Coley Pharmaceutical Group Inc. suspended development of Actilon due to limited efficacy seen in Phase I and II trials in hepatitis C and the competitive challenges in that indication.

The company, which focuses on compounds that target Toll-like receptors, also said it is reducing its work force by about 22 percent, or 33 employees, mostly in drug development, leaving it with about 125 employees. Its plan going forward is to outsource drug development activities.

Coley's suspension of Actilon development leaves even more riding on ongoing Phase III trials of PF-3512676 (formerly ProMune) in non-small-cell lung cancer, being run by partner Pfizer Inc. Data from those two pivotal studies, which began in November 2005 and together are enrolling 1,600 patients, are expected in the fourth quarter, according to analysts who follow Coley.

Positive data from those studies, in addition to milestone and royalty revenue for Coley, "would be extremely validating to the TLR platform," Joe Pantginis, vice president of equity research at Canaccord Adams Inc., told BioWorld Today.

PF-3512676, like Actilon, targets Toll-like receptor 9. Coley said stimulation of TLR9 is believed to trigger both innate, or short-term, and adaptive, or sustained, immune responses. That dual activation, along with its potential for reduced side effects, differentiates the drug class from many other immune therapy approaches, it said.

Terence Flynn, an analyst at Lazard Capital Markets, said in a research note that it was significant that safety concerns had no impact on the decision to discontinue trials, and that even though the two compounds target the same receptor, they are "structurally dissimilar and as a result stimulate different components of the immune system."

Pantginis, too, while disappointed in the Actilon data, remained optimistic about Coley's stock (NADAQ:COLY), which fell $1.12 Tuesday, or 11.3 percent, to close at $8.77

"Though there is always a negative sentiment surrounding program discontinuation, Coley has made its decisions from a position of strategic and financial strength," Pantginis said. He noted that the company was expected to end 2006 with a little more than $100 million, or three years of cash. All indications are that Pfizer remains committed to the program, even as Pfizer on Monday began a significant new round of cost-cutting measures.

Robert Bratzler, president and CEO of Wellesley, Mass-based Coley, said in a conference call Tuesday that interest in the program "remains high. We are one of four, maybe five Phase III programs in Pfizer's pipeline. We have been in touch with Pfizer, in continuous touch, and we don't see anything to give us pause in terms of commitment to this program."

Pfizer gained rights to PF-3512676 in March 2005 in a deal that meant $50 million up front to Coley and a $10 million equity investment, as well as up to $455 million in potential milestone payments. Pantginis estimated that Coley would get royalties of 15 percent to 18 percent on sales, which he conservatively projected could peak at $500 million in the U.S and $350 million in Europe.

Pfizer's pivotal trials are comparing the TLR9 agonist with standard chemotherapy regimens to those regiments alone in the first-line treatment of Stage IIIb or IV NSCLC patients. The primary endpoint is overall survival, with secondary endpoints relating to survival and responses. Pfizer also has begun Phase II trials of PF-3512676 in advanced NSCLC, in combination with the cancer agents Avastin, Tarceva or Alimta. Pfizer also is conducting a Phase I trial of the product with chemotherapy in treatment-naive NSCLC patients in Japan.

For Actilon, Coley provided a bit of an update on a Phase Ib trial in relapsed hepatitis C virus patients who got the drug in addition to pegylated interferon and ribavirin. Previous data showed seven of 14 patients in the Actilon group remained negative for the virus after 24 weeks. But after those patients completed the full 48 weeks of treatment and were measured months afterward, only two showed continued viral clearance.

In a Phase II trial in null and partial responders, Coley earlier said no meaningful differences in viral load in the treatment arms were seen in the null population. It is suspending further enrollment of partial responders.

Bratzler said in the conference call that although Coley is ending development of Actilon, the company is open to finding a partner with the resources and expertise in HCV to take it forward. He noted the compound hadn't been evaluated in a treatment-naive patient population, nor as a potential replacement therapy for pegylated interferon.

"The data generated to date show the need for Coley to capture a portion of the naive patient population to maximize its commercial opportunity in HCV," Bratzler said in a news release. "However, the competitive landscape for the naive patients is rapidly evolving, making drug development complex, expensive and high risk."

Coley expects to take a charge of about $1.1 million related to employee terminations, most of it in the first quarter. But it also expects to eliminate about $15 million of previously planned expenses for the Actilon program.

Coley has other clinical and preclinical programs based on agonists or antagonists of TLRs 7, 8 and 9, a technology platform Bratzler called "broad and deep. We've only just begun to evaluate the full potential of this therapeutic class."

Two Coley TLR therapeutics are being developed for asthma and allergic rhinitis in collaboration with Sanofi-Aventis.

Coley also has VaxImmune, a TLR9 agonist, designed as a vaccine adjuvant to enhance both antibody levels and killer-T-cell immune responses to infections or tumors.

VaxImmune is being incorporated into vaccine products being developed by GlaxoSmithKline plc, of London, and Novartis Vaccine & Diagnostics (formerly Chiron Corp.). It also is the subject of grants received from the U.S. government for use to enhance the potency of vaccines for potential biowarfare and other infectious agents, including anthrax.