Recurrent respiratory papillomatosis represents the first indication that Stressgen Biotechnologies Corp. intends to pursue with its drug HspE7, based on positive Phase II data released this week.

It plans to file a biologics license application by mid-2007.

That's the good news.

The bad news is that the drug failed in a non-pivotal Phase III trial for a larger market - anal dysplasia.

The company's stock (TSX:SSB) dropped C46 cents Wednesday, or 26 percent, to close at C$1.31 (US98 cents).

"We took our estimates down," said Brian Bapty, an analyst with Raymond James Ltd. in Vancouver, British Columbia. "Because from our perspective it looks like they're limiting the use of the product in a very narrow indication."

In the recurrent respiratory papillomatosis (RRP) trial, the product reached high statistical significance in its primary endpoint of lengthening the interval between surgeries. The company has pursued RRP as its primary indication for HspE7 since reviewing interim results in early 2003, it said.

"These results were highly statistically significant," said Dan Korpolinski, president and CEO of Stressgen, in a conference call, "and support Stressgen's plan to begin a pivotal trial and submit a biologics license application for RRP as the first indication for the company's lead product, HspE7, in mid-2007."

While HspE7 showed positive results in RRP, it also showed a treatment effect in anal dysplasia patients. But the 133-patient trial, which was not designed to be pivotal, did not meet its primary endpoint as measured by adjudicated pathological assessment of biopsies. The assessment was meant to determine if patients had downgrading of dysplasia from high grade to low grade or to no dysplasia at all at the six month mark.

"The final analysis showed that the drug exceeded the treatment effect that it was intended to detect," Korpolinski said. "However, the anticipated placebo effect doubled as estimated from previous Phase II trials and as had been predicted by experts through studies of natural history.

"Thus, there was no difference between drug and placebo."

While company officials found the results surprising, they also were confused when the adjudicated pathological assessment showed a 28 percent discordance among the pathologists that read the biopsies.

"What we observed is not unprecedented," said John Neefe, senior vice president of clinical development at Victoria, British Columbia-based Stressgen. "Pathologists agree less often than one would like to think."

The discrepancy makes it difficult to interpret the results, Korpolinski said. Therefore, the company does not have plans to begin a pivotal dysplasia trial, at least not until researchers can evaluate the pathology discordance and make additional measurements of human papillomavirus (HPV), such as viral load. The fastest route to commercialization, Korpolinski said, would be in the fast-track RRP indication.

The anal dysplasia trial did show some positive findings: HspE7 reached statistical significance in the secondary endpoints of physician's global assessment and a subset of patients with concomitant genital warts. Global assessment, which took into account the extent and depth of diseases as well as pathological analysis of biopsies, showed the drug reached statistical significance (p<0.03) at six months. In patients with concomitant genital warts, the drug showed an increasing treatment advantage during the course of the study. The durability of effect from responders in the study and previous Phase II studies were the same.

Raymond James' analyst Bapty downgraded Stressgen's stock, despite the "clear signs of efficacy" in both the RRP and anal dysplasia indications. But as it stands now, the company only has plans to move forward in the RRP indication, which is "very expensive to treat," he told BioWorld Today. "However, the patient numbers are low."

Bapty estimates that at its peak, sales of HspE7 in the RRP indication worldwide would be about $150 million to $175 million annually.

Stressgen has received orphan drug designation for RRP. The disease, indicated by warts in the upper airways, is found in the larynx and on the vocal chords, and can spread into the trachea and lungs. It is deadly in children, and the only known treatment is surgery. Pediatric patients have about four to five surgeries per year, the company said.

In the RRP trial, which included 27 patients, researchers found a 93 percent interval increase post-treatment, when looking at the time that elapsed from baseline to the first surgery. That result was statistically significant (p<0.02). The median of all intervals increased 107.6 days with treatment, compared to 55.3 days at baseline - suggesting that the children had 87 fewer surgeries during the first year following treatment. The annualized surgical rate also was reduced significantly. The children also showed a statistically significant decrease in their Derkay-Coltera Score by the end of the study.

HspE7 is a fusion of a heat-shock protein and an antigen from the human papillomavirus. Aside from the RRP and anal dysplasia indications, it is being studied in genital warts, cervical intraepithelial neoplasia (CIN) and cervical cancer.

Anal dysplasia, also called anal intraepithelial neoplasia (AIN), is characterized by the presence of abnormal cells that might precede anal cancer. It is not treatable by surgery, as is CIN.

RRP, however, represents a small market, compared to other HPV indications. The National Institute of Allergy and Infectious Diseases, there are about 5.5 million new genital HPV infections each year, with more than 20 million people in the U.S. currently infected.

Stressgen expects to have HspE7 data from an anal dysplasia trial in HIV patients who have hepatitis B virus, as well as data from an ongoing cervical dysplasia trial, in the fourth quarter. Neefe said the cervical dysplasia trial might show similar results as the anal dysplasia trial.

"It is known and well shown in the literature that cervical dysplasia pathologists do not always agree," Neefe said. "So by moving to cervical dysplasia we are not going to get rid of this problem. We still have to power large enough to overcome the possibility of variance or variability in pathological assessment."