Tanox Inc. received a $12.8 million milestone payment from Genentech Inc. as a result of the asthma drug Xolair (omalizumab) hitting U.S. sales of more than $300 million in 2005.

It is the second time this month that Xolair has been in the news. South San Francisco-based Genentech said earlier it was stopping a 150-patient trial in peanut allergy because of severe reactions in patients given small amounts of peanut protein. The safety issue was not related to the drug, but does bring up concerns over whether Xolair will be further developed for peanut allergy - a condition with serious consequences for which there is no approved treatment.

"Just because this particular trial has been stopped doesn't mean the entire Xolair program for peanut allergies has been stopped," said Steve Sievert, Tanox's director of investor relations and corporate communications, who added that Houston-based Tanox and its partners "remain committed" to the program.

Tara Cooper, a spokeswoman for Genentech, concurred, saying the company intends to meet with the FDA next quarter to determine a path forward. "We do plan to continue development for peanut allergy," she said.

Tanox receives a range of 8 percent to 12 percent on Xolair's worldwide net sales, as well as various milestone payments - all part of a cross-licensing agreement with Genentech. The $12.8 million milestone payment to Tanox was for Xolair sales surpassing a pre-specified tier of $300 million. It earned $320.6 million in 2005, a 71 percent increase over 2004.

"There are other milestones that we have to achieve," Sievert said. "However, this milestone based on Xolair reaching an annual sales threshold is a one-time event."

Tanox recorded the payment as fourth-quarter revenue. It may be entitled to milestones related to the peanut allergy indication, as well.

Only 27 patients were enrolled, and only 14 had completed testing with Xolair when the Phase II trial was discontinued, Cooper said. The trial was stopped due to severe "hypersensitive reactions" in patients during the oral food challenge screening process. None of those concerned were administered Xolair, Cooper said, confirming that the safety issues had to do with the trial itself, not the drug.

Why would Genentech pursue such a small indication for Xolair?

"There's a large unmet need," Cooper said. "We're developing it in hopes of meeting that unmet need."

The market size is measurably different from asthma, a chronic inflammatory lung disease that affects about 20 million Americans. At the time of its FDA approval for asthma in June 2003, analysts expected Xolair to make $600 million at its peak in 2008.

In contrast, peanut allergy affects about 1.5 million Americans, and would offer Genentech, Tanox and marketing partner Novartis Pharma AG, of Basel, Switzerland, a fraction of the asthma revenues. Yet, if it showed efficacy in clinical trials, it could become a meaningful medicine for those with a peanut allergy, who can fall into a fatal anaphylactic shock from ingesting a trace amount of peanut flour or oil. About 50 to 100 Americans die annually from accidental exposure.

Tanox previously had developed its own peanut allergy product, TNX-901, which showed positive results in an 80-patient Phase II trial. The drug, however, was dropped following lawsuits between Tanox, Novartis and Genentech. An arbitration panel decided that despite TNX-901's promise, Tanox could not pursue its own molecule. (See BioWorld Today, April 8, 2005.)

The focus instead turned to Xolair, which, like TNX-901, blocks the production of circulating IgE.

While Tanox still holds the rights to TNX-901, it "would not be brought back into development" unless Xolair failed to show safety and efficacy in treating peanut allergy, Sievert said.

Xolair works by binding to IgE antibodies in the blood, preventing them from binding to mast cells, thereby inhibiting the release of chemicals that cause inflammatory responses.

IgE antibodies are a key protein involved in the allergic cascade, which leads to asthma or allergy signs and symptoms, such as bronchial constriction, coughing and wheezing.

The gross milestone payment to Tanox was $20 million, but $7.2 million is payable to its former attorneys under the arbitration ruling. Tanox plans to use its $12.8 million share to offset a portion of its research and development expenditures. The company is developing TNX-355, a viral-entry inhibitor antibody, for HIV/AIDS, which has shown significant antiretroviral activity in Phase II testing.

Tanox's stock (NASDAQ:TNOX) rose 7 cents Monday to close at $17.11, while Genentech's stock (NYSE:DNA) dropped $1.55, to end the day at $85.62.