Give

SciClone Pharmaceuticals

(SCLN)

credit for persistence.

Its main product, a hepatitis drug called

Zadaxin

, failed in U.S. clinical trials six years ago and is now sold mainly in China. But the San Mateo, Calif., biotech company continues to test it, hoping it will be an immune system-boosting hit against as many as six diseases. The company's stock has risen sharply in the past year, mostly on hopes linked to Zadaxin.

But will Zadaxin ever be the blockbuster SciClone claims? Some analysts are dubious. Though the drug's supposed promise has helped SciClone raise money and keep its share price up, it has many hurdles to surmount.

Prospecting

SciClone illustrates the risks of biotech investing, in which share prices ride mostly on prospects for drugs in development rather than actual sales. Muddying the waters in this case is the fact that the time is right for a hepatitis drug: Demand for new treatments is strong, with the disease reaching epidemic proportions in some parts of the world and current treatments leaving much to be desired. Whether Zadaxin is that drug is another question.

Buying In
SciClone shares rise on hepatitis-drug talk

Source: BigCharts

The business model for biotechs is typically to raise money from investors while developing treatments they hope will become billion-dollar drugs. SciClone's model is slightly different. Zadaxin is already on the market, but 86% of its sales are in China, where the standards of testing the effectiveness of medicines are lower than in the West. And while the company is testing the drug for the U.S. market, the possibility of approval appears remote.

"It's replete with challenges, given the history of the drug," says Mark Augustine, an analyst with

U.S. Bancorp Piper Jaffray

, which isn't doing underwriting for SciClone.

Yet its shares have appreciated substantially in the last year, rising from a low of 1 3/16 a year ago to peak at 22 in March, around when many biotechs peaked; it closed at 13 15/16 Thursday, giving it a market cap of about $400 million.

Moving On

The main problem, analysts say, is that Zadaxin proved to be no better than placebo for hepatitis B in 1994 clinical trials in the U.S. with its previous owner,

Alpha 1 Biochemicals

. In such cases, companies typically drop a failed drug and move on.

SciClone insists the original tests were flawed and continued testing the drug. Claims that the drug is "safe and effective" have helped SciClone raise about $18.5 million by selling shares and warrants, fueled by prospects for Zadaxin sales. The company has racked up $116 million in cumulative losses since its founding in 1989.

Rising sales in China are evidence that some patients like the drug, even at a hefty $5,000 for a course of treatment. Zadaxin generated $9.1 million in 1999, up from $3.6 million the year before. But assuming all patients are charged the full rate, that means that only about 1,800 patients used the drug last year.

And even analysts for brokerages that have underwritten for SciClone admit that providing proof of effectiveness by Western standards may pose challenges. Zadaxin may be a dud in disguise, relying on the Chinese market for revenue -- a market in which traditional medications, such as deer penis for potency, are still widely sold.

"How effective it is is a bigger question," says Jim McCamant, analyst at

Moors & Cabot

, a San Francisco brokerage that has raised money for SciClone in the last year.

Even if SciClone proves that Zadaxin is effective, its patent position is limited. Because the drug was invented decades ago, it is no longer covered by "substance" patents, although the company claims other patents that cover use in certain diseases. For instance, it said it won a patent covering Zadaxin use in hepatitis B last month.

Perception Issues

SciClone is now testing Zadaxin against six diseases: hepatitis B and C, HIV infection, skin cancer, carcinoma and drug-resistant tuberculosis. If the company manages to prove that the drug is effective in any of these diseases where it isn't covered by patents, other drugmakers theoretically also could market the drug.

But competition is more likely to come from another source. Heavy hitters in the industry, such as

Schering-Plough

( SGP) and

Roche

, which dominate the treatment of hepatitis, are developing easier-to-use formulations of the industry standard for treatment, a drug called alpha interferon. With those companies' large sales forces, the new formulations are likely to continue dominating the market, analysts say.

Schering-Plough is keeping its options open. While it develops newer versions of interferon in the U.S., it is testing Zadaxin in clinical trials in Japan for both hepatitis B and C in partnership with SciClone. Nearly 5 million people in Japan are infected with hepatitis B and C, SciClone says.

Shawn K. Singh, SciClone's chief business officer, acknowledges that the company has faced "perception" issues when presenting to potential institutional investors. But he says rising Zadaxin sales demonstrate the validity of the company's strategy. And he said he anticipates those sales will continue as it wins more regulatory approvals in world markets. Furthermore, he says the company has other drugs in the pipeline, such as CPX for cystic fibrosis, which also could prove useful.

"Six months from now, we will be a profitable company," says Singh. "We are not without risk, but ours is substantially lower than most. We are selling something and we're not going to be hostage to the capital markets."

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