City biotech sold to MGI Pharma for $177 million

Guilford Pharmaceuticals is latest in mergers trend

Operation to stay in Baltimore

Shares rise 41% after deal with Minnesota buyer

July 22, 2005|By Tricia Bishop | Tricia Bishop,SUN STAFF

After a year of layoffs, restructuring and a management overhaul, Baltimore biotech Guilford Pharmaceuticals Inc. announced yesterday its sale to cancer-drug maker MGI Pharma Inc. of Bloomington, Minn., in a deal worth $177.5 million in cash and stock.

Guilford shares jumped 41 percent yesterday on the Nasdaq stock market, rising 99 cents to close at $3.40 on the news after months of revitalization efforts under Dean J. Mitchell, the chief executive officer brought in from Bristol-Myers Squibb Co.

MGI, with about 300 employees, said it plans to maintain the Baltimore operation and retain many of Guilford's 250 staff members, particularly those in research and development and sales. Over the past eight months, Guilford eliminated about 60 jobs.

The sale is the latest in a string of mergers and acquisitions in the biotechnology sector pairing bigger, cash-rich - but product-poor - pharmaceutical companies with smaller, indebted biotechnology companies that have promising pipelines of potential new therapies. Last week, GlaxoSmithKline took over Seattle-based biotech Corixa Corp. Pfizer Inc., the world's largest drugmaker, paid nearly $2 billion last month to acquire Vicuron Pharmaceuticals Inc., a Pennsylvania biotech yet to commercialize anything.

"Big pharma is running out of products, biotech has got it," said John W. Holaday, founder of Rockville-based EntreMed Inc., another Maryland biotech, and now board chairman of Harvest Bank of Maryland. "It makes sense to acquire."

Within the next two years, patents on drugs worth about $85 billion are expected to expire, opening them up to generic copycats, said Holaday, who was preparing to give a presentation on the topic at a biotechnology conference yesterday in Rockville. And few companies have backup drugs waiting in the wings to replace the revenue. That's where biotechs come in.

While MGI isn't huge, it's bigger than Guilford, with an estimated market value of about $1.9 billion compared with Guilford's $158 million. The decision will give MGI a third location - the company also has a division in Lexington, Mass. - along with a marketed brain cancer treatment, called the Gliadel Wafer, to add to its oncology portfolio.

The wafer, which is put in place after a tumor is removed to destroy any remaining cancerous cells, brought in about $27 million in revenue last year. It is expected to generate $38 million this year.

MGI will also acquire Guilford's Aquavan, a sedative in late-stage clinical trials that has had a rocky road recently, but is expected to be widely used during office procedures if approved. MGI estimates it could one day bring in $250 million in annual sales.

"[This will] allow us to move into a new market segment," said Leon O. Moulder, MGI's president and chief executive officer. "The way we build our company is through transactions," he said. Last September, MGI bought two other companies.

With Guilford, MGI will also acquire debt - nearly $70 million worth. MGI will also have to deal with Guilford's troubled properties: Trials of its drug Aquavan, a sedative expected to be used during treatments such as colonoscopies, were halted in March because of dosing issues. Guilford's Aggrastat Injection, a heart attack treatment, hasn't lived up to its sales expectations, and Guilford has been trying to unload it as part of a reorganization announced in April. MGI said it will do the same with Aggrastat.

The Minnesota company expects to post a loss for 2005 because of the acquisition and the money it plans to invest in Aquavan, which should resume trials next week.

Moulder said MGI intends "to be profitable next year," although Guilford has never managed a profit in 12 years. Guilford's revenue last year of $47.9 million was up 74 percent over 2003, but the company still managed to have a similar increase in its loss for the year.

In December, Guilford replaced its science-trained founder, Craig R. Smith, a former professor at the Johns Hopkins School of Medicine, with Mitchell, a former vice president of strategy at Bristol-Myers Squibb.

"I was brought in to maximize shareholder value," Mitchell said yesterday, amid questions that he was brought in to prepare the company for sale, which he denied. As recently as this spring, he said he "felt very bullish about being able to succeed as a stand-alone company."

But, he added, when MGI approached the company about two months ago about a possible acquisition, it became clear that "was a more attractive option."

Guilford's only option for raising cash to further its products was to offer more stock. That would have further diluted shares for current holders, something Mitchell wanted to avoid. That option likely wouldn't have raised as much money, either, analysts said.

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