Prana Biotechnology Ltd.'s dreams of becoming a late-stage drug development company in 2005 suffered a blow Monday with the company's decision to cancel an upcoming Phase II/III trial of PBT1, a disease-modifying compound for Alzheimer's disease, due to manufacturing toxicity issues.

Shares of Prana (NASDAQ:PRAN) dropped by 60.4 percent Monday, losing $1.98 to close at $1.30, following the announcement canceling the PLACQUE (Progression Limitation in Alzheimer's: Clioquinol's Efficacy) trial set to begin this quarter. Prana received approval in January from the UK's regulatory agency for the 435-patient study to evaluate two dose levels of PBT1 (clioquinol) added to the existing therapy in patients with moderate Alzheimer's disease.

"Unfortunately, Prana needs to cancel the study," said Ivette Almeida, a spokeswoman for the Melbourne, Australia-based company, which is "planning to do a strategic review and investigation" of its PBT1 programs.

The company said it found "unacceptably high" levels of a toxic diiodo impurity, believed to occur during the PBT1 synthesis. The impurity could cause an increased risk of side effects and mutagenicity. Although the company considered methods to reduce the toxicity, it said those methods likely "would not be successful in a timely manner and that further development of PBT1 is not warranted."

No further details were available, but Almeida said Prana likely will have more to say after completing the strategic review.

The good news is that it does not affect Prana's second product in development, PBT2. Even though it is described as a follow-on compound to PBT1, the product is not at risk for the same diiodo toxicity because, unlike PBT1, it does not contain iodine in its structure, Almeida said.

Prana initiated a Phase I trial of PBT2 last month, and Almeida said the company still is enrolling patients.

The bad news, of course, is that Prana's lead product is for now out of the picture, despite promising Phase II results released in December 2003 demonstrating a statistically significant difference at several time points between the treated and untreated Alzheimer's patients. Data from the extension study further reinforced those findings and indicated that PBT1 appeared to slow the expected progression of the disease by about half. The drug also was found to be well tolerated.

When PBT1 received clinical trial authorization from the Medicines and Healthcare products Regulatory Agency, Prana hailed it as a significant milestone for the company, which only a few months earlier had settled patent litigation suits with P.N. Gerolymatos SA, of Athens, Greece. In the settlement, Prana retained the rights to PBT1 in the U.S. and Japan.

With the patent litigation completed and approval to begin a Phase II/III trial, the company said it had hoped to accelerate the development of PBT1, the first of its metal protein-attenuating compounds, and eventually launch a drug that targeted what is believed to cause Alzheimer's disease - the accumulation of beta-amyloid plaques in the neocortex of the brain.

Prana's drug discovery and development platforms are based on "the metal theory" of Alzheimer's disease, which suggests key metals, such as zinc and copper, are responsible for the aggregation of beta-amyloid and the formulation of amyloid plaques. Both PBT1 and PBT2 were designed to reduce beta-amyloid accumulation.

The company, founded in 1997 to focus on age-related degenerative disorders, has ongoing research programs to develop other possible targets for Alzheimer's, as well as therapeutics to treat Parkinson's disease, Creutzfeldt-Jakob disease, amyotrophic lateral sclerosis, age-related cataracts and tardive dyskinesia.