"It's all Axokine," said analyst Steven Harr with Morgan Stanley in New York, earlier this month.

He was trying to explain the market's so-what reaction to Regeneron Pharmaceuticals Inc.'s handsome deal with Novartis AG, of Basel, Switzerland, which is focused the former's Interleukin-1 Trap technology, in a Phase II study for rheumatoid arthritis.

Novartis agreed to pay $27 million in cash and make a $48 million equity investment in Regeneron through a stock purchase, with the potential for $275 million more in milestone payments if a product is approved and sells at satisfactory levels in the U.S. and Europe.

That's not all. Novartis agreed to pay pre-Phase III development expenses, with Phase III expenses and pre-launch costs to be divided equally by the companies - but Novartis said it would provide a loan to finance Regeneron's share.

There was still more. Under the terms, Novartis would provide manufacturing. That takes another big financial load off Regeneron, which might have had to pay around $200 million for a facility.

The "hard cash" value of the deal might be put at $75 million, but its worth to Regeneron is far above that, noted CEO Leonard Schleifer, who declined to name the higher potential number but grumbled that many had missed the point.

So it seemed. On March 28, the day the Novartis deal was disclosed, Regeneron's shares not only failed to rise but also dropped, closing at $17.31, down $2.04, or 10.5 percent. It was, Harr said, anticipation of Phase III data regarding Axokine that kept enthusiasm low - whether that made sense or not.

Axokine: Hailed as the next new drug for diet-related obesity, the ciliary neutrophic factor appeared ready to take the place of the once charmed, scarcely remembered hormone leptin as the magic bullet for overweight people.

To some investors, the notion of therapy for "diet-related obesity" might seem odd, conjuring the picture of some hefty eater loading up on a breakfast of eggs, sausage and pancakes laden with butter and syrup, then popping a pill (or taking a shot) and starting to think about lunch.

That picture is not far off the mark. Much of America can't stop chowing down, and they're chowing down on some of the least healthy food ever available on the planet, thanks to fast-food profiteers eager to make a buck from the weak-willed. As a result, about 60 million people in the U.S. are obese.

The two approved obesity drugs, Hoffmann-La Roche Inc.'s Xenical (orlistat) and Knoll Pharmaceutical Co.'s Meridia (sibutramine hydrochloride monohydrate) may carry nasty side effects: flatulence and explosive diarrhea with Xenical, high blood pressure with Meridia. If something else came along that worked better - or even as well, but without the side effects - the market could be considerable.

There's an "appetite, if you will, for these drugs," as Schleifer said. In the mid-to-late 1990s, about 4.6 million people reported using an obesity drug, he noted.

Axokine proved positive in Phase II studies and was cheered in August 2001 as it entered Phase III trials, the preliminary results from which were on the verge of disclosure when Regeneron unveiled its collaboration with Novartis. (See BioWorld Financial Watch, Dec. 4, 2000, and April 30, 2001.)

Harr, whose firm makes a market in Regeneron securities and expects to receive or seek compensation for investment banking services from the company, forecasted the Axokine data would be "pretty good." The following Monday, they spilled out. This time Wall Street didn't fail to react strongly, and Regeneron's shares ended the day down a whopping 56.6 percent, closing at $7.52.

What was clear was that, compared to placebo, Axokine met the trial's primary and secondary endpoints.

In the two primary endpoints, a greater proportion of Axokine-treated patients lost at least 5 percent of their initial body weight compared with placebo-treated patients (25.1 percent compared to 17.6 percent, p<0.001), and those given Axokine had a greater average weight loss than those receiving placebo (6.2 lbs. compared to 2.6 lbs., p<0.001.)

Performance in secondary endpoint news was good, too. The proportion of patients who lost at least 10 percent of their initial body weight, for example, was 11.3 percent compared to 4.2 percent (p<0.001).

Just as clear, unfortunately for Regeneron, was that the incidence of neutralizing antibodies after about three months of treatment was 70 percent - knocking down Axokine's efficacy in the sizeable patient group that developed them.

Damage control kicked in. Once again, the market had missed the point, Schleifer said, allowing in a conference call that Regeneron officials had only had the weekend to sift the data themselves.

The drug seemed to have been done in by antibodies.

"I don't think we were done in - that's the wrong word," Schleifer told BioWorld Financial Watch. By Tuesday, though, Harr was citing in a research note "concerns about whether Axokine will have enough benefit to warrant approval."

Schleifer held out well-reasoned hope: If Axokine worked in 30 percent of 60 million obese people, that's a nice slice of the market pie.

"The population we're dealing with is 30 percent of an extraordinarily large number," he said during the conference call. "I doubt you would run out of patients."

Michael King, an analyst with Banc of America Securities, said Schleifer was "turning up the rhetoric. He's probably got a drug, but it's going to be a real challenge to get patients to go on it and insurance companies to pay for it." Axokine is injectable, unlike the two other drugs, which are orally administered.

Maged Shenouda, an analyst with J.P. Morgan, downgraded the stock from "overweight" to "neutral," noting the "average placebo-adjusted weight loss was 8.1 pounds in patients who [developed] antibodies" - and, by Regeneron's own measure, at least a 10-pound weight loss likely would be necessary to make Axokine commercially viable.

Still ongoing, along with analysis of the Phase III data, are analysis of a pilot study in obese individuals with Type II diabetes, and Axokine short-term treatment studies. Schleifer pointed out that independent studies have shown pre-diabetic people who manage to lose 10 pounds reduce their risk of diabetes by 40 percent to 60 percent.

Also, the 12-month Phase III treatment period is being followed by an open-label safety extension phase lasting another 12 months, in which all participants are given Axokine and monitored for side effects. When all the data are in hand, Regeneron will meet with the FDA and decide the next step.

In a research note, King remained neutral on Regeneron and said the smaller market for Axokine likely will mean the company will commercialize it without a partner - a feat that will be contingent upon streamlining the costs of the project.

The Axokine failure cast the Novartis deal in an even more favorable light.

"It was very good economics, better than we were modeling," King told BioWorld Financial Watch, adding that the collaboration "keeps them in business for the foreseeable future."