Cat allergy flop torpedoes high-profile UK biotech Circassia

* Shares (Berlin: DI6.BE - news) tumble 64 pct on failure of immunotherapy

* Treatment fails to show benefit over big placebo effect (Adds CEO interview, details on investors, updates shares)

By Ben Hirschler

June 20 (Reuters) - Circassia Pharmaceuticals lost nearly two-thirds of its value on Monday as its experimental cat allergy treatment failed in a late-stage trial, dealing a major blow to the high-profile British biotech company.

Circassia (Stuttgart: 23863607.SG - news) listed on the London stock market in March 2014 in Britain's largest biotech flotation for decades and last year it expanded by buying two companies focused on asthma.

Its two biggest shareholders are Invesco (NYSE: IVZ - news) and Neil Woodford, both longstanding backers of UK life science. They have increased their holdings in the last six months to 35.1 and 19.2 percent respectively, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data.

Hopes for a cat allergy treatment have been central to Circassia's investment case, taking its valuation to $1 billion, but the company's immunotherapy failed to meet the main goal in a Phase III study because of a marked placebo effect among patients not on therapy.

As a result, all groups in the study showed improvement compared to the baseline and the results of the active treatment groups were not significantly better than those on placebo.

In fact, all the groups showed an improvement of close to 60 percent in rhinoconjunctivitis symptoms, such as itchy eyes, runny noses and sneezing.

RBC (Other OTC: RBCI - news) analyst Nick Keher described the news as "very disappointing" and shares in the company fell 64 percent to 97 pence by 1200 GMT. The stock was floated two years ago at 310p.

Unlike antihistamines, which provide short-term relief, Circassia's treatment aims to change patients' underlying allergy by making their immune systems tolerate allergens.

The company said it would stop its recently initiated registration study of its grass allergy treatment and preparatory work for a study on suitable doses of its ragweed allergy therapy.

DUSTING DOWN

Steve Harris, Circassia's chief executive, said he only got the clinical trial results over the weekend and was surprised and disappointed by the findings, since such a dramatic placebo effect was not seen in earlier mid-stage clinical trials.

The placebo effect is well-known in medicine but the size of its impact in this trial is nonetheless puzzling.

Some analysts suggested it might have been due to patients over-reporting baseline symptoms in order to get into the study, although Harris (Stuttgart: HRS.SG - news) said he was not convinced by this explanation.

"We have to dust ourselves down, understand the result and get on with building the business up again," Harris told Reuters.

Oxford-based Circassia will now focus more efforts on its respiratory franchises, which were unaffected by the results.

This includes the Aerocrine (Other OTC: ACNOF - news) business bought last year for just over $200 million, which makes instruments to measure airways inflammation for managing asthma, and a pipeline of generic lung drugs that came with the purchase of Prosonix.

Circassia said its unaudited cash balance remained over 139 million pounds ($202.5 million).

"We were hoping for a better scenario, but under this scenario we still have the cash and the manpower to progress a number of exciting opportunities," Harris said.

($1 = 0.6838 pounds) (Additional reporting by Mamidipudi Soumithri in Bengaluru; editing by Keith Weir and Jason Neely)