Just like taking off a Band-Aid, there are two ways to kill a drug trial: the slow, painful way, and the quick, painful way. A company can slowly kill a drug by analyzing the data in a bunch of different ways, looking for a glimmer of hope that the compound has some efficacy (Northfield Laboratories (NASDAQ:NFLD) provides a perfect example). Or the company can cut its losses at the first sign of failure and drop the drug in one fell swoop.

Pfizer (NYSE:PFE) chose the latter yesterday when it killed its non-small cell lung cancer (NSCLC) drug that it licensed from Coley Pharmaceutical (NASDAQ:COLY) two years ago. Pfizer said that an independent data safety monitoring committee had analyzed interim phase 3 clinical data and determined that the compound, PF-3512676, was no more effective in combination with standard cytotoxic chemotherapy than the chemotherapy regimen alone.

Pfizer stopped the two phase 3 and two phase 2 clinical trials that were testing the efficacy of the compound in combination with different chemotherapies. Given that clinical trials are expensive, the move will likely save the company millions of dollars developing a compound that it doesn't believe will receive FDA approval.

It had so much promise
PF-3512676 is a short DNA-like sequence compound that stimulates the Toll-like Receptor-9 (TLR9) in immune cells by mimicking the CpG motifs found in intracellular pathogens. This immune response should cause B-cells and T-cells to attack the tumor. The drug showed considerable promise in multiple phase 2 clinical trials for lymphoma, melanoma, renal cell carcinoma, and NSCLC, but that's why companies are required to do large phase 3 trials; sometimes, because of small sample size, phase 2 data can look promising with drugs that have no real effect.

There are two possibilities for why the compound wasn't effective. Either the immune response it elicited wasn't as strong as had been hoped, or the immune cells didn't attack the lung tumor cells. If it's the latter, the compound may be effective in treating other cancers; the amount of mutations in a cancer cell, which varies in different tumor types, determines whether the immune system recognizes the tumor cells as foreign. In that case, Coley might be able to partner the drug with another company.

Down but not out
Since Coley doesn't have any approved drugs, killing its lead compound resulted in a free-fall shedding of more than half its market cap. It would have received $455 million in milestone payments, plus royalties, upon successful commercialization of PF-3512676. However, Coley has two related products that have been licensed by big pharmaceutical companies, so it may be down, but it's certainly not out.

Coley is developing a TLR9 receptor agonist, VaxImmune, to be used in combination with vaccines. As with the cancer drug, VaxImmune stimulates the immune system -- in this case, to attack the antigen contained in the vaccine, thus eliciting a stronger immunity. It has licensed the compounds to GlaxoSmithKline (NYSE:GSK) and Novartis (NYSE:NVS) for use with their vaccine products. VaxImmune has recently entered phase 3 clinical trials in combination with Glaxo's cancer immunotherapeutics for NSCLC. Coley also has three U.S. government contracts to develop VaxImmune to increase the effectiveness of vaccines against bioterrorism and infectious agents, one of which has reached phase 1 trials.

In addition, Coley is developing TLR therapeutics for treating asthma, allergic rhinitis, and chronic obstructive pulmonary disease, which it has licensed to Sanofi-Aventis (NYSE:SNY). These diseases are all caused by an overreaction of the immune system, and Coley compounds act to channel the immune reaction away from the overreacting pathway into a more normal response. The lead compound in this program was well tolerated in a 2004 phase 1 clinical trial, but hasn't been developed further, so I wouldn't count on milestone payments anytime soon.

With $98 million in the bank at the end of last quarter and a current burn rate of about $35 million per year, Coley has some time before it will need a new cash infusion. After the tremendous hit Coley took, its market cap is now less than $100 million, and it's certainly undervalued if any of its partnered compounds make it to market. While all the compounds that Coley is developing act on the same TLR pathway in the cell, the immune responses required for them to be effective are quite different. Investors are probably overreacting to Pfizer's decision, but only time -- and clinical trials -- will tell.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any companies mentioned in this article. GlaxoSmithKline is an Income Investor pick. Pfizer is a Motley Fool Inside Value recommendation. The Fool has a disclosure policy.