Cytos Biotechnology - Musical Chairs

Novartis (NVS) has returned NIC002, a smoking cessation vaccine, to Cytos Biotechnology (CYTN) but Pfizer (PFE) has started a Phase I study with VLP-IgE. The investment case is barely altered by these changes and still largely hinges solely on how its main asset, CYT003, progresses through a key Phase IIb trial in allergic asthma. The study is due to report early data in H114, with full results by end-2014. A positive outcome should mean that debt, due for repayment in February 2015, will be converted or repaid without difficulty, and that Cytos will have sufficient time to out-license CYT003.

Novartis returns rights for NIC002...
Novartis has terminated development of NIC002, a therapeutic vaccine candidate for the treatment of nicotine addiction. This follows from a disappointing Phase II study, submitted in October 2009, which failed to meet the primary endpoint of increased smoking cessation. The other Novartis collaboration involves CAD106 for Alzheimer's disease and is in Phase II development.

... but Pfizer moves IgE programme into Phase I
Pfizer has started a Phase I trial with the anti-IgE vaccine with two different adjuvants in patients with perennial allergic rhinitis. The vaccine is based on Cytos’s virus-like-particle (VLP) platform. The 189-patient trial is expected to be completed by the end of 2014. Novartis and Roche sell the anti-IgE antibody omalizumab (Xolair) for the treatment of allergic asthma.

Key CYT003 trial to report early data in H114
The investment case for Cytos Biotechnology is still largely dependent on how its main asset, CYT003, progresses through a critical Phase IIb trial in allergic asthma. Full data from this study is expected by end-2014; if the trial is positive, we believe that current financing structures should mean that debt will be converted or repaid without difficulty, and that Cytos will have sufficient time to out-license.

Valuation: Upside dependent on CYTOO3 trial success
Our valuation falls by CHF4m to CHF94m or CHF4.19 per share following the removal of NIC002 and addition of VLP-IgE on our model. If CYT003 (currently worth CHF75m) is successful in the key Phase IIb trial, the value per share would rise to between CHF5.31 and CHF5.92 per share at FY14, assuming that the conversion of loan notes and exercising of outstanding warrants occurs as expected.

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