Switzerland's Cytos Biotechnology Ltd. stepped away from the ledge of a financial precipice and rescued its lead immunodrug candidate CYT003-QbG10 by forging agreements with a syndicate of international investors to raise up to CHF37 million (US$40.6 million) in equity and debt.

The investment round was led by venBio and included Abingworth LLP, Aisling Capital and a direct investment from Amgen Inc.

The funds will recapitalize Zurich-based Cytos, enabling it to move CYT003-QbG10 into a global, multicenter Phase IIb trial in allergic asthma. The allergen-independent immunotherapy potentially could be used to treat a range of allergies, according to Harry Welten, Cytos' chief financial officer.

"This is an innovative product, and if it turns out to work very well – which we expect, because it has worked well in a small number of patients – it could be a paradigm shift in how to treat asthma patients," Welten told BioWorld Today.

CYT003-QbG10 is an immunotherapy product composed of the virus-like particle Qb and the G10 immunostimulatory sequence.

G10 is a synthetic bacterial DNA recognized by Toll-like receptor 9 (TLR9) in human immune cells, so activation of TLR9 may help down-regulate the overactive allergic response.

The technology's promising potential hasn't spared Cytos from the vagaries of the public markets, however. Facing the maturity of its convertible bond in February and with its stock falling from CHF13.60 in March 2011 to less than CHF2 in August 2011, Cytos suspended all research and product development programs other than CYT003-QbG10 and cut 72 of its 82 employees. (See BioWorld Today, Aug. 18, 2011.)

Last month, bondholders approved the company's convertible bond restructuring, enabling the firm to remain a going concern while it searched for longer-term financing. The private investment completes the company's restructuring.

Cytos also has tried, and failed, to license CYT003-QbG10, despite encouraging clinical findings. In September 2010, Cytos reported Phase II results for the immunodrug showing an increase in the number of patients whose asthma was described as well controlled and a decrease in asthma symptoms under corticosteroid withdrawal. The study also demonstrated improvement in lung function and reduction in blood inflammatory cells.

In May 2010, top-line data from a Phase II trial indicated that CYT003-QbG10 in persistent asthma bronchiale improved outcome parameters in all patients compared to placebo. The company also reported positive Phase IIb data of CYT003-QbG10 monotherapy in allergic rhinoconjunctivitis.

Any innovative technology heightens the risk associated with development but also piques the interest of certain types of investors, Welten observed. In the new deal, "we were lucky enough to get those people around the table who like innovative products," he said.

In fact, the financing came together more on the basis of therapeutic promise than on the strength of long-term relationships.

"I couldn't say I knew venBio's Kurt von Emster from grammar school," Welten observed wryly.

The deal itself is intricate. It combines CHF23.75 million in equity, priced at CHF1 .87 per share – the 60-day average closing price prior to March 20 – and CHF13.25 million in secured convertible loan notes, which carry a conversion price of CHF2.244 per share, payable in two tranches of CHF6.625 million each. The second tranche is subject to the achievement of undisclosed milestones in connection with the Phase IIb study of CYT003.

Each member of the investment syndicate also received one warrant, with an exercise price of CHF2.244, for each new share of equity issued to it.

Additionally, the deal allows existing shareholders to participate through a rights offering of up to an additional CHF5 million. All told, the capital increase of up to CHF28.75 million will result in the issuance of up to 15.4 million new shares of Cytos' stock.

Up to 32.3 million additional shares, representing 10 percent of Cytos' total outstanding shares after the capital increase, will be issued and acquired by Cytos and held as treasury shares, mainly to support the warrants and convertible loan notes.

Shareholders must approve the transaction, which is scheduled for a vote next month. The deal doesn't seem in any jeopardy, as the company's shares (SWF:CYTN) perked up Wednesday, gaining 33 percent to close at CHF2.38.

The arrangement also is conditioned on an exemption from the Swiss Takeover Board for the investment syndicate, which will hold a majority of outstanding shares when the financing closes.

In conjunction with the financing, the company will ask shareholders to approve new board members. They include Arthur Krieg, CEO of RaNA Therapeutics and co-founder of Coley Pharmaceuticals; John Berriman, deputy chairman of Norwegian biotech Algeta ASA; Kurt von Emster and Paul Brooke of venBio; and Joe Anderson of Abingworth.

Cytos plans to launch the Phase IIb study as soon as possible.

During the trial's estimated 18-month to 24-month timetable, the company will screen its earlier-stage assets "to see whether and to what extent they're worth pursuing again" and look for potential outside compounds that would complement the company's pipeline, Welten said.

The investment will more than see the company through the Phase IIb study.

"If you take the equity portion, add the convertible loan notes, add the subscription rights and, on top of that, add potential proceeds from the warrants, you get to around CHF77 million," Welten said.

Provided the Phase IIb study succeeds, the company will decide whether to take CYT003-QbG10 into Phase III on its own or go back to the negotiating table with potential partners.

"A Phase III trial for a product like this costs a substantial amount of money," Welten conceded. The decision to partner will be determined by whether the company has access to sufficient resources "or whether it's more appropriate to put that responsibility into the hands of the people who will be selling that product at the end of the day."