CytoTherapeutics at a crossroads

For CytoTherapeutics, Rhode Island’s premier bio-technology company, survival may rest on an Eastern European study of the effects of its chronic pain technology on 85 terminally ill cancer patients. The results are scheduled for release next month.

“CytoTherapeutics is at a crossroads,” said Michael J. Lysaght, director of the state’s Center for Cellular Medicine and among CytoTherapeutics’ foun-ders. “The trial comes up with one of two answers. Yes or no. A successful trial and a decision to go to market by Astra (Cyto-Therapeutics financial partner in this process) would be like landing on Boardwalk. An unsuccessful trial is like landing in jail.” Elizabeth Razee, a CytoThera-peutics’ spokesperson, said a successful trial would be “a very good thing,” but failure, she added, would be “an unpleasant event.”

That unpleasant event is outlined in the company’s latest quarterly and annual reports, filed with the Securities and Exchange Commission. They essentially say the company would have to regroup if the study failed, a victim of “limited liquidity and capital resources.”

In its most pessimistic outlook, the report says the company could only guarantee that it would have enough funds to operate through the first quarter of next year.

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“It’s not necessarily true,” Razee said. “In the company’s interest to be fully disclosed, you don’t get the rosiest pictures. There is a great effort to make sure you do not lead people down a rosy path. We opted to make sure people understand it’s not a desperate situation, but serious.”

And what serious could mean are layoffs from the company’s staff of 50 to 60 in Rhode Island, and another 12 at its Sunnyvale, California plant, where the company concentrates on stem cell technology, Razee said. And while she and others tried to assure that the Rhode Island operation would remain in some form, there was little guarantee. “The idea is not that we desire to be elsewhere,” Razee said.

Other observers suggest that if the trial fails and AstraZeneca (Astra AB of Sweden merged with Zeneca of the United Kingdom in April) does stop funding the company will end its encapsulated cell technology program, sell off its intellectual property, close the facility in Rhode Island, reorganize and rename the company to pursue its stem cell program in Sunnyvale.

At its peak CytoThera-peutics had about 125 employees, but has reduced its staff through attrition, Razee said.

At center stage is a phase II pain trial study, a project in which Astra AB has been a primary financial partner and the company that would bring the process to market if it is successful. But Astra AB has guaranteed funding only through the first half of this year. Razee said the future relationship between CytoTherapeutics and Astra AB is contingent upon the study results and changes at Astra (of Sweden) after its merger with Zeneca (of the United Kingdom). And no matter what happens, the relationship, after the trial’s completion, will change in some form, she said.

Lysaght refers to the study as a “real finger nail biter,” and notes that few companies reach a stage II test, and fewer gain approval from the Federal Drug Administration. If this test is successful, Lysaght said, there would be one final study, “largely conformational” before the product could go to market with FDA approval.

This particular study, Razee said, will determine whether there is a benefit to the encapsulated cell technology, the chronic pain process. Phase I testing determined that the product was safe. Phase II determines whether it works.

Some 85 patients in Eastern Europe, all of whom are cancer patients with an estimated six months to live, were enrolled in the program in March for a 10-week trial. Half received placebos, the other half the actual medication. Patients are being measured on how treatment affects their quality of life, whether it has allowed for a reduction in their normal pain medication (often morphine), and how patients are able to deal with pain daily.

Several factors make the study difficult, including its reliance upon subjective measures, Razee said, and the fact that as cancer patients approach death their level of pain usually increases.

The study is what is called a blind study, in that no one at this point knows which patients have received the actual medication and which have received placebos.

Those close to the company say that while there are rumors about the progress of the trial, there have been no concrete clues, and that answers won’t be available until the trial is completed and the results announced.

Disturbing to some has been what they believe is the company’s failure to develop a strategic plan in the event the trial fails, beyond shutting down the encapsulated cell program. Among them are a few who would agree to be quoted only if they were not identified. They characterize CytoTherapeutics as a “house divided” between those who wish to pursue the encapsulated cell technology and those who favor the stem cell technology. However, they are quick to note the company has done all it can to prepare for the study that is under way.

But they are still disturbed by what they say is the lack of a defined plan in the event the study fails. There are those who believe that if it fails, it may not mean that the encapsulated cell technology fails, but rather some adjustments or further research might be necessary.

“With appropriate strategic planning it doesn’t have to take the hit, but it will” if the trial fails, an observer said.

In Cyto Therapeutics’ own house there has been some controversy with the resignation from its board of Dr. Patrick Aebischer, a scientific founder of

CytoTherapeutics, and co-inventor of the company’s encapsulated cell technology. Aebischer is Chairman of the Board of Modex Therapeutiques SA, a partially owned subsidiary of CytoTherapeutics. Dr. Aebischer resigned his position on the board because of differences with Cyto-Therapeutics’ management and Board of Directors over the management and future direction of the Company.

Company officials have said the differences of opinions were honest disagreements and maintain that Dr. Aebischer’s resignation did not adversely affect the company.

Meanwhile, Razee said the morale is upbeat at CytoTherapeutics, as employees await the outcome of the current trial. And, she added, representatives from Astra have made regular visits to the plant, giving encouragement to employees.

Astra originally signed a collaborative research and development agreement with the company in 1995 that involved an initial investment of $5 million. As the project has progressed, Astra has entered into several other agreements that have resulted in that company’s investment of in excess of $30 million in the project.

From a state standpoint, Cyto-Therapeutics, which was founded in August 1988, still owes the state $3.4 million, which Razee said is secured by the building. For the state, however, Lysaght said, the investment has paid considerable dividends.

The return on the state’s money, Lysaght said, has been many fold in terms of the normal costs of doing business and millions in payroll.

As the days move closer to the trial, the anxiety at CytoTherapeutics, and among its investors, will increase. One observer likened it to a card game: “You either win big or lose big.”

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