Following a 17 percent stock slide Monday after the National Cancer Institute announced plans to amend the clinical trial protocols for 17-AAG and KOS-1022, Kosan Biosciences Inc. terminated its $39.4 million public offering priced just last week.

Analysts told BioWorld Today that tossing out an offering, particularly after it has been priced, is rare. Settlement dates occur only three or four trading days after a pricing, and the chances are slim that negative news would be released during that window.

But it happened to Hayward, Calif.-based Kosan. After the company priced its offering of 4.5 million shares at $8.75 per share Wednesday last week, it received notice from the NCI Friday that five patients infused with 17-AAG displayed electrocardiogram (EKG) changes "without clinically significant consequences." The EKG changes included three atrial arrhythmias, one QTc prolongation and one right bundle branch block. (See BioWorld Today, Aug. 12, 2005.)

That prompted the NCI to amend the protocols for all 17-AAG and KOS-1022 trials being conducted by the institute and by Kosan - about 15 in total. That news, released by Kosan on Monday, sent the company's stock down by 17 percent, or $1.51, to close at $7.35 - well below the public offering price. The offering was expected to close Tuesday.

"What happened Monday is a lot of shareholders and investors overreacted to the press release, although we tried to make it as clear as possible," said Daniel Santi, Kosan's chairman and CEO. "The price went below what we priced it at, and we hadn't closed it yet. Obviously, investors were not going to pay a price that was higher than market."

The underwriters for the offering included New York-based firms Credit Suisse First Boston, SG Cowen & Co. LLC, and CIBC World Markets Corp.

Analysts that cover the company could recall only one or two other times when a deal was terminated after being priced.

"Once it's priced, they have their book of business," said Joseph Pantginis, vice president of equity research at Adams Harkness Inc. in New York. "It's a done deal."

But Kosan serves as an example of why that is not always the case - not anymore. In 2000, the SEC enacted Regulation FD (Fair Disclosure) to ensure that publicly traded companies disclose material information publicly and not just to sell-side analysts and buy-side fund managers.

Once Kosan learned of the NCI's news, it had an obligation to release it broadly before the offering had closed.

"This may just be an example of Reg-FD working," Pantginis said.

Santi said the timing of the NCI's advisement, coming less than two days after the common stock pricing, was a complete coincidence.

"In one sense, I think it's obviously better that it came out before this offering was completed," he told BioWorld Today. "It would have looked pretty bad if it came out after. We didn't profit at all by the situation."

While several analysts declined to comment on the terminated offering, many agreed with Santi that investors were overreacting to news from the NCI.

In a research note, analyst Bret Holley and his colleagues from CIBC World Markets said the altered EKGs warrant caution, but even if Kosan's drugs show some cardiovascular effects, "like many other chemotherapeutics, we believe their benefits could clearly outweigh the risks in cancer."

The protocol amendments will require clinical investigators to obtain EKGs before and after treatment with 17-AAG or KOS-1022 (DMAG). It also will exclude patients with certain histories of cardiovascular disease and the use of QTc-prolonging medications. The changes will affect further patient enrollment, and those currently receiving the two drugs may continue their treatment.

While EKG changes in the five patients might turn out to be unrelated to Kosan's drugs, investors saw a perceived threat, Pantginis said, of delays in clinical development and signs of possible side effects.

"Bottom line, it's serious enough," he said, "that people could paint the doomsday scenario and say, These drugs could not make it to market now because it will cause these [perceived] side effects.'"

The need for screening more patients suggests to investors that the potential market size could be reduced, and "any perceived delay in biotech has a negative connotation to it because if things take longer, you have to spend more money," Pantginis said.

But Santi said the delay should not be significant, only about one to three months. Kosan already has submitted its amended protocol to the internal review board, which meets twice a month. He also stressed that more than 400 patients have been treated with 17-AAG, yet only five have shown EKG changes, which "by themselves are certainly not uncommon."

"We have not established, nor has anyone established, that it is truly drug related," Santi said.

A heat-shock protein 90 (Hsp90) inhibitor and geldanamycin analogue, 17-AAG is in Phase II NCI trials for melanoma, lymphoma, and breast, renal and thyroid cancers, as well as Phase Ib trials testing it in combination with gemcitabine and cisplatin, Taxotere, Gleevec and paclitaxel. A second-generation product, KOS-1022, is in an NCI-sponsored Phase I study for advanced malignancies, and a Kosan-sponsored Phase I trial for hematologic malignancies. Kosan also is studying KOS-953, a formulation of 17-AAG, in a Phase I trial in multiple myeloma, and in Phase Ib trials in combination with Herceptin, Velcade and Gleevec.

As of June 30, Kosan had $69.3 million in cash, cash equivalents and investments. Santi said the company did not need to do a public offering.

"It certainly was not an emergency," he said. "We certainly were not in dire need of the cash, but obviously, we have clinical trials we're supporting."

Kosan's stock (NASDAQ:KOSN) dropped 17 cents Tuesday to close at $7.18.

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