The suspense has been building for months about whether Cell Therapeutics has an important new drug for lung cancer patients, but when some...

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The suspense has been building for months about whether Cell Therapeutics has an important new drug for lung cancer patients, but when some key clinical results finally came out, it was a major letdown.

The Seattle biotech company announced today that a combination of its experimental drug, Xyotax, and a conventional chemotherapy drug failed to make patients live longer than a standard twin-drug chemotherapy regimen.

The news ignited a sell-off of Cell Therapeutics shares, sending them down near 48 percent to $5.25. The trading came on an extraordinary volume of 33.6 million shares.

“On the surface, this is obviously somewhat disappointing,” said Chief Executive James Bianco said on a morning conference call.

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Detailed statistics from the Xyotax trial, dubbed Stellar 3, were not released publicly because the company wants to release them at a medical meeting in May. But Cell Therapeutics said the trial of 400 patients missed its main goal of showing that the drug extends lives. The drug’s ability to prolong lives was roughly equal to that of the study’s control arm, the company said.

However, the Xyotax combination did show fewer side effects — less hair loss, nerve damage, heart trouble and muscle pain.

Cell Therapeutics

Founded: 1991

Headquarters: Seattle

CEO: James Bianco

Employees: 402

What it does: Develops cancer drugs with fewer side effects than standard treatments

Net loss: $165 million in 2004

Cash & Investments: $116 million at end of 2004

Source: Cell Therapeutics

Xyotax, which the company licensed from M.D. Anderson Cancer Center in 1998, was expected to show fewer side effects. It takes the active ingredient in Taxol, a successful chemotherapy drug, and combines it with a polymer to make it stable and soluble in the blood. Once the Xyotax molecule penetrates tumors, the polymer is designed to break down, depositing the chemotherapy inside tumors, where it remains to fight the disease.

The trial results, while disappointing to Cell Therapeutics and to patients, do not spell the end for Xyotax.

It has two other large, final-stage trials in lung cancer that are due to release results in the first half of this year. One measures the drug’s effectiveness alone in newly diagnosed patients; the other tests it in relapsed patients.

Bianco said the company is having ongoing discussions with the Food and Drug Administration about the results from the Stellar 3 trial and the other trials. About 1,700 patients are enrolled in the trials.

Hopes were high that the first trial would be successful. The company enrolled the last of 400 patients in the trial in November 2003 and expected to release comparative survival results by mid-to-late 2004 because patients were expected to live only a few months.

But the timelines were pushed back because patients were living much longer than they had been expected to.

Cell Therapeutics made bullish comments to investors last week, reminding them that the trial showed a median survival of 8.1 months when blending both arms of the trial, a significantly better-than-expected result. The company had hoped to release banner results in May at the American Society of Clinical Oncology conference.

Critics of the company doubted whether the patients enrolling in the trial were actually as sick as once thought, and they speculated that patients may have benefitted by receiving more cycles of treatment than usual.

Quynh Pham, an analyst with Delafield Hambrecht, said she downgraded the company’s stock to a “hold.” She said the company may have to persuade the FDA to modify the goals for the following two trials, a difficult task.

The Xyotax results announced today will not make or break the company, Pham said, but they do turn up the pressure.

“The risks are higher now,” Pham said. “This first trial has lowered their prospects.”

Pham does not own the stock, but her firm has done investment banking for the company.

If all the trials fail, Cell Therapeutics could fall back on another drug in development, Pixantrone for non-Hodgkin’s lymphoma. That drug is in the final stage of clinical testing, and the company plans to peek at clinical results late this year.

Cell Therapeutics ended 2004 with a net loss of $165 million and $116 million in cash and investments. Without compelling evidence that Xyotax prolongs lives, it will be more difficult for the company to partner with a pharmaceutical company to bring in much-needed cash.

Bianco said the company still plans to spend $95 million to $105 million this year. That leaves it with enough cash for a little more than a year.

Luke Timmerman: 206-515-5644 or