Shares of

Cell Therapeutics

(CTIC) - Get Report

have come under heavy selling pressure on fears that its innovative drug-delivery technology might need a bit more time in the workshop.

The Seattle-based biotech firm is developing a technology designed to deliver higher, more effective doses of existing cancer drugs to tumors, while reducing their toxic side-effects. For starters, Cell Therapeutics is combining its technology -- a naturally occurring polymer called polyglutamate -- with the blockbuster cancer drug paclitaxel, best known by the brand name Taxol. This "supercharged" drug is called PG-TXL.

But last week, research abstracts from the upcoming meeting of the American Society of Clinical Oncology -- detailing preliminary, midstage test results for PG-TXL -- leaked onto Wall Street. The abstracts raised red flags for some institutional investors because of evidence suggesting that PG-TXL might not be as effective as previously believed. Final results from these tests will be released at the ASCO meeting May 18-21.

But just the hint of trouble has been enough to send shares of Cell Therapeutics sharply lower. The stock has lost more than 23% of its value since April 10, when the ASCO abstracts started making the rounds of Wall Street. On Wednesday alone, Cell Therapeutics fell more than 11% to close at $16.46 a share. More than 2.3 million shares traded hands, five times average volume. The stock was rebounding slightly Thursday, up 47 cents, or 3%, to $16.93.

Responding to the selloff, Banc of America Securities biotech analyst Eric Ende on Wednesday came to the company's defense. "In our opinion, the perceived lack of data in the ASCO abstracts will become irrelevant when strong data is presented at the conference," Ende wrote in a research note.

While acknowledging the risk of a delay -- by a year, to 2005 -- in the approval and launch of PG-TXL, Ende believes the drug's peak sales should reach $700 million and that this, alone, is worth $26 a share to the company. Ende rates Cell Therapeutics a strong buy, and his firm has done banking for the company.

Doubts and a Strong Defense

But one hedge fund manager, who went short Cell Therapeutics after perusing the ASCO abstracts, believes there's a strong chance that PG-TXL does not live up to expectations.

"The drug could get approved because it appears to be safer than Taxol, but I have doubts as to whether it really is any more effective," he says. "If Cell Therapeutics can't prove that PG-TXL is superior, I think the market for this drug will be really limited."

ASCO puts all companies presenting data at its annual meeting under a strict gag order, so Cell Therapeutics' CEO James Bianco can't discuss actual results from its PG-TXL clinical trials. But in the strongest possible language, he insists that the drug's prospects are stronger than ever.

"We're eager to walk into ASCO and discuss our results," says Bianco, adding that he'll have a special remark to pass along to shorts: "You guys blew it."

The paclitaxel family of drugs is the most successful cancer treatment ever created, generating about $1.5 billion in sales last year. Once sold exclusively by

Bristol-Myers Squibb

(BMY) - Get Report

as Taxol, the drugs are now available as a generic, sharply reducing their cost. Cell Therapeutics will likely charge a premium price for PG-TXL, so to steal away significant sales from Taxol, it must be safer and more effective.

And that brings us back to the ASCO abstracts, which were detailed in a research note last week published by CIBC World Markets biotech analyst Matt Geller.

"The studies are expected to show antitumor activity and a better side-effect profile compared to historical Taxol data," writes Geller. "In our view, the tolerability and administration profile for PG-TXL is favorable." Geller rates Cell Therapeutics strong buy, and his firm has a banking relationship with the company.

In one phase II test, according to Geller's research note, 47 patients who failed various therapies for several types of cancers, including ovarian, were given PG-TXL. Based on a preliminary analysis, four of 16 patients showed a partial response, four patients' disease stabilized, and eight patients got sicker. No serious, drug-related side effects were reported.

But according to another fund manager who has no position in Cell Therapeutics, the patients who responded to PG-TXL in this study were all still "sensitive" to paclitaxel, meaning that it's impossible to tell if PG-TXL is working any better.

"It would have been more encouraging to see positive responses to PG-TXL in patients where Taxol doesn't work," he says, referring to the preliminary results in the abstract. "But so far, we're not seeing that happen."

Careful not to discuss actual results, per ASCO rules, Bianco says this interpretation of the early data is wrong, and that PG-TXL will prove itself when the full results are released next month.

Cell Therapeutics must still conduct phase III tests before it pushes PG-TXL to the Food and Drug Administration. But here too, critics charge the company with backing away from its goal to prove that PG-TXL can work where Taxol is ineffective. The company changed one of its phase III clinical trials to show "non-inferiority" of PG-TXL compared with Taxol in a front-line treatment of ovarian cancer. Previously, the company planned to prove PG-TXL's superior efficacy in more advanced, or Taxol-resistant, ovarian cancer patients.

Bianco, again, insists critics are misreading the company's strategy. He says changes in the phase III clinical trial were made after consulting with ovarian cancer experts impressed with PG-TXL's ability to deliver longer doses of the drug with a better safety record. And gaining approval for PG-TXL as a front-line treatment for ovarian cancer opens up a much larger market opportunity for the drug, he adds.

The big selling point of PG-TXL has always been that the drug is a kind of "Super Taxol" -- able to leap Taxol-resistant tumors in a single bound, and do so without causing some of the nasty side-effects of the older drug. And a "Super Taxol" could be a super-seller, generating around $1.6 billion in annual sales, according to a company forecast.

But now some investors are injecting a dose of kryptonite into that story, believing that PG-TXL's only real advantage might be a better safety profile and more convenient dosing regimen. And if this bear case proves true, the drug could hit pharmacy shelves with all the authority of a 98-pound weakling.