MBI and Palatin agree to merge in bid for more appeal to investors

Mallinckrodt will assist revamped contrast effort

Bigger can be better for the smaller players in the pharmaceuticals business and for the giant drug firms involved in recent merger activity. Medical imaging contrast firms Palatin Technologies of Princeton, NJ, and Molecular Biosystems (MBI) of San Diego agreed to a stock swap earlier this month. The ultimate intent of the deal is to raise share valuations so that further investment can be obtained to support both R&D and continued growth through acquisition.

“It is a matter of survival, especially if you are a public company,” said Edward Quilty, Palatin’s chairman, president, and CEO. “You can’t get people interested in a company if it has a $30 million market (capitalization). You can’t get analysts to write about a company or find institutional investors to buy stock. They can’t buy enough stock to make it worth their while. There are liquidity issues with companies this small.”

It also makes sense to bring together two companies that have synergistic products in order to achieve profitability more quickly, Quilty told SCAN. In Palatin’s case, the company’s first product, the nuclear medicine infection imaging agent LeuTech, is nine to 12 months away from market, he said.

MBI’s echocardiography agent Optison, on the other hand, is already on the market, although revenues have been lower than expected. The company is involved in clinical trials to extend indications of the agent to cardiac perfusion, an area that holds larger market prospects.

MBI’s next product is much further back in the development pipeline, according to MBI president Bobba Venkatadri, who spoke during a conference call to investors following the announcement. That product is MB-840, a CT agent capable of imaging very small tumors in the liver. The delay in launching a second product would have affected MBI’s finances.

“We are still a one-trick pony,” he said. “MB-840 is four years away. We can’t have that kind of gap. (That is why) we are teaming up with a company with a late-stage product that fills the gap.”

While a continuing stream of product revenue will help support new diagnostic and therapeutic agent development, the companies also needed the option to go to the markets with additional stock offerings. Funding prospects were limited by what both firms considered undervalued share prices.

MBI’s share price hit a high of around $40 when confidence in Optison was at its height a few years ago. Now, MBI investors are getting “a dollar and change” for their shares, as one observer put it.

Mallinckrodt of St. Louis is a significant investor in both companies. Mallinckrodt is also the U.S. marketing and distribution partner for Optison and LeuTech and will take over production of Optison once the deal is finalized. MBI’s San Diego facilities will be closed down and support activities transferred to Princeton next year, Quilty said.

Quilty will continue in his current capacity at the merged company, which will retain the Palatin name. Venkatadri will be a board member and consultant. The joint effort will save substantial funds initially by eliminating redundant positions and assets, such as the San Diego manufacturing facility.

Revenue prospects are also good. LeuTech should start earning revenue faster than Optison originally did because it provides a technological leap over existing infection imaging methods, without requiring physicians to make as drastic a change in their practice, Quilty said.

Current infection imaging involves withdrawing blood and radiolabeling white-blood cells, which are then reinjected. The process can take 15 hours, as compared to perhaps 30 minutes for LeuTech, he said.

“There are about 100,000 white blood cell labeling procedures done in the U.S. annually. This is a very difficult and time-consuming test that has health risks associated (with moving blood outside the body). LeuTech is a shake-and-shoot kit,” Quilty said. “Mallinckrodt thinks they can pick up the 100,000 cases that exist today in 18 to 24 months. That would be $40 million to $50 million (in revenue) right there.”

The initial launch of Optison could have been handled better, but lessons were learned that can be applied to future launches, he said. Not enough emphasis was placed on face-to-face clinical education, especially for a product that involved major changes in the way cardiologists practice.

“Mallinckrodt would be the first to admit they missed the mark on the initial launch (of Optison),” Quilty said. “Now they have it together. The way they are doing it is exactly right.”

With a strengthened marketing relationship and a larger, more streamlined company developing new agents, the stage is set for continued growth of Palatin, he said.