Isis Falls on Report that Cancer Drug Failed Test

Updated from 2:08 p.m. EST

Isis Pharmaceuticals ( ISIS) dropped 22% Friday after a sell-side analyst issued a downgrade note in which he claims that the biotech firm's key cancer drug failed a late-stage clinical study.

UBS biotech analyst Andrew Gitkin cut his rating to reduce from buy based on his belief that a phase III clinical study of Isis' drug Affinitak is not showing any significant benefit in lung cancer patients. Isis is expected to release results from this study in the first quarter of 2003.

"Our downgrade reflects heightened concerns regarding the impending release of phase III data for Affinitak," Gitkin wrote. "Recent conversations with investigators involved in the trial have not supported or increased our confidence about a successful outcome to this trial." Gitkin's firm has a banking relationship with the company.

After the close of Friday trading, Isis issued a statement saying that results from the Affinitak study have not yet been analyzed, and in fact, the data remains "blinded" to the company. But what Isis failed to explain in its statement is that the study is "open label," which means that doctors and patients know who is getting Affinitak and who isn't. Gitkin's negative call on the study's outcome resulted from conversations with doctors, not from anything obtained from the company.

Isis shares closed off $1.72, or 22%, to $6.19 in Friday trading. The stock moved up to $7 in after-hours trading.

Affinitak is a somewhat controversial drug because it relies on an unproven technology called antisense. These kinds of drugs are actually snippets of genetic code that work by infiltrating cells and preventing the expression of certain harmful proteins.

In Affinitak's case, it is designed to inhibit a protein that's believed to play a role in the development and growth of cancer cells. The 600-patient, phase III trial was designed to see if a combination of Affinitak and chemotherapy would be more effective than chemotherapy alone in patients with recently diagnosed, or first-line, non-small cell lung cancer.

In August 2001, Eli Lilly ( LLY) signed a partnership deal with Isis to codevelop Affinitak. At that time, the deal was seen as a validation of the antisense technology.

Along with Isis, shares of Genta ( GNTA) closed down 6% to $9.70 Friday because the company is also trying to develop an antisense cancer drug dubbed Genasense. Genta will be presenting some midstage test data on Genasense at the American Society of Hematology meeting taking place this weekend.

Gitkin's Isis downgrade Friday follows more than a week of rumors regarding the failure of the Affinitak trial that have spread across Wall Street's biotech trading floors. The rumors have contributed to slow, but steady, selling pressure on Isis shares. Isis executives selling company stock in October and November have also contributed to Isis' weakness, although many of the executives are selling under pre-approved insider trading plans.

One clinical oncologist familiar with the Affinitak test results told TheStreet.com that the lung cancer study has likely failed, based on unaudited test results that have been completed and available to Isis officials since early last month. This oncologist requested anonymity because the final results from the study have not been reported, but he has no investment position in Isis stock.

On a conference call held Friday night, Isis CEO Stanley Crooke blasted Gitkin's downgrade, insisting that the study is not completed and that there was no way any individual doctor could know enough about the trial's results to come to any conclusions. He added that a final analysis of the data would be done in March.

"I'm very disappointed by the events of the day. We and Lilly remain enthusiastic about Affinitak, not only for lung cancer, but for cancer in general," he said.

In his research note, Gitkin wrote that Isis could trade down to a range of $4 to $6 per share (the company has $2 per share in net cash) if the Affinitak lung cancer trial does fail. "While it is difficult to say, we currently believe that there is a 60% to 70% chance of a negative outcome."

A second, 1,000-patient study of Affinitak in lung cancer patients, sponsored by Lilly, is currently under way, with results expected in early 2004.

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