Shares of Human Genome Sciences Inc. fell 44 percent on Wednesday after the company reported that an independent data monitoring committee review of its two ongoing Phase III trials of Albuferon (albinterferon alfa-2b) in chronic hepatitis C turned up a higher rate of serious pulmonary adverse events in the higher dose group.

The finding prompted HGS to reduce dosing in the trials. Dubbed ACHIEVE 1 and ACHIEVE 2/3, the studies had randomized 2,264 treatment-naïve HCV patients to receive ribavirin plus either 900 mcg of Albuferon dosed every two weeks, 1,200 mcg of Albuferon dosed every two weeks, or Pegasys (pegylated interferon alfa-2a, F. Hoffmann-La Roche Ltd.) dosed weekly. Following the DMC recommendation, HGS transitioned all 1,200-mcg Albuferon patients to the 900-mcg dose.

During a conference call, HGS President and CEO H. Thomas Watkins attempted to placate investors by pointing out the positives. "For some time, as most of you know, we have regarded the 900-mcg Albuferon dose as the dose that we and our collaborator Novartis are most likely to bring to market," Watkins said, adding that the DMC "did not express any safety concerns" regarding the 900-mcg dose.

Watkins also emphasized that the dosing changes will not slow down the Albuferon development timeline. HGS still expects initial Phase III data late this year, final Phase III data by the spring of 2009 and global regulatory filings by the fall of 2009.

Despite Watkins' arguments, investors pushed shares of Rockville, Md.-based HGS to new 52-week lows on Wednesday. The stock (NASDAQ:HGSI) closed down $4.40 at $5.62.

Of concern to analysts is the future of Phase II trials HGS and Novartis AG had planned to evaluate higher doses of Albuferon administered monthly. Monthly dosing could offer a significant market advantage compared to Pegasys dosed weekly or even Albuferon dosed every two weeks. HGS indicated it remains committed to those trials, but Lazard Capital Markets LLC analyst Terence Flynn wrote in a research note that the monthly program "could be delayed" due to the adverse events seen at the 1,200-mcg dose.

Also of concern to analysts was the fact that although both Phase III trials are designed to establish non-inferiority to Pegasys, HGS had stated publicly that it hoped to see superiority at the 1,200-mcg dose. Showing non-inferiority with the 900-mcg dose shouldn't be a problem: in Phase IIb trials, 900-mcg Albuferon provided a sustained virologic response (SVR) at 24 weeks in 58.5 percent of patients, compared to 57.9 percent on Pegasys. But a claim of superiority rather than just non-inferiority could have provided an important market advantage.

Joseph Schwartz, analyst with Leerink Swann & Co., argued that the market response was an overreaction. In a research note, he wrote that he had never viewed superiority at the 1,200-mcg dose as "likely or necessary" and that the Phase IIb data "clearly suggest that 900 mcg [Albuferon dosed every two weeks] is as good or better than Pegasys, which remains the primary endpoint for Phase III."

But others weren't so sure.

HGS was unable to provide specifics regarding the adverse events observed by the DMC, saying only that they were "expected and rare." While serious pulmonary adverse events previously have been associated with interferon treatment, the lack of detail provided by HGS prompted Stanford Group Co. analyst Han Li to question whether the events were dose-related and "could potentially surface in the 900-mcg dosing group."

In the Phase IIb trial, Albuferon dosed even at 900 mcg had more serious adverse events than Pegasys (32.2 percent vs. 29.8 percent) and resulted in a higher rate of discontinuation due to adverse events (9.3 percent vs. 6.1 percent). Overall, both the safety and efficacy of Albuferon 900 mcg and Pegasys were deemed comparable, with Albuferon offering the advantage of less-frequent dosing, improved quality of life and better efficacy in a subgroup of heavier patients.

But will these differentiators provide enough benefit for a risk-averse FDA to approve Albuferon if it shows increased side effects compared to Pegasys? To Susquehanna Financial Group analyst Jason Kolbert, it comes down to whether the higher drop-out rate in the Phase IIb trial was really due to side effects or just due to the fact that the trial was not blinded and patients tend to drop out more when they know they are on an experimental drug.

In the blinded Phase III trials, if the dropout rate turns out to be higher, "you have to ask if the benefits of less frequent dosing outweigh the risks of side effects," Kolbert said. But if the dropout rate is in line with that for Pegasys, Kolbert said he would expect the efficacy data to improve as well, creating an even better approval prospect.