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UPDATE 3-Cytos anti-smoking vaccine flops; shares drop

* Anti-smoking vaccine missed target in mid-stage trial

* Second major clinical setback this year

* Shares plummet, analysts question future of company

(Rewrites, adds more comment, detail and updated shares)

By Sam Cage

ZURICH, Oct 16 (Reuters) - Cytos Biotechnology's CYTN.S anti-smoking vaccine missed its main target in a mid-stage study, making it highly unlikely the product will reach the market and slamming the Swiss group's shares.

The Swiss start-up drug discovery group, which does not yet generate sales of its own products, will now probably miss out on a milestone payment by partner Novartis NOVN.VX and analysts said it would struggle to finance itself and pay debt.

“We see the company’s prospects not only built on shaky scientific ground, as we have discussed it repeatedly over the past years, but also its financial foundation appears very fragile,” said Olav Zilian, analyst at Swiss brokerage Helvea.

The clinical failure continues a string of bad news in the Swiss biotech sector, following setbacks to Basilea BSLN.S, Arpida ARPN.S, Santhera SANN.S and BioXell BXLN.S, and highlights the risky nature of the business.

Shares in Cytos -- which focuses on so-called immunodrugs, aimed at treating chronic diseases and addictions through vaccination -- lost more than 30 percent to 15.70 Swiss francs by 0819 GMT, extending a two-year losing streak from a high of more than 170 francs in 2007.

The Zurich-based group, which also has a partnership deal with Pfizer PFE.N, had already suffered one major setback this year after a high blood pressure vaccine failed to meet its target in a mid-stage trial. [ID:nLH230277]

Helvea’s Zilian noted the group has a high debt burden with a 70 million Swiss franc ($69 million) convertible note maturing in early 2012 -- a significant sum for a company that cannot count on sales of its products.

“Two of Cytos’s lead projects have now failed to reproduce efficacy data. Without nicotine milestone payments by Novartis and with the pending convertible bond, Cytos might run into serious cash problems,” said Vontobel analyst Silvia Schanz.

TOO MANY RISKS

Novartis bought the rights to the Cytos NIC002 anti-smoking vaccine in 2007 in a deal valued up to 600 million francs, including an upfront payment of 35 million francs, with further payments contingent on development milestones.

The vaccine aims to help smokers kick the habit by preventing nicotine from entering the brain, depriving them of the satisfaction many associate with smoking.

Novartis has now informed Cytos that the vaccine failed to show a statistically significant difference in continuous abstinence from smoking determined from weeks eight to 12 after start of treatment, compared with a placebo.

Novartis is continuing the study and would decide on next steps once the scheduled 12-month duration of the trial is completed, but analysts think it highly unlikely the vaccine would show clinical benefits after a longer period.

“Our valuation of the company was based primarily on this vaccine, therefore we can no longer see a case for Cytos as we think there are now too many risks with assuming that the vaccine will be launched successfully,” said Kepler Capital Markets analyst Mark Belsey. (Additional reporting by Emma Thomasson; Editing by Hans Peters) ($1=1.014 Swiss Franc)

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