CytoTherapeutics Inc. stock (NASDAQ:CTII) jumped 35 percent onthe news last Tuesday that Genentech Inc. will invest up to $50million in the small biotech company to combine Genentech'streatment of Parkinson's disease, Lou Gehrig's disease andHuntington's disease with CytoTherapeutics' encapsulated-celltechnology.

The stock, which had jumped from $8.125 to a high of $11, closed,however, at $9.375 _a drop that surprised analyst Mark Ostro, ofUBS Securities Equity Research.

"I expected the stock to go up a lot more," Ostro said. "The street hasmissed the importance of this deal. This is an importantcollaboration."

An initial equity investment of $8.3 million to CytoTherapeutics willincrease Genentech's stake in the company from 3 percent to between8 and 9 percent.

CytoTherapeutics, of Providence, R.I., will issue between 700,000and 900,000 shares to be purchased by Genentech at an undisclosedpremium over the current market price, Daniel Geffken, vicepresident and CFO of CytoTherapeutics, told BioWorld Today. Theprice of the stock will be determined by the average price over a 20-day period, 10 days before and after the Nov. 26th announcement,Geffken said.

Genentech, located in South San Francisco, plans to useCytoTherapeutics' encapsulated-cell implants to deliver several ofGenentech's proprietary growth factors, including Neurotrophin-4/5(NT-4/5), Cardiotrophin-1 (CT-1), Neurturin (NTN) and nervegrowth factor (NGF).

Under the agreement, Genentech will make available another $40million of equity investments and research funding if future clinicaldevelopment requirements are met. In addition, Genentech hasgranted to CytoTherapeutics licenses to its nerve-growth factor drugsfor research and testing of Huntington's disease and Lou Gehrig'sdisease _ subject to certain rights by Genentech _ to gaindevelopment and marketing access to the products.

"Our great challenge has been to get our nerve growth factors to thebrain," Kathleen Rinehart, manager of corporate communications atGenentech, said. "We feel that CytoTherapeutics' technology, whichcan deliver substances across the blood-brain barrier, offers a uniqueapproach to treating neurodegenerative disease."

This agreement replaces a 1994 agreement between the twocompanies designed to develop encasulated cell products based onNGF, NT-3 and NT-4/5. The focus of that agreement was thedevelopment of a treatment for Alzheimer's disease using NGF. Thecurrent agreement does not include Alzheimer's disease as a target.

"By Genentech licensing NT-4/5 and CTI to CytoTherapeutics,CytoTherapeutics at long last has taken control of its own destiny,"UBS Securities' Ostro said. "With the rights to the growth factors inhand, CytoTherapeutics will be able to develop products for ALS(amyotrophic lateral scelerosis, or Lou Gehrig disease) andHuntington's disease independent of signing any requiredcollaborations with third-party patent holders."

The Parkinson's disease agreement calls for CytoTherapeutics toperform preclinical and pilot Phase I clinical studies, initially usingNeurturin. The cost of these studies will be funded by the initialequity purchase. Neurturin, the company said, is homologous to glialcell line derived growth factor (GDNF). By promoting cell growthand protecting certain nerve cells against damage, it said, Neurturinmay be useful in treating Parkinson's.

Genentech will fund the cost of Phase II trials by purchasingadditional common stock from CytoTherapeutics, Geffken said. Thetwo companies will share the cost of Phase III trials in the UnitedStates and Genentech will pay 100 percent of the cost of foreigndevelopment. In addition, Genentech will provide CytoTherapeuticswith a line of credit to fund its share of U.S. clinical developmentcosts.

When the product is commercialized, Genentech andCytoTherapeutics will share profits in the U.S. at an agreed-uponpercentage. Genentech will pay CytoTherapeutics a royalty based onsales outside the U.S. CytoTherapeutics will retain manufacturingrights and will be paid manufacturing costs for products sold.

Genentech has licensed CytoTherapeutics' CT-1 and NT-4/5 fordevelopment for the treatment of ALS worldwide, either alone orwith other companies. Upon commercialization, CytoTherapeuticswill pay Genentech a royalty based on sales outside the U.S. In theU.S., Genentech retains the right to participate in the commercialdevelopment of the program by electing to pay most of the U.S.Phase III development costs. Genentech and CytoTherapeutics willshare profits. If Genentech doesn't exercise its option,CytoTherapeutics could proceed with development and payGenentech royalties.

CytoTherapeutics will conduct and fund preclinical and clinicaldevelopment of CT-1 as the designated therapeutic for Huntington'sdisease subject to specified rights of Genentech to negotiate forworldwide development and marketing rights. Uponcommercialization, CytoTherapeutics will pay Genentech royaltiesbased on worldwide sales.

Ostro said he expects to see, for the Parkinson's disease aspect of theagreement, at least a 25 percent to 35 percent share of the profits forCytoTherapeutics. CytoTherapeutics' "most vexing problem," Ostrosaid, has been that it had no rights to any growth factors and the"Genentech deal finally has solved this problem forCytoTherapeutics. This deal provides CytoTherapeutics with whatcould amount to over $50 million in total funding and the rights toindependently develop two valuable nerve growth factors for large,poorly met medical conditions," he said. "When one adds the right touse the NT-4/5 and CTI CRIB products as sources for future jointventures collaborations, the value of this deal becomes enormous."

CytoTherapeutics has cash on hand of $35.6 million, and as of Sept.30, 1996, revenues of $5.3 million and a net loss of $9.3 million. Itsburn rate is approximately $1 million a month. n

-- Frances Bishopp

(c) 1997 American Health Consultants. All rights reserved.

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