Shares of Acambis plc plunged 40 percent on news that the U.S. Department of Health and Human Services (HHS) rejected the company's proposal to provide 20 million doses of its modified vaccinia ankara (MVA) smallpox vaccine.

In its notification, HHS informed the Cambridge, UK-based firm that its technical proposal was "no longer in the competitive range," and the company would not be eligible to receive a contract for MVA3000, a third-generation compound that is a weakened form of current smallpox vaccines and aims at inoculating people with impaired immune systems or other conditions that would preclude administration with other vaccines.

For Acambis, which previously had received a contract award for its ACAM2000 smallpox vaccine and has been progressing through safety trials with MVA3000, the news came as a shock.

"It was absolutely unexpected for a variety of reasons," Lyndsay Wright, vice president of communications and investor relations, told BioWorld Today. "We've hit all our milestones and delivered vaccine doses, actually before [main European competitor] Bavarian Nordic [A/S], and we have a proven manufacturing capability."

Manufacturing is handled by Acambis' partner, Baxter Healthcare SA, the European arm of Deerfield, Ill.-based Baxter International Inc.

In its letter, the HHS did not provide any detailed information for the decision, but Acambis anticipates a meeting with the U.S. department with the hopes of gaining some clarification, Wright said.

Acambis' stock (NASDAQ:ACAM) lost $2.43, or 40.3 percent, Tuesday to close at $3.60, though analyst Robin Campbell, of Jefferies International Ltd. in London, who maintained a "hold" rating, called investor reaction "somewhat overdone."

Acambis "just lost a third-generation smallpox vaccine, so I think people see some additional risk there," he said.

For Campbell, the real uncertainty is what the HHS' decision means in context with the overall biodefense program.

"I think, generally, over the last few years, people have been trying to work out the framework of Project BioShield," he told BioWorld Today, "and whether it's appropriate to be spending that much money."

The U.S. biodefense program offers short-term funding, with promises of larger amounts down the road, Campbell said, but whether all the companies working on biodefense agents actually receive contracts remains to be seen.

With Acambis out of the race in the RFP3 (the HHS request for proposals for 20 million doses of MVA vaccine), Bavarian Nordic has become the front-runner. The Kvistgard, Denmark-based firm is developing Imvamune, which is based on a live, non-replicating strain of MVA virus, but it's too early to say whether Bavarian will get the award, and if so, whether it would be the full 20 million doses for Part A of the contract, plus the optional 60 million doses for Part B.

There are some questions, Campbell said, as to whether the RFP3 has been "downscaled to a degree or being guided in a new direction."

It's a question that I've been asking myself, and I'm not getting any answers at the moment," he said.

While the HHS' decision was disappointing, Acambis continues to move forward in its ACAM2000 smallpox vaccine and is on target to deliver 10 million doses in a $30 million government contract by the end of the year. The company filed a biologics license application in April for ACAM2000, and expects a PDUFA date of Feb. 14.

The company, which last week said its strategic focus would be its non-biodefense pipeline, anticipates its biodefense work to be an ancillary effort to provide additional revenue.

"The goal is not to actually grow that side of the business, so much as to exploit what opportunities are available," Wright said. "The vast majority of the value is the real biotech side of the business, which is our pipeline of ChimeriVax, and our Clostridium difficile and influenza vaccines."

Acambis is developing is ChimeriVax-JE against Japanese encephalitis. That product completed a Phase III safety trial, with results of a Phase III efficacy study expected in the first quarter of 2007. Pending positive results, the company anticipates filing for approval in endemic countries, such as India.

Early next year, Acambis plans to file an investigational new drug application to start clinical testing of ACAM-FLU-A, a candidate designed as a universal vaccine to protect against all "A" strains of influenza.

Acambis reported a pre-tax profit of £4.8 million (US$9.1 million) for the third quarter. As of Sept. 30, the company had cash and short-term investments of £46.1 million.