Cell Therapeutics ( CTIC) has one approved cancer drug on the market with decent, albeit not huge, sales; two other experimental cancer drugs are involved in late-stage, pivotal clinical studies. What's a portfolio like this worth to Wall Street?

Biotech investors have certainly awarded other, similarly positioned companies market valuations of around $1 billion. Onyx Pharmaceuticals ( ONXX), which has just a single cancer drug in phase III studies, sports a market cap of $1.3 billion. Telik ( TELK) has a bit more going on in its drug pipeline, although investors are only really focused on a single product in phase III studies. Market value: $945 million.

So, what gives with Cell Therapeutics? The Seattle biotech firm tallies a paltry market value of just $296 million. The stock closed Wednesday down 61 cents, or 9%, to $5.89 -- a new 52-week low. At that price, Cell Therapeutics is off 38% year to date and 50% in the past 12 months -- that's a wide underperformance relative to its biotech peers any way you slice it.

Let's just say that investors, when it comes to Cell Therapeutics, are in a serious "show-me" mood. You can lay part of the blame on a listless market that's not whetting anyone's appetite for added biotech risk. However, Cell Therapeutics has a history of overpromising and underperforming. Investors are likely to wait for documented good news from this company -- and not just happy talk from executives and analysts -- before they hop back on the investing wagon.

On Wednesday, the company announced plans to sell 8 million shares in a follow-on offering, a move that will further dilute current shareholders and is not likely to boost the company's stock price anytime soon.

Cell Therapeutics executives could not be reached for comment.

The showpiece of Cell Therapeutics' cancer drug pipeline is Xyotax, a reformulation of the blockbuster chemotherapy agent paclitaxel, sold for years by Bristol-Myers Squibb ( BMY) as Taxol before it went generic.

Paclitaxel is a great cancer-fighting drug, but at the cost of significant side effects. Xyotax combines paclitaxel with a proprietary molecule that is supposed to maintain, possibly enhance, paclitaxel's efficacy while reducing toxic side effects and the time required to administer the drug.

Tracking Stellar 3

Cell Therapeutics is putting Xyotax through its paces in a series of phase III studies. The most advanced of these studies, dubbed Stellar 3, is enrolling newly diagnosed non-small cell lung cancer patients to determine whether the combination of Xyotax and the chemo drug carboplatin increases survival compared with paclitaxel and carboplatin.

Though the lung cancer patients enrolled in this study haven't previously received chemotherapy, their cancer was diagnosed late, and they are in relatively poor health. On a performance scale of 0-5, Stellar 3 patients are ranked a 2, which means they can walk and care for themselves most of the time, but are too sick to work at all. (A patient with a performance status of 0 is fully active, while a performance status 5 patient is deceased.)

Results from the Stellar 3 study are expected in early 2005. Normally that's far enough in the future for investors not to get fixated on the event. But in this case, the data were expected in the fourth quarter of this year. Cell Therapeutics pushed back the projected data release because patients in the study seemed to be living longer than expected.

While taking care not to draw specific conclusions, Cell Therapeutics executives have been dropping hints in public that this Stellar 3 timeline pushback, at the very least, suggests that Xyotax is working. And they've done nothing to suppress comparisons between the Stellar 3 study and the recently concluded (and successful) OSI Pharmaceuticals ( OSIP) study for its lung cancer drug Tarceva . Results from the Tarceva study were also delayed, as it turns out, because it showed that Tarceva boosted survival. (OSI's stock price, naturally, soared on the news.)

Punk Ziegel biotech analyst Matt Kaplan believes that the Stellar 3 delay does suggest that positive data are coming. He combed medical journals and found 10 studies involving similar lung cancer patients with performance status 2 who were treated with various combinations of chemotherapy drugs. In these studies, median survival fell typically into the four-to-five month range.

The last patient enrolled in the Stellar 3 trial in November 2003, so given an anticipated early 2005 data release, Kaplan believes this suggests that Xyotax is having a positive impact on survival. Kaplan rates Cell Therapeutics a buy with an $18 price target. His firm has a banking relationship with the company.

But yet, investors haven't responded at all. The stock is actually down from when Cell Therapeutics first started dropping bullish hints about Stellar 3 in May.

"My guess from an investor standpoint is that in the absence of any near-term data, investors are not willing to give Cell Therapeutics the benefit of the doubt, especially when management has a history of disappointing," said Lehman Brothers analyst Jim Birchenough.

The biggest disappointment so far, he says, is the company's failure to follow through on a much-hyped promise to ink a Big Pharma marketing partnership for Xyotax. Birchenough downgraded Cell Therapeutics to equal weight from overweight in June 2003, when instead of announcing an expected Xyotax deal, the company ventured over to Europe to acquire Novuspharma, a rather obscure Italian biotech firm that had been on the sale block for months, with no takers. (Birchenough's firm doesn't do banking for Cell Therapeutics.)

Indeed, a look at Cell Therapeutics' chart shows that its stock hit the skids the day the Novuspharma acquisition was announced on June 17, 2003. The previous day, the stock hit an intraday high of $15.70 -- it hasn't been anywhere close to that since.

Looking Before You Leap

Birchenough also cautions against jumping to happy conclusions about the Stellar 3 study simply because Cell Therapeutics executives have pushed back the data timeline. He notes, correctly, that non-small cell lung cancer patients are a notoriously heterogeneous group, which means that other factors could be affecting the study, not the least of which may be that paclitaxel patients in the study's control arm are also living longer.

For Xyotax to succeed in this study, it must prove itself superior to paclitaxel, which as I said above, is well known as an effective cancer drug. By comparison, OSI Pharmaceuticals' Tarceva study had an easier hurdle to vault because the drug was only being compared with a placebo.

A price has yet to be set for Cell Therapeutics' follow-on offer, but the timing of the financing in front of the Stellar 3 study results will cause some investors to worry more, and it will underscore the company's weak balance sheet -- another reason investors have stayed away.

At the end of the first quarter, Cell Therapeutics had $132 million in cash and marketable securities, but $190 million in convertible debt and negative shareholder's equity. Before this most recent financing, the company had enough cash to last though mid-2005.

Lastly, let's not forget that Cell Therapeutics has not exactly been a poster child for pristine corporate governance. The company granted CEO Jim Bianco a $3.5 million loan in 2002, due April 2004. But Bianco, to date, hasn't been able to repay the obligation in full, although he's promised to make good on it. Bianco and the rest of company management also fly in a company-leased corporate jet, a tad expensive and unusual for a company its size.

Don't look for Cell Therapeutics to exit from Wall Street's penalty box until, and if or when, Xyotax delivers.
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.

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