By Charles Craig

Struggling Cytel Corp., which in the past year lost a corporate partner and suffered a drug development setback, is restructuring operations to conserve resources by separating its pharmaceutical and vaccine programs, spinning off the latter to form a new company.

San Diego-based Cytel said Wednesday it has not determined how to finance the vaccine company. Officials said the lead product candidate, Theradigm-HBV, is in Phase II trials for hepatitis B and no additional clinical studies will be conducted until a corporate partnership is negotiated. The Phase II trials are expected to be complete by the third quarter of 1997.

Cytel President and CEO Virgil Thompson said the vaccine company could be formed as a subsidiary with its own privately held stock or as a more traditional public spin-off. Cytel should have a better idea on a financing structure in the next few months.

Deborah Schueren, Cytel's chief financial officer, said removing vaccine program expenses initially will save Cytel an estimated $6 million to $7 million a year.

Cytel ended 1996 with $23.8 million in cash and reported a net loss of $12.45 million for last year. The company, in its year-end financial statement for 1996, said it had sufficient resources to support operations "at least through the beginning of 1998."

Cytel's stock (NASDAQ:CYTL) closed Wednesday unchanged at $2.25.

Thompson said Cytel will focus on development of cell adhesion blocking drugs to treat inflammatory conditions and on expanding its carbohydrate manufacturing activities for revenue to support the pharmaceutical candidates.

Cytel's lead cell adhesion inhibitor is Cylexin, a carbohydrate small molecule. The drug is in Phase II trials to prevent inflammatory damage caused by reperfusion of blood following surgery to correct congenital heart defects in infants.

The company suffered a setback with Cylexin in June 1996 when the drug failed in a Phase II study evaluating its effect on reducing reperfusion injury in heart attack patients treated with angioplasty.

Schwarz Pharma AG, of Monheim, Germany, was collaborating with Cytel on Cylexin for heart attack patients. The partnership remains in effect.

Inflammatory damage is triggered by adhesion of white blood cells to the walls of blood vessels. The white blood cells, summoned in an immune system response to a specific disturbance, migrate from the blood vessels into surrounding tissue and release toxins that attack normal cells as well as the disturbing antigen.

Cylexin and two other earlier-stage drug candidates are designed to block white blood cell adhesion to vessel walls to shut down the damaging inflammatory cascade.

While Cylexin targets P- and E-selectin cell adhesion molecules involved in acute inflammation, another Cytel drug candidate is designed to block integrins, which are cell adhesion molecules linked to chronic inflammation, such as that characteristic of asthma, rheumatoid arthritis and multiple sclerosis.

Another drug candidate, CY-1748, is a monoclonal antibody against P-selectin to prevent reperfusion injury and platelet aggregation. P-selectin is an adhesion molecule on platelets; when it interacts with white blood cells it can trigger blood clots.

In January 1997, Pharmacia & Upjohn, of Kalamazoo, Mich., discontinued its collaboration with Cytel on CY-1748. The decision was made as part of the pharmaceutical company's re-evaluation of drug development priorities following the 1995 merger of Pharmacia AB, of Uppsala, Sweden, and Upjohn Co., of Kalamazoo, Mich.

Since then, Sumitomo Pharmaceuticals Co. Ltd., of Osaka, Japan, licensed rights to the monoclonal antibody for Asia. Cytel is seeking partners for U.S. and European development.

Sumitomo, which has been working with Cytel since 1991 on cell adhesion blockers, also has rights to Cylexin in Asia.

To help fund drug development activities, Cytel officials said they will attempt to boost carbohydrate manufacturing activities, which are coordinated by the company's Glytec business unit.

Cytel currently is making carbohydrates for Abbott Laboratories, of Abbott Park, Ill., for its infant formula. And Cytel produces carbohydrate molecules for Nextran Inc., of Princeton, N.J., to use in xenotransplantation. Nextran is a subsidiary of Baxter International, of Deerfield, Ill.

Thompson said a reduced burn rate, achieved through spin-off of the vaccine program, and Glytec's near-term revenue potential should translate into a faster march toward profitability for Cytel.

The proposed vaccine company would be the second set up by Cytel to advance development of vaccines against infectious diseases and cancers.

The first , Sequel Therapeutics Inc., was a joint venture with Scripps Research Institute, of La Jolla, Calif., in 1992. Scripps sold its interest in Sequel in October 1995 and the vaccine development effort was merged with Cytel.

The vaccines use peptide fragments, derived from viral or tumor-associated antigens, to stimulate immune system production of killer T cells that attack diseased cells.

In addition to the hepatitis B preventive therapy, an HIV vaccine is in clinical trials sponsored by the National Institutes of Health and a vaccine against malignant melanoma is ready for clinical trials this year.

Cytel officials said the new vaccine company's business strategy will focus on negotiating corporate partners for clinical development of the products. *