Biotech success could lead to CytRx payoff, but there's risk.

CytRx Corp. is a biopharmaceutical research and development company with an intriguing product pipeline and strategic alliances that several years ago would have boosted the company's stock well above its current $1.15 or so a share.

But these days Wall Street is much more skeptical of biotech sizzle, and even the Los Angeles company's latest move to attract investor attention by spinning off a cutting edge technology business may not bear fruit for some time.

"All the stocks in this space tend to be undervalued because the market is based on revenue rather than promise," notes Dr. Alan Louie, research director for Life Science Insights, a Framingham, Mass., market research and forecasting firm.

CytRx's core research involves three small molecule compounds that would trigger certain proteins to repair or block other damaged proteins linked to a variety of diseases.

A mid-stage clinical trial began last fall on arimoclomol for the treatment of amyotrophic lateral sclerosis, also known Lou Gehrig's disease, a debilitating disease with only one drug to treat it on the market. The new drug will be administered in pill form and has received a U.S. Food and Drug Administration "fast track" designation that should enable CytRx to move to market sooner if it's found effective.

The company has a similar small molecule treatment called iroxanadine, a diabetes drug that may soon enter phase two trials. Also in the pipeline: an innovative DNA-based vaccine for HIV that recently reported some positive interim results in an early trial.

But the company's most intriguing research involves RNA interference technology, called RNAi, which triggers the body to stop genetic action that make a person more prone to a particular disease. The company hopes to use the technology to develop even better treatments for Lou Gehrig's disease and diabetes, as well as obesity and herpes viruses. The company last month announced it would spin off the business into a subsidiary so investors could better compare it with similar companies.

"You hate to put all your eggs in one basket, which is why we have several programs. But you also want each of them to be valued fairly, which we realized from analysts wasn't being done with our RNAi program," said Chief Executive Steven Kriegsman.

Interest in RNAi took off earlier in this decade, but no products are yet on the market. It was named "Breakthrough Technology of the Year" in 2002 by Science magazine.

"We believe RNAi has the potential to be the next major product platform in biotechnology... and will have profound implications for many inherited diseases," wrote Griffen Securities analyst Chrystyna Bedrij. "CytRx is well poised to rapidly advance high-value (drug candidates) into the clinic and generate significant value for its investors."

Bedrij has set a December 12-month price target for CytRx of $4 a share based primarily arimoclomol's potential.

CytRx was practically a shell company in 2002, its shares trading at around 60 cents, when Kriegsman, a Los Angeles-based life sciences investment banker, became a major shareholder when one of his holdings was acquired by CytRx. Only a few employees remained at its then headquarters in Norcross, Ga., and its intellectual property, including a DNA vaccine delivery method, had been licensed to other drug companies.

CytRx's board was unable to sell the company's assets for a price the directors considered fair, and Kriegsman came on board as chief executive in an effort to revitalize the company in 2003. Among the experts providing strategic guidance to the company are Dr. Louis Ignarro, a UCLA-based Nobel laureate in medicine, and Dr. Craig Mello, the co-discoverer of RNAi.

The company decided to pursue its own DNA-based HIV vaccine, licensing technology from the University of Massachusetts Medical School and forming a strategic alliance with Advanced Biosciences Laboratories Inc. in Kensington, Md.

CytRx then obtained arimoclomol, iroxanadine and a third small molecule compound, plus a library of 500 other potential drug candidates, from a Hungarian company in October 2004. The RNAi program includes agreements with the University of Massachusetts, which did some of the earliest work in RNAi. The company has sponsored research both at the university and at Massachusetts General Hospital.

The company has raised $25 million in private placements since October 2004, and recently reported it had sufficient cash to continue operations though the second quarter of this year. But after briefly shooting close to $2 in 2003, CytRx's share price has dwindled and the company last year had to fight off Nasdaq delisting when the price dropped below $1.

Even analysts who are enthusiastic about the company say shareholders should be willing to tolerate high risk.

"We're encouraged but caution investors that Lou Gehrig's disease is challenging and CytRx is just about to enter the first human (effectiveness) trial," wrote Elemer Piros at Rodman & Renshaw, which has a "outperform-speculative risk" rating on shares and 12-month target price of $3.50 a share.

DEBORAH CROWE Staff Reporter

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