), gaining access to the Phase II drug Brostallicin.

Cell Therapeutics will pay SMi shareholders $20 million in stock priced according to a five-day average, $5 million in cash or stock if the FDA agrees to a special protocol assessment for a single pivotal trial of Brostallicin, and $10 million in cash or stock if the product is approved. In a conference call, Cell Therapeutics President and CEO James Bianco called the price "similar" to what SMi had hoped to raise in a Series A venture round.

Brostallicin, the crown jewel of the acquisition, was discovered at Pharmacia Corp. (now part of Pfizer Inc.) and licensed to the Italian research group Nerviano Medical Sciences, which later licensed it to SMi. Cell Therapeutics now holds exclusive worldwide rights to the drug, which has been studied in more than 200 cancer patients in Phase I and Phase II trials.

While some existing cancer drugs such as camptothecins and anthracyclines bind the major groove in DNA, Brostallicin is among the most advanced to bind the minor groove. Another drug sharing this mechanism is Yondelis (trabectedin, PharmaMar SA and Johnson & Johnson), which received a positive opinion earlier this month from the European Medicines Agency in advanced soft-tissue sarcoma and is undergoing a Phase III trial in relapsed ovarian cancer.

Brostallicin has been studied in soft-tissue sarcoma and several solid tumors as well, but SMi President and CEO Jeff Jacob said it has not shown the cumulative bone marrow toxicities that have plagued other minor groove DNA binders. He added that the drug is designed to target tumors "based on their molecular homogeneity rather than based on where they are in your body." Thus, screening for patients with mismatched repair deficiencies, high glutathione levels or T[12:16] translocations is expected to allow faster, less expensive clinical trials with a higher probability of success.

That concept is being evaluated in an ongoing Phase II trial sponsored by the European Organization for the Research and Treatment of Cancer. In the trial, 108 previously untreated sarcoma patients will be randomized to receive Brostallicin or doxorubicin and screened for genetic markers. Jacob predicted that the trial, along with a single-arm biomarker trial in the U.S., could be sufficient for FDA approval.

Analyst Matt Kaplan of Punk Ziegel & Co. called Brostallicin "very interesting at first glance" and agreed the proposed regulatory path is not unheard of in cases of serious unmet need. But Cell Therapeutics will need confirmation from the FDA "that this is a viable route" and would have to demonstrate a "robust response rate," he added.

Yet Kaplan noted that the SMi acquisition provides Cell Therapeutics with a strong team that "knows how to navigate some of those [regulatory] routes." The SMi team will function as a wholly owned subsidiary of Seattle-based Cell Therapeutics. Even SMi founders Richard Love, former co-founder and CEO of ILEX Oncology, and Daniel Von Hoff, director of the clinical translational research division at the Translational Genomics Research Institute (TGen), will play advisory roles.

Cell Therapeutics also will inherit SMi's strategic relationships, including the manufacturing capabilities of Nerviano and the genomic platform and high-throughput capabilities of TGen. Between TGen's technology and SMi's pharmacogenomics expertise, Bianco said he anticipates the development of multiple new products either for internal development or out-licensing.

Cell Therapeutics estimated the cost of running SMi's programs, including trials of Brostallicin, at about $2 million per quarter over the next two years. The company ended the first quarter with $48.7 million in cash, equivalents and securities, not including a $37.2 million offering and $10.6 million settlement expense in April.

If all goes well with Brostallicin, Bianco predicted a potential launch in 2010. That fits nicely behind potential 2009 launches of cancer drugs Xyotax (poliglumex paclitaxel) and pixantrone, both of which are in Phase III trials. Kaplan called pixantrone "very interesting" but said the "jury is still out" on Xyotax due to previous Phase III failures.

But if things go as planned, Cell Therapeutics may have a product on the market even before Xyotax and pixantrone. Bianco said he is "pretty confident we're close to a final purchase agreement" regarding a marketed non-Hodgkin's lymphoma drug.

Shares of Cell Therapeutics (NASDAQ:CTIC) gained 5 cents Wednesday to close at $4.55.