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has run into a buzzsaw of rumors linking its experimental obesity drug, Axokine, with a potentially serious nervous system disorder.

Two weeks ago, executives at the Tarrytown, N.Y.-based biotech firm acknowledged that a person taking Axokine as part of an ongoing, late-stage clinical trial developed Guillain-Barre syndrome -- a nerve disorder that causes temporary muscle weakening and paralysis.

Regeneron was quick to deny any connection between its drug and the patient's illness, and its assertion was backed by the opinion of the patient's doctor. But that hasn't stopped concerns from being raised about Axokine's safety, because the drug has already shown some evidence of making a patient's nervous system susceptible to certain viruses.

All this has played havoc with Regeneron's stock. Shares sank 19% to a 52-week low of $19.74 per share on Feb. 6, the day Regeneron executives, prompted by questions at an investment banking conference, disclosed the case of Guillain-Barre. The stock has since recovered somewhat, closing Thursday at $23.39 per share.

Regeneron is developing Axokine as a possible new treatment for morbidly obese people. The drug, injected once a day, targets a receptor in the hypothalamus area of the brain that suppresses appetite. Results of midstage tests conducted last year showed that patients did lose weight after taking Axokine -- not a lot of weight, but a small, gradual decline. This prompted Regeneron to start a two-year, late-stage clinical trial in 2,000 patients last August. Additional trials will be conducted soon on another 2,000 patients.

Blame Game
Regeneron's shares are fighting rumors

But Axokine is not without side effects, which is why the Guillain-Barre case is raising safety concerns. In earlier studies, a person taking the drug was diagnosed with Bell's palsy, another nerve-related viral condition that causes temporary facial paralysis. Still other patients suffered from re-emergence of symptoms related to the herpes virus.

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The fear is not that Axokine is causing these side effects directly, but that it's suppressing the body's ability to keep potentially damaging viruses at bay. And because Axokine affects the central nervous system, the viruses that may become reactivated are ones that affect the nerves, such as Bell's palsy, Guillain-Barre or herpes.

"While we do not believe that Axokine directly causes conditions such as Guillain-Barre syndrome, we cannot rule out the possibility that it predisposes nerves to the effects of the usual inciting viruses," said UBS Warburg biotech analyst Andrew Gitkin in a recent research note.

Gitkin rates Regneron a hold, believing the Guillain-Barre case raises additional risks about Axokine that won't be answered until more patients are treated with the drug. (Gitkin's firm doesn't have a banking relationship with the company.)

Patient's Doctor Clears Drug

Charles Poole, Regeneron's vice president of investor relations, says the company's investigation of the Guillain-Barre case found no link to Axokine. The incident occurred about two months ago. The patient was pulled out of the study, hospitalized, and has since recovered.

"The patient was treated by a neurologist who concluded that Axokine had nothing to do with the onset of Guillain-Barre at all," he says, adding that follow-up tests showed the patient hadn't developed antibodies to Axokine either, which indicates the patient was not reacting negatively to the drug.

Furthermore, Poole says the company believes there is no substantial medical proof linking Axokine to the other nerve-related disorders occurring in its patients.

"The cases of herpes reactivation we've seen are really just cold sores which can be caused by a whole host of factors," he says.

Robertson Stephens biotech analyst Mike King, in a research note published earlier this month, said investors overreacted to the Guillain-Barre case, and that the weakness in Regeneron's stock presented a buying opportunity. King rates Regeneron a buy, and his firm has done underwriting for the company.

Poole says all of its clinical investigators, their respective data safety monitoring boards and the Food and Drug Administration have been notified about the Guillain-Barre case, per regulation, but that no further action was deemed necessary unless new cases appear. If new cases of Guillain-Barre do pop up, the Axokine clinical trial could be halted, which would all but end the drug's development.

Regeneron expects to report preliminary efficacy results from its Axokine clinical trial in the first quarter of next year, with late-stage testing scheduled for completion in January 2004.