MELBOURNE biotech Cytopia has landed what is believed to be...

MELBOURNE biotech Cytopia has landed what is believed to be Australia's largest joint drug development deal after signing a contract with Novartis that could net as much as $287 million if the drugs reach the market.

Any royalties from new drugs would be on top of that, chief executive Kevin Healey said.

The news received a mixed reaction from the sharemarket, where profit-takers sent the shares down, even as brokers raised their buy ratings.

The products to be developed are aimed at preventing transplanted organ rejection, although other applications have been identified in early testing, including rheumatoid arthritis.

Novartis, the fourth-largest drug company in the world, has agreed to pool its knowledge with Cytopia's and will continue to make the agreed milestone payments no matter whose molecules prove successful.

It eclipses the $168 million Amrad deal with Merck and the $107 million agreement with MedImmune last year.

"This is a highly unusual deal for a big pharma to do," Mr Healey said.

"We both share our technology. We will put in our drug inhibitors and they will be putting in their molecules and lending their crystallography."

Under the agreement, Novartis will fund $13 million of research and development by Cytopia over three years.

Cytopia could also receive a further $274 million in milestone payments for development, regulatory and sales milestones if some drugs are commercialised.

"Transplantation is a $3 billion market and rheumatoid arthritis is a $15 billion market," Mr Healey said.

"These are huge markets where there are unmet therapeutic needs."

He said Cytopia would aim to develop drugs to inhibit the action of an enzyme, or kinase, known as JAK3, which hyperactivates the immune system and causes rejection.

Cytopia's chief financial officer Andrew McDonald said directors expected to receive milestone payments in a "fairly short-term period".

Cytopia shares were sold down yesterday, easing from $1.02 to 95.5¢, on volume three times the daily average.

But EG Capital broker Linda Ong was impressed, particularly that Cytopia had struck a deal with Novartis, which already has a kinase inhibitor on the market.

In a note to clients, Ms Ong said a deal was expected, which explained the profit-taking, but that new price gains could also be expected.

"We remain bullish on the stock, given a further deal concerning its JAK2 kinase is likely in the medium to long term," she said.

"Cytopia's lead anti-cancer compound, CYT997, is also expected to hit important clinical milestones in the short term, leading to a further re-rating of the stock."