Maxim Pharmaceuticals

(MAXM)

is gearing up to release data from an all-important study of its skin cancer drug Ceplene at the end of September. But Ceplene has already failed a pivotal skin cancer trial once before, and this second shot isn't likely to turn out differently.

I've dinged Maxim in past columns for performing shoddy clinical work, issuing (in my opinion)

misleading statements about its dealings with U.S. drug regulators, and for being led by a chief executive, Larry Stambaugh, who

defaulted on a cushy $2.85 million corporate loan in 2002, which he still has not fully repaid.

But all these red flags are just the sideshow to the main event, the phase III Ceplene skin cancer study. Maxim's future rides almost entirely on the results from this study. If it succeeds and Ceplene is ultimately approved, Maxim's stock -- in Wall Street's penalty box for more than four years -- will get a new lease on life. But if this Ceplene study fails, which I suspect will happen, Maxim's shares, now trading around $7, will likely take another steep fall.

As of Tuesday's close at $7, Maxim shares have fallen almost 30% since the beginning of July. Not coincidentally, the short position in Maxim is high. As of July 15, short sellers controlled more than 7 million Maxim shares, or 25% of the company's freely traded shares, according to Nasdaq. That's the biggest short position in Maxim in more than a year, and likely represents investors placing bets on the upcoming data release from the phase III Ceplene study.

One hedge fund manager, who is short Maxim via puts, is confident in a failed Ceplene study and believes Maxim stock has a lot farther to fall. He calculates Maxim's cash position at about $1.50 per share, and thinks Maxim could slide into the $2 to $2.50 range.

The foundation of all this cynicism regarding Ceplene dates back four years. As I've explained before, Maxim sought marketing approval in 2000 for Ceplene (then known as Maximine) from the Food and Drug Administration based on what the company said publicly was a successful phase III study, which used a combination of Maximine and the existing skin cancer drug, Interleukin-2, or IL-2.

An FDA advisory committee in December 2000 criticized Maxim for shoddy work and improper analysis of its Maximine study. Refuting the company's claims, the advisory panel concluded there was no evidence that the drug improved survival for skin cancer patients. The FDA agreed, rejecting the drug in early 2001.

But Maxim continued to insist that Maximine (now Ceplene) was a real drug. The company started a new phase III skin cancer study, this one restricted to skin cancer patients whose disease had metastasized, or spread, to their livers. The company narrowed the target patient population for the second study because it says this subgroup of patients (skin cancer patients with liver metastases) survived significantly longer in the first study and benefited from Ceplene.

It is this phase III study that is nearing completion, with results expected to be announced at the end of September. The study enrolled 232 skin cancer patients, who were randomized to receive IL-2 alone (the control arm) or a combination of Il-2 and Ceplene. In order for the study to be a success, patients taking the Ceplene combination must show a 50% improvement in overall survival compared to patients in the control arm.

Jon Aschoff, a biotech analyst with Brean Murray, believes this second Ceplene study will fail because there was no compelling evidence of the drug's efficacy in the analysis of the first skin cancer study, despite what Maxim claims.

When the FDA analyzed the first study, Aschoff said regulators found that patients with liver metastases were very poorly randomized between both arms of the study, essentially stacking the deck in favor of Ceplene (then known as Maximine.) To the FDA, this imbalance explained why Ceplene showed a benefit in skin cancer patients with liver metastases, not because the drug actually worked.

In the current study, the two arms of the Ceplene study will be balanced, which eliminates any artificial statistical advantage the drug might have, and significantly raises the odds that the study fails, Aschoff said. He initiated coverage of Maxim in July with a sell rating and a $4 price target. His firm doesn't have a banking relationship with the company.

Aschoff's negative opinion on Ceplene is supported by a March 2002 editorial in the

Journal of Clinical Oncology

, a well-respected medical journal. The conclusion: "We believe ODAC

the FDA advisory panel was correct in recommending against approval of this regimen based on this study, and that unfortunately, the addition of histamine

Ceplene to IL-2 does not represent a significant clinical advance for patients with metastatic melanoma, even those with liver metastases."

The aforementioned biotech hedge fund manager (short Maxim) says that after the statistical smoke was blown off the first Ceplene study there was no scientific data showing that the drug was having any real, positive impact on tumors. "In order to boost survival by 50% in this second study, a very high hurdle, Ceplene has to actually do something. But in the first study, there was no evidence of anything happening with this drug."

Not everyone is bearish on Maxim. Kate Winkler, a biotech analyst with Merriman Curhan Ford & Co., is forecasting positive results from the Ceplene study. In her research reports, Winkler claims Ceplene works by boosting a patient's immune system, therefore boosting the efficacy of concomitant cancer-fighting drugs; data from the first Ceplene study bolsters this thesis, she said. Winkler has a buy rating on the stock and a $12.50 price target. Her firm has a banking relationship with the company.

Adam Feuerstein writes regularly for RealMoney.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He invites you to send your feedback to

adam.feuerstein@thestreet.com.