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Failure of Key Gene Therapy Trial Leaves Vical in a Difficult Position

San Diego pharmaceutical company Vical Inc. may be headed down a slippery slope, analysts said, now that Allovectin, its gene therapy vaccine for skin cancer, has failed in late-stage clinical trials. And it will have to produce results with its other developing vaccines to regain its footing and investors’ confidence.

Shares plunged more than 57 percent after the company announced Allovectin’s failure — a $2.05 drop, closing at $1.52 on Aug. 12. Since then, shares have dropped an additional 14 percent, closing at $1.31 per share on Aug. 29. The company holds a market capitalization of $113 million.

The company is cutting its workforce by 47 employees, or about 39 percent, to compensate for the losses as it regroups and refocuses. The remaining 74 employees will focus instead on developing vaccines for infectious diseases such as HIV, dengue fever and herpes simplex virus type 2.

CEO Vijay Samant said Allovectin’s failure “does not diminish the potential for success” for the company’s remaining drugs. The company reported cash and investments of $70 million on June 30, which it said is enough to meet its needs through the end of 2014.

This isn’t the first failed phase 3 clinical trial for Vical. In 2000, it licensed technology that treated blood clots to French pharma giant Sanofi SA, but the drug failed in a late-stage trial in 2010. Following that news, Vical stock crashed about 35 percent. Investors, nevertheless, remained hopeful about Allovectin then but are now becoming increasingly wary about the company’s performance.

Slow Pipeline

Eric Schmidt, an analyst with New York-based Cowen and Co., said shareholders would have fared better had Vical ended the trial 12 to 18 months ago, when clinical results were already looking grim.

He wrote in a note to his clients that the company now will face “a lack of confidence in Vical’s pipeline” and that the market will show “frustration with the slow pace at which Vical’s DNA-based gene delivery platform has advanced.”

Indeed, the drug has been in development for nearly 20 years — longer than the typical drug development timeline of about 10 years, but not an unheard-of timeframe considering the company created a whole new platform, said Anastassios Retzios, president and founder of Bay Clinical R&D Services LLC, a San Ramon-based clinical trial consultancy.

Vical researchers’ new platform involved injecting modified genes into a cancer patient that enhances the ability of the immune system to kill tumors. But a 390-patient trial found that the drug didn’t significantly reduce the size of melanoma tumors or increase the survival rate of patients compared to those undergoing chemotherapy.

Enormous Attrition Rate

Retzios said that despite many years of research and development, such drugs often don’t get through the drug development pipeline. About 45 percent of all drugs fail in Phase 3 clinical trials. And only 8 percent of cancer drugs make it through all phases of clinical trials, according to estimates from the Food and Drug Administration.

While large pharmaceutical companies can absorb the financial blow of an enormous attrition rate, it can be devastating for small companies like Vical, Retzios said.

“When you’re a small company, there’s always a wish factor,” Retzios said. “Even if your data is ambivalent, you’ll always give it the benefit of the doubt.”

But at some point many companies are forced to change.

For example, British Antisoma Plc partnered with Swiss multinational Novartis AG to develop a lung cancer drug. But phase 3 data was disastrous, and it cancelled clinical trials in 2010.

“This is hugely disappointing for patients, investigators, investors and employees,” Antisoma CEO Glyn Edwards said at the time. “We will now become smaller and focus on maximizing the value of our other programs.”

But rather than shifting gears to research other drug therapies, Antisoma morphed into an investment and holding company by 2011. After 13 years at the company’s helm, Edwards left Antisoma.

Such stories are common as rain, and Vical is at a critical turning point.

“It’s sink or swim,” Retzios said.

Since June, Vical has been working with Japanese drugmaker Astellas Pharma Inc. on a multinational, 500-patient Phase 3 trial of a vaccine designed to control cytomegalovirus, a form of herpes. It is also planning to enter another early-stage clinical trial for herpes before the end of the year. It licensed technology for a malaria vaccine to New York-based Bristol-Myers Squibb Co. (NYSE: BMY). And two of the company’s products have been approved for use in animals: a vaccine for oral cancer in dogs and a vaccine for farm-raised salmon.

If the company has solid intellectual property to fall back on and “an active CEO who will be able to wean investors back,” it can survive, Retzios said.

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