Drug Firm’s Burst Bubble Stuns Investors : Pharmaceuticals: The failure of SciClone’s trial of a hepatitis medicine shows the risks inherent in biotechnology.


Without a product to market or its first dollar in sales, the small Silicon Valley biotechnology company counted on the allure of a promising experimental drug to entice investors.

It was not disappointed. Buoyed by predictions of a drug with billion-dollar sales potential, investors drove up the company’s stock market value to among the highest in biotech.

Then the bubble burst for SciClone Pharmaceuticals.

In late April, the San Mateo biotechnology firm stunned investors by announcing that a potential therapy to treat chronic hepatitis B appeared to have flopped in an important scientific trial. Study results showed the drug, thymosin alpha 1, was no more effective than plain water.


SciClone’s shares, which had peaked at $27 in November, plunged 60% in a single day. The stock dipped below $5, a value that pegged the company’s worth at no more than the cash on its balance sheet. The shares have rallied some since then, closing Friday at $7.625, up 37.5 cents in Nasdaq trading.

SciClone’s problems come at a bad time for the industry. Capital-hungry biotech firms already face a financing crisis that has some experts predicting a major shakeout as weaker companies begin to run out of cash. Analysts cite the weak stock market, health care reform and the growth of managed-care companies as reasons for the money shortage.

Another factor in the financing chill is the fact that many investors have soured on biotech after watching a series of drugs that looked great in the laboratory flop in human clinical trials.

SciClone’s situation has made Wall Street even more jittery, said Dr. Charles B. Engelberg, an analyst for Montgomery Securities in San Francisco who has been bullish on the San Mateo firm.


“People are saying they’re not going to place their bets early in the biotech game,” he said, explaining that investors may not put money into a company until a drug has passed several testing hurdles. “They will invest later and later based on this disappointment.”

“A lot of institutions ponied up a lot of money for SciClone shares,” said Evan Sturza, editor of New York-based Sturza’s Medical Investment Letter, who is skeptical of SciClone’s prospects. “This is an incident that will leave a very bad taste in investors’ mouths.”

Until recently, SciClone had the appearance of a winner.

The company, founded in 1989, adopted a business strategy that is unique in the industry. Unlike most biotech firms, it employs no research scientists and has no expensive laboratories or technical equipment.


Instead, SciClone’s plan is to buy the rights to promising “late stage” drugs that have faltered at other companies, continue their development and bring them to market. Instead of spending hundreds of millions of dollars to develop a drug from scratch, the company can focus its resources on drugs with some record of safety and effectiveness.

SciClone acquired the rights to thymosin in 1990. The drug--originally developed by Hoffman-La Roche Inc.--has been lauded as a potential cure for chronic hepatitis B, a disease that has 300 million carriers worldwide, most of them in China, India, Taiwan and elsewhere in Asia and Latin America. About 350,000 of those people are believed to have the type of chronic disease for which thymosin is designed.

The drug, a synthetic hormone, is expected to be cheaper to manufacture and have fewer side effects than Schering-Plough Corp.'s alpha interferon, the only U.S.-approved drug for chronic hepatitis B. In earlier, smaller clinical studies in the United States, the drug proved more effective against hepatitis B than did alpha interferon. The drug has been approved for use in Singapore for hepatitis B.

Bullish analysts have estimated that the worldwide market for the drug could be worth several billion dollars.


SciClone’s partner in thymosin’s development, Bethesda, Md.-based Alpha 1 Biomedical Inc., was also battered by news of the recent clinical findings. Alpha manufactures the drug and has marketing rights in the United States and Europe. SciClone owns the marketing rights in Asia, potentially the drug’s biggest market.

SciClone and Alpha have been locked in a yearlong legal fight over marketing and manufacturing of the drug. Last week, the companies said they are discussing a deal in which Alpha would relinquish full worldwide marketing rights to the drug in exchange for SciClone shares.

SciClone officials and analysts say they are puzzled over the negative data in the recently completed study of 99 patients at test sites in Los Angeles, Miami and Detroit. They note that the results show an extraordinarily high “remission” rate among patients who took a placebo--or patients who got better without taking thymosin.

“We feel this is a situation where we have a trial with incomplete and inconsistent results,” SciClone Chairman Thomas Moore said. “Now we’re in a position of having to explain why this trial has an aberrant data set.”


Moore said SciClone and Alpha, which oversaw the clinical study, are still trying to analyze the data. Alpha officials had discussed the results with SciClone “in very sketchy fashion” the day before the data was released publicly, he said.

The rocky relations between SciClone and Alpha led some observers to question whether results from the recent clinical tests may have been deliberately tampered with--a charge both companies strongly deny.

Some analysts say the recent tests signal that the drug is unlikely to work. Sturza says the prospects for thymosin have been overblown by SciClone officials and bullish analysts who have referred to it as a “billion-dollar drug.” He contends that much of the interest in the company came on the basis of a small preliminary test.

But Montgomery Securities’ Engelberg continues to rate SciClone a “speculative buy.” He predicts the stock could earn $4 a share within two years of the drug’s launch. That would put a value on SciClone stock of more than $100 a share.


“Given all the published data taken on balance, we believe that the evidence still supports the efficacy of (thymosin) in the treatment of hepatitis B,” said Engelberg, a doctor of internal medicine. He said the next crucial test for the drug is a 150-patient clinical study taking place in Taiwan, but those results probably won’t be known until later this year.

Montgomery, which has taken a lot of heat from angry investors for its support of SciClone, was a co-underwriter with Smith Barney Shearson of SciClone’s secondary stock offering in January. SciClone sold 2 million shares at $23.25 each, raising $46.5 million.

Moore says the negative results have forced the company to take “an enormous amount of corporate energy” explaining to investors and others what went wrong. He says the company, which has $80 million in cash set aside, still believes the drug works.

And others say Wall Street’s punishing reaction to the results show once again that investors still don’t understand the high risks of biotechnology.


“This is an important trial and it’s a negative that the drug didn’t do well,” said Kenneth Lee, Ernst & Young’s director of life sciences industry services. “But that is not an ironclad conclusion about the power of a drug candidate.

“Looking at a drug at any point of time as the final story is also risky,” he said.

Falling Prices

SciClone Pharmaceuticals’ stock price took a beating last month when the company disclosed disappointmenting results of an experimental drug to fight chronic hepatitis B. Monthly closes, except latest:


Friday: $7.625, up 37.5 cents.

Source: Dow Jones