UPDATE 2-Penwest's pain-drug study fails main goal; shares drop

(Recasts; adds details from conference call, analyst's comments, updates share movement)

By Jennifer Robin Raj

BANGALORE, Feb 4 (Reuters) - Penwest Pharmaceuticals Co (PPCO.O) said Nalbuphine ER, its experimental drug for moderate chronic pain, did not meet the main goal of a mid-stage trial that was marred by a large number of patient dropouts, sending shares down more than 28 percent.

The company said the mid-stage trial did not meet the main goal of reducing pain, but achieved a number of secondary goals. One-third of the patients enrolled dropped out, mostly in the first week of the study.

Monday's share slide reflects the "lack of diversity and opportunity" for the company, which has few products in development, analyst Angela Larson with Susquehanna Financial Group said by phone.

Apart from Nalbuphine, the Danbury, Connecticut-based company's pipeline consists of three drugs targeting neurological disorders in early-stage development.

The company primarily focuses on neurological drugs, and as a result, the actual impact from Monday's data on Nalbuphine is minimal because the product was expected to be out-licensed in the future, Larson said.

Penwest said the results from the trial for Nalbuphine showed efficacy sufficient to support continued development of the drug, and added that it plans to conduct another mid-stage trial scheduled to start in the second half of 2008.

The company said it has initiated partnering discussions for Nalbuphine in Europe, but plans to retain U.S. rights for the drug.

Chief Executive Jennifer Good said during a conference call that the company would like to have a European partner during the second mid-stage trial to share some of the risks, money and bring some development expertise. After the trial, the company may look for a marketing partner in the United States.

Nalbuphine, if approved, will compete in a market for chronic pain worth about $1.5 billion. The main competitive product in the space is Purdue Pharma LP's drug OxyContin, Susquehanna Financial's Larson said.

"SURPRISE" SECOND STUDY

The company said the new mid-stage study for Nalbuphine is expected to take about one year to complete and the goal will be to demonstrate statistically significant analgesic efficacy compared with a dummy drug.

"What surprises me today is they (Penwest) want to do another study starting in the second half of the year, and we need to see them increase their cash balances before they start that study," Larson said.

Larson forecasts 2008 cash burn of $37 million for the company, and expects Penwest to end the year with $32 million cash in hand.

As of September 30, 2007, Penwest had $29.9 million in cash, cash equivalents and marketable securities. In November, 2007, the company had said its cash level was sufficient to fund its operations at least into the second quarter of 2008.