Progen announced today the results of its Phase II advanced...

Progen announced today the results of its Phase II advanced melanoma study. The announcement was not structured properly in our view and lead to mass confusion about the effectiveness of the drug. We believe investors have focussed attention on the fact that PI-88 was only able to shrink tumours in one patient, rather than the stabilisation of disease (27% of patients) and survival data presented (9 months). This explains the savage reaction in the market to the announced data.

PI-88 was never intentioned to cure cancer per se, but rather slow/halt disease progression and help prevent metastasis, as with other anti-angiogenesis drugs. Furthermore, tumour shrinkage is not necessarily an expected outcome for anti-angiogenic drugs and tumour shrinkage rates, overall, have very little to do with survival (PI-88 showed this). One must also bear in mind, the trial was on extremely sick patients for whom all other treatments had failed. Mean survival time was 9.0 months for PI-88 (some other commonly used drugs have mean survival times of 6-7 months).

The U.S Food and Drug Administration (FDA) is now taking the view that evidence of extended life should be provided for new drug approvals in oncology. Survival is the gold standard of clinical end points, given the patient is dead or alive, whereas tumour response rates tend to be quite variable in how they are obtained. For example, 59% of oncology drugs approved in the last 3 years had mean survival times of the patients as the key clinical endpoint - not tumour size.

A license deal for PI-88 was widely anticipated by March 2005. Since that date has passed, the shares have declined in value. However, we believe the value proposition for PI-88 has increased significantly since that time, on the back of further clinical data results and very promising sales and clinical results from a related drug called Avastin™. This drug was approved on the basis of a 4.7 month increase in overall patient survival.

Our risk adjusted fully diluted valuation is $5.43, a 75% premium to the current share price. The per share contribution of PI-88 and PI-166 to the valuation is $4.75 and $0.68, respectively. The Company is expected to have approximately $23 million in cash as a result of exercise of underwritten May 05 options, which should be sufficient to fund all of its current Phase II clinical trials. The positive Phase II trial results coupled with the expectation of a significant license deal for PI-88 drives our Speculative Buy recommendation.

do your own research.