Lifeline for biotech

MiddleBrook CEO steps down, Equity Group investment aims to bring drug to market

July 03, 2008|By M. William Salganik and Tricia Bishop | M. William Salganik and Tricia Bishop,Sun reporters

After eight years of struggling to make a success out of MiddleBrook Pharmaceuticals, chief executive and founder Edward M. Rudnic agreed to step down after a management shake-up and a $100 million investment from a private Chicago investment firm. It's the company's latest effort to bring its version of a time-released antibiotic to market.

The announcement, made late Tuesday, took a punishing toll on the company's stock, which fell $1.55 - 50.5 percent - yesterday to close at $1.52.

Investors had been counting on the ailing Germantown biotech to find a buyer and cash out. Few seemed to expect that MiddleBrook would continue to operate independently, in large part because the company faced such a tough time on its own during the past few years.

Equity Group Investments LLC said it will buy more than 30 million MiddleBrook shares for $3.30 apiece, as well as a five-year warrant to purchase an additional 12 million shares for $3.90 each (the company has about 56 million outstanding shares). Equity executives are betting that the funds will be enough to turn MiddleBrook's antibiotic into a success in hopes it could provide an easier way to deliver medicine.

MiddleBrook will also buy back rights to Keflex, a drug the company previously sold to raise funds. The remaining money from the Equity Group investment will be used to create a sales and marketing team to sell Moxatag, a once-a-day version of the top-selling antibiotic amoxicillin approved for patients age 12 and older. The company also hopes to restart clinical development of a pediatric version of that drug as well as Keflex, a time-released adaptation of the popular antibiotic cephalexin.

The investment firm - founded by real estate mogul Sam Zell, who also owns The Sun's parent company - will replace Rudnic with John Thievon, a former executive vice president with New Jersey's Adams Respiratory Therapeutics, which markets the expectorant Mucinex. Adams' former chief financial officer, David Becker, will replace MiddleBrook's CFO, Robert C. Low.

The transaction is expected to close within 90 days if approved by shareholders, which is likely. MiddleBrook's three largest shareholders, representing 37 percent of the company, have agreed to vote for the deal.

MiddleBrook, which changed its name from Advancis Pharmaceuticals last year, serves as a case study in the development of biotech companies. Like many of its peers, MiddleBrook never turned a profit and spent far more than it raised in sales to perform clinical trials and gain FDA approval for its drugs. Through its first four years, the company did not report any revenue. During its second four years, MiddleBrook had revenue of about $22 million - but it spent $195.6 million over the same period.

It can take a dozen years and a billion dollars to bring a drug to market, and many small biotech businesses find they can't do it on their own. They often partner with larger pharmaceutical companies looking for new products or allow themselves to be acquired.

Rudnic, a former pharmaceutical company executive, founded MiddleBrook in 1999 with $1 million in venture capital funding. The company was based on finding a better way to deliver doses of antibiotic. Typically, antibiotics are taken three or four times a day. But, Rudnic wanted to try "pulse dosing, rapid staccato bursts."

The early lab work was a success. Pulses appeared to kill germs better than standard dosing. And it seemed to have promise for parents who have long sought out easier and less frequent ways to deliver medicine to their children.

The company raised $60 million in an initial public offering of stock in October 2003, and its lab success led to more private investment.

Needing even more money to go through the lengthy trials needed to bring a drug to market, MiddleBrook struck a deal with giant GlaxoSmithKline in July 2004. Glaxo would provide much of the funding for development in return for a partnership in marketing a pulse-dose version of GSK's antibiotic Augmentin. The deal with an established pharmaceutical company helped boost MiddleBrook's credibility and profile. But Glaxo pulled out of the deal in December of that year.

Running low on money in 2005, MiddleBrook Pharmaceuticals raised enough to complete two final clinical trials the next year on a promising timed-release version of Amoxicillin. It suspended work on its other drug candidates, and bet everything on the two trials.

Both clinical trials failed. The company's board of directors convened an emergency meeting.

"It was seriously discussed - I mean deadly serious - that we fold the company down and distribute the cash," Rudnic recalled in an interview earlier this year. He could not be reached yesterday.

Some board members wanted to liquidate the business back then, paying stockholders about 80 cents a share from the assets remaining, Rudnic said. He pressed the board to roll the dice on one more clinical trial.

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