UPDATE 3-Avigen's lead drug fails mid-stage trial, shares sink

(Recasts, adds analyst comments, updates share movement)

By Suzannah Benjamin

BANGALORE, Oct 21 (Reuters) - Avigen Inc (AVGN.O) said its lead drug for the treatment of spasticity associated with multiple sclerosis failed to meet the main goal of a mid-stage trial, sending its shares plunging 84 percent to an all-time low.

Two analysts said Avigen may discontinue development of the drug AV650, or tolperisone, which was the most important value driver for the biopharmaceutical company that investors focused on.

"We are somewhat surprised with the outcome of the multiple sclerosis trial, given the prior clinical data and the fact that AV650 is already a marketed product in Europe as an antispasticity agent," Oppenheimer & Co analyst Brian Abrahams said.

The 150-patient trial failed to show a statistical significance in reduction in patients' Ashworth scores, a standard tool used to measure increased resistance to passive limb movement, compared to placebo.

The company, which focuses on therapies for neurological care, said the trial also failed to meet the secondary goal of reduction of muscle spasm.

Shares of the company sank 82 percent to 60 cents in midday trade on Nasdaq. They had touched a low of 53 cents earlier.

The news is clearly devastating for the company, and it would need to completely change its strategic focus, Abrahams, who has a "perform" rating on the stock, said by phone.

Avigen said it will shift its focus and resources towards the clinical development of AV411, an experimental treatment for neuropathic pain and opioid addiction and withdrawal.

By the end of 2008, the company expects to have about $50 million of cash and securities.

"$50 million is not sufficient to ultimately bring AV411 through phase III," RBC Capital Markets analyst Michael Yee said in an e-mail.

Analyst Abrahams said the AV411 program is relatively risky, but given its adequate capitalization, the company will be able to reinvent itself, as it has in the past.

Oppenheimer makes a market in the securities of the company.

Ladenburg Thalmann analyst Juan Sanchez downgraded the stock to "sell" from "buy," and said Avigen is now worth about $1 a share.

The company's remaining drug candidates, AV-513 for the treatment of bleeding disorders and AV-411, need to generate additional data before significant value can be attributed to them, the analyst said. (Additional reporting by Jennifer Robin Raj; Editing by Himani Sarkar and Deepak Kannan)