"This is not the conference call we were hoping to have with you," Richard Hollis, chairman and CEO of Hollis-Eden Pharmaceuticals Inc., told investors Thursday morning after the Department of Health & Human Services (HHS) declared Neumune technically unacceptable and thus no longer in the running for a Project BioShield contract for radiation sickness.

Shares of the San Diego-based company (NASDAQ:HEPH) plunged to a 52-week low of $3.94 late Wednesday and continued to slide on Thursday, closing down $1.38, or 32 percent, at $2.90.

"We are unable to comprehend how Neumune can no longer meet the technical requirements," Hollis said. In June 2006, Hollis-Eden was told its proposal for Neumune was in the competitive range for the HHS's solicitation. The company said that since October it believed it was the only contender for the contract. Although the award date was extended multiple times as HHS sought additional information, Hollis said the data provided was not new and emphasized that Neumune demonstrated a statistically significant survival benefit in a primate model and an attractive safety profile in clinical studies.

"We clearly met all of the very detailed requests of this solicitation," Hollis said. "We are at a loss to explain why HHS would not want to acquire this drug candidate." He added that the company has requested a debriefing to obtain additional information.

Hollis called the HHS decision "shocking" and an "injustice." Yet not everyone was surprised.

Michael Wilhelm, CEO of ImmuneRegen BioSciences, of Scottsdale, Ariz., a wholly-owned subsidiary of IR BioSciences Holdings Inc., said he "didn't think there was enough data yet that the government were comfortable with."

ImmuneRegen is developing a competitive radioprotectant product, Radilex, and announced Thursday that its drug prolonged survival of animals exposed to lethal gamma irradiation and increased platelet concentrations in surviving animals. Cleveland BioLabs Inc., of Cleveland, also is developing a radioprotectant molecule.

Perhaps more surprising than the HHS rejection of Neumune was the agency's decision to cancel its request for a proposal in acute radiation syndrome (ARS) completely.

Joseph Pantginis, analyst with Canaccord Adams, called the situation "beyond the worst-case scenario," which he had originally envisioned as a competing company winning the award.

Congressman James Langevin (D-RI), chairman of the Homeland Security Subcommittee on Emerging Threats, Cybersecurity, and Science & Technology, also criticized the HHS decision. "BioShield will cease to attract companies to participate if RFP's and contracts continue to be cancelled," he said in a statement.

Although HHS could not comment specifically on Hollis-Eden due to confidentiality restrictions, spokesman Marc Wolfson told BioWorld Today the contract was cancelled because "no competing product met the government's requirements as identified in the RFP."

Wolfson emphasized that HHS is "still committed" to purchasing treatments for ARS for the national stockpile and plans to issue a new RFP as quickly as possible. The new RFP will include changes due to the Biomedical Advanced Research and Development Authority (BARDA), such as the ability to provide incentive payments to companies at certain development milestones rather than only upon delivery of product.

The real benefit of BARDA, according to John Clerici of law firm McKenna Long & Aldridge LLP, is that it "will allow products to get further along" so the "government doesn't need to take risks on early stage products." Essentially, HHS will be able to survey the market and decide either that there are sufficient products to compete for funding through BioShield, or that the products are too early and need to be advanced using BARDA first.

Clerici told BioWorld Today he anticipates that BARDA will help address the criticism BioShield has received due to its lack of transparency and communication with companies as well as inability to guarantee a market opportunity.

"BioShield is not being implemented the way it was intended," Pantginis said. He explained that companies are willing to invest money into cancer drug development because they know a market exists. "It's a lot different from developing a drug where no market exists," he said.

Hollis agreed that a "lack of transparency" and "ability to change the rules in the middle of the game" send a negative message to industry.

Yet Clerici maintained there is reason for optimism. "This is by no means the death of BioShield. HHS is self-aware of the problems and working to fix them." He also pointed to the anthrax therapeutics space, where Human Genome Sciences Inc. and Cangene Corp. have both received BioShield awards, as an example of where BioShield has worked.

Wilhelm told BioWorld Today ImmuneRegen is "very comfortable" with BioShield and hopes to meet the criteria for the next ARS request for a proposal.

Regardless, Langevin said he believes that "rigorous oversight of BioShield is warranted" and plans to begin that oversight with a hearing next month. Hollis said the company already has been asked to testify at upcoming hearings.

As for Hollis-Eden, the future of Neumune in ARS is now uncertain. "There is clearly a need for this compound; we just have to make sure there is a market for it before we spend shareholder money to bring it forward," Hollis said. The company already has spent $80 million to $90 million on the drug's development in ARS.

One option could be to sell the drug to international governments. State and local governments have also shown an interest. The Department of Defense could get involved by issuing its own request for a proposal in ARS. Considering that the DOD co-developed and supports the drug, Hollis said the company plans to explore this option.

But Pantginis said he had the sense the DOD was waiting to see what HHS did. He downgraded Hollis-Eden from buy to hold on the news, removing Neumune from his projections due to the "many open-ended questions" about its future.

Outside of ARS, Hollis-Eden plans to begin Phase I/II trials this month with Neumune in the treatment of hospital-acquired infections. It also will file an investigational new drug application this month with HE3286, which will be studied first in Type 2 diabetes and eventually in rheumatoid arthritis. Later this year, the company plans to begin clinical trials with HE3235 in prostate cancer.