Cytos Biotechnology: Investment Case Hinges On Phase IIB Trial

Cytos Biotechnology’s (CYTN.SW) investment case hinges on how its main asset, CYT003, progresses through a Phase IIb trial in allergic asthma. The company navigated its way through a funding crunch and now has sufficient cash to conduct the trial. Initial data from the study is expected in H114. Convertible notes and bonds are due for repayment in February 2015. However, 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 the product.

CYT003 set to start Phase IIb trial
Cytos’s lead compound CYT003 is poised to start a 360 patient Phase IIb study in allergic asthma. CYT003 modifies the T cell immune response and targets asthma patients who are poorly controlled on existing therapies. An earlier 60-patient randomised and placebo controlled Phase IIa trial produced sufficiently encouraging results to interest new investors into refinancing the company.

Investor confidence being restored
The past year has seen the company restructured; costs were slashed and new management introduced, with new investors brought in. The February 2012 convertible expiry was a major concern during 2011, despite the positive CYT003 Phase IIa data presented in 2010, but the convertible debt has been restructured.

Funded through to key value inflection point
A total of CHF35m in debt and equity has been raised (in H112) so that Cytos should have sufficient capital to complete the Phase IIb trail and have time to out-license CYT003 if the trial is positive. Much of the new investments have come from a consortium of new investors including Amgen. The structuring of the combination of equity, warrants and convertible loan notes is such that Cytos’s potential efforts to out-license CYT003 should not be hindered by the convertible debt that needs to be repaid in February 2015.

Valuation: Undervalued on most scenarios
We currently value Cytos at CHF98m (CHF4.36 per share). This centres on CYT003, worth CHF75m in our model, together with net cash of CHF6.0m. If CYT003 makes suitable progress, the value of Cytos’s pipeline would rise to between CHF209m and CHF297m in FY14, which equates to between CHF4.89 and CHF6.79 per share depending on the conversion of loan notes and exercising of outstanding warrants.

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