Guilford plans to purchase rival

Analysts' questions over Gliatech deemed misdirected


May 31, 2000|By Julie Bell | Julie Bell,SUN STAFF

Baltimore-based Guilford Pharmaceuticals Inc., convinced that recent questions about a competitor's main drug are much ado "about absolutely nothing," announced plans yesterday to acquire the rival - Cleveland-based Gliatech Inc.

The stock-for-stock deal, valued at $185 million at yesterday's closing prices, would leave Guilford with three products on the market and nine in various stages of testing on patients. The companies' combined revenue last year was $58.6 million.

"I think Guilford probably got a good deal on this," Legg Mason Wood Walker analyst Stefan D. Loren said, referring to the agreement that will give Gliatech shareholders 1.38 shares of Guilford common stock for every share of Gliatech they own. "This deal was crafted when both stocks were quite a bit higher."

Shares of Guilford dipped nonetheless, losing $1.375 yesterday to close at $14.125. Shares of Gliatech rose $2.375 to $18.75.

The definitive agreement, subject to both government and shareholder approvals, is expected to close in the third quarter.

Gliatech produces and sells absorbable medical devices designed to inhibit adhesions and scarring after surgery. Guilford develops therapeutic and diagnostic products to treat neurological diseases.

Guilford aims to combine most operations here by year's end, increasing the number of full-time jobs in Baltimore to 300 from 240. The combined company would continue to operate a manufacturing plant built by Gliatech in Solon, Ohio.

Guilford Chief Executive Officer Craig Smith would remain president and CEO of the company, while Gliatech Chairman and CEO Thomas O. Oesterling would get a board seat and a management role in strategic planning, the company said.

Smith said the acquisition is expected to raise Guilford's earnings. The company reported a net loss of $7.9 million on revenue of $3.3 million in the first quarter, including nonrecurring revenue of $1 million related to a milestone payment for getting regulatory approval of its major drug in Spain.

Guilford's Gliadel, a nickel-size wafer that carries a potent chemotherapy drug, already is approved for use in patients with a severe and aggressive form of brain cancer in the United States. It is implanted in the brain at the site of a removed tumor, allowing it to release the drug and dissolve over time.

Gliatech has two products on the market, both polymer gels designed to inhibit the development of painful scar tissue after surgery. One, Adcon-T/N, has been approved for use in tendon and peripheral nerve surgery in 28 countries outside the United States, while Adcon-L has been approved for use in 29 countries including this one.

It is Adcon-L that has generated a stir for Gliatech. First, the contractor Gliatech had hired to make the substance at a manufacturing plant in the Netherlands received a warning letter from the Food and Drug Administration, leading to a ban on U.S. imports of Adcon-L.

Smith described the problems as "procedural" and said they had been resolved.

European Medical Contract Manufacturing, the contractor, resumed shipments of Adcon-L to the United States in December 1999 after a reinspection of the plant, Gliatech said in filings with the government.

Then a controversy erupted over whether the use of Adcon-L - regulated as a medical device and not a drug - makes it difficult for rare surgical nicks of the spinal-cord lining, known as the dura mater, to heal.

Surgeons, in an extremely small percentage of spinal-cord surgeries, inadvertently rupture the dura when operating, leading to leakage of cerebrospinal fluid that can cause headaches and - in some cases - infection for patients.

Some analysts said they lost faith in the company's management, and Gliatech's stock suffered. But yesterday, Smith said his company's extensive review of company and FDA documents, as well as inspection of Gliatech's plants, led Guilford to conclude that problems with Gliatech's manufacturing procedures are behind it and that there is no evidence that Adcon-L inhibits healing of nicks to the dura.

"The bottom line from my perspective," Smith said, "is that much ado has been made about absolutely nothing."

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