All Eyes on Cell Therapeutics' Cancer Drug

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The scramble is on to figure out whether

Cell Therapeutics'

(CTIC) - Get Report

Phase III trial will work.

Investors will know by the end of this month whether CTIC's

Lisofylline

keeps patients who undergo bone-marrow transplants alive in the first hundred days. If the drug doesn't do that, it could still be a success if it's proven to cure serious infections. Lisofylline is being tested in 132 cancer patients who are taking their normal course of therapy.

There are a several reasons to worry about the trial results, and that's been reflected in CTIC's volatile stock activity during the last month. It's down 20% so far in March.

But cautious optimism seems to be the conclusion of most investors and analysts who have been taking a look at the drug closely in the last couple of weeks.

"It's a tough call. If I had to handicap it, I'd say it's a 70% to 80% chance they hit one of the endpoints," says Mike Yellen, a portfolio manager for

GT Global

, which manages money for

Chancellor LGT Asset Management

, which owned 1.88 million CTIC shares at year-end, according to data tracker

Technimetrics

. And some hedge fund managers who frequently short biotechs have decided not to play CTIC in front of the data.

It's the same old story: If the drug hits, the stock blows up in the hip-hop sense of the word. If not, it blows up in the

Hindenburg

sense. And then there are the nuances if the data are marginally effective. If Lisofylline scores on all its main goals, including survival, the stock will head higher and be in a strong position for approval. If the drug reduces serious, life-threatening infections with statistical significance but doesn't improve survival, the stock will also go up strongly, but there will be an ensuing debate about whether the

Food and Drug Administration

will approve it.

The company plans to submit its filing to the FDA in the third quarter if the results are strong.

The data so far haven't been uniformly strong, but they have been promising. "We've always had a statistically significant effect in one of the endpoints," of all the Lisofylline trials, says Dr. James Bianco, the president and CEO of CTIC. "I feel good. People are excited. The folks at

partner J&J are serious about the product."

Johnson & Johnson

(JNJ) - Get Report

will co-market the product and split the profits 50/50.

Most analysts think it's a long shot that the drug improves mortality. For one, bone-marrow transplant patients' deaths have fallen in recent years, as doctors have learned to use transplants more effectively. Still, there are a lot of deaths: 45% of BMT transplant patients die after 100 days, with 70% of those caused by infections, according to CTIC. The Phase III trial, with its 132 patients, is probably not enough to show a difference, some analysts expect. In the Phase II trial, however, the company did show a survival benefit. In the high-dose Lisofylline arm, 89% survived after 100 days, compared with 59% in the placebo group, a statistically significant difference.

The major reason some investors don't expect a benefit in saving lives is that in a more recent Phase II study in leukemia patients, the drug didn't show a survival benefit. There isn't a very good explanation for that, analysts say.

For investors, reducing serious infections is probably sufficient. "It's a pretty good shot that they hit serious infections. They hit it twice

in the Phase II trials. If so, it's probably a $16 to $17 stock," says Yellen. Late Monday morning, CTIC is trading at 12 1/8.

Still, even with many ways to win, investors have concerns. One is that CTIC's sponsors on the sell-side don't have stellar biotech records. "

Montgomery

and

UBS

don't have the best records so it's making some people nervous.

Liposome

(LIPO)

LIPO,

AutoImmune

(AIMM)

AIMM,

Amylin

(AMLN)

AMLN -- there have been so many that have just collapsed," says Yellen.

Worse, Eric Hecht, a respected analyst from

Merrill Lynch

, put forward a report in early March, detailing reasons to be cautious about the drug's chances of success. Hecht doesn't officially follow the company and Merrill isn't a CTIC banker.

Chief among Hecht's reasons is that there is an older related drug called

Pentoxifylline

that failed in improving survival and reducing infections in its trials. But Lisofylline, while related to the older drug, has different properties and may be more effective, the company thinks.

Another problem is that with nausea being one of the main side effects of Lisofylline, it's possible that doctors could tell which patients got the drug and which got placebo. In other words, the trial may have been "unblinded." That means doctors may have treated those getting the drug differently than those who didn't. CTIC says that didn't happen.