Minnesota biotech buying Guilford Pharmaceuticals in $177.5 million deal
Thursday July 21, 4:01 pm ET
[A much expanded version of the previous article. It appears that the journalists in Baltimore feels that the most interesting and noteworthy thing about MGI is that the company is based in Minnesota].
Guilford Pharmaceuticals, one of Baltimore's cornerstone bioscience companies, said Thursday it plans to sell to Minnesota-based MGI Pharma Inc. in a deal worth about $177.5 million.
The transaction will bolster publicly held MGI's portfolio of cancer-treatment drugs focused on the acute-care market, and furthers MGI's strategy of buying companies with drugs in later-stage clinical trials and getting them over the hump to commercialization.
The acquisition also marks a turning point for one of this region's largest bioscience companies. CEO Dean Mitchell -- who joined Guilford late last year with the charge of rejuvenating the money-losing company into a focused, profitable firm -- said the deal gives Guilford "the resources to unlock the full potential of our product portfolio."
"We determined this was the best path forward," Mitchell said Thursday afternoon, after spending most of the day talking about the transaction with investors and employees, who he described as surprised by the news. "It's not what I intended [upon joining Guilford eight months ago] but I feel we're doing the right thing as a senior team moving the company forward."
Shares of Guilford stock (Nasdaq: GLFD - News) closed at $2.41 per share July 20. MGI plans to pay $3.75 for each of Guilford's more than 46.5 million outstanding shares, a 55 percent premium over the July 20 closing price.
Guilford shares were trading at $3.45 Thursday afternoon, up more than 43 percent.
The deal is expected to close by Oct. 1. Guilford will operate under the MGI Pharma Inc. banner, company spokeswoman Stacey Jurchison said. Mitchell will likely take a seat on the board but won't be involved in day-to-day operations. MGI may expand its Baltimore presence to take advantage of the research and development and manufacturing capabilities that have been built up here -- "I think this is a really positive day for all the people based here in Baltimore," Mitchell added.
Guilford executives emphasized that the deal was forged because of the business value it would bring both camps, not as a move to simply cut costs through economies of scale. Dr. Solomon Snyder, a Johns Hopkins researcher and Guilford co-founder (along with former CEO Dr. Craig Smith) whose work formed the foundation of the company at its launch in July 1993, called MGI a "very outstanding company."
"I think [the acquisition] is an opportunity for Guilford to develop products it didn't have adequate funding to do on its own," Snyder, a Guilford board member, added.
During a morning conference call with analysts, Mitchell said Guilford's board wanted the company to continue to go it alone in its quest to shepherd new drugs through the government's lengthy and expensive regulatory process.
But such a move would have required Guilford to raise more money, diluting shareholder value, Mitchell said. In Thursday's interview with the Baltimore Business Journal, Mitchell said the two companies began talks a couple of months ago, after being introduced by investment bankers with UBS, a Wall Street firm.
When clinical trials for Aquavan, a sedative and one of the company's most promising drug candidates, were suddenly stopped in the spring, causing the stock to plunge, executives felt additional pressure to go out and raise more money -- a daunting prospect, Mitchell said.
Company officials said the union with MGI means Guilford can spread its risk across a broad product portfolio, while creating a newly "vibrant, rapidly growing biopharmaceutical company, which will continue to have a major presence in Baltimore."
"We were very cognizant of the fact that [remaining a standalone company] was going to require significant dilution to unlock the value of the portfolio," Mitchell said during the conference call. "We felt this was a much better risk-return profile for our shareholders."
Through its 11-year history, Guilford was no stranger to the financial roller-coaster ride common to bioscience companies, which are often faced with raising large sums of money in a cash-intensive business.
Guilford had in recent years taken on $69 million in convertible debt -- with an exercise price higher than where the company's stock has been sitting recently -- and a $60 million revenue obligation that was part of the financing it secured in 2003 to buy the rights to a cardiovascular disease treatment.
Guilford said in April it would divest that drug candidate, called Aggrastat, from its portfolio after spending $84 million less than two years earlier to buy the drug's rights from Merck & Co.
"The confounding issue for Guilford was the balance sheet was in less-than-pristine shape and Guilford had to do something about that," Brian Rye, an analyst with Janney Montgomery Scott who has followed Guilford for several years, said in an interview Thursday.
The deal with MGI "essentially extinguishes the debt" for Guilford, Rye added, and gives the company access to the financial resources it needs to commercialize what most agree is a rich pipeline of early-stage scientific research.
Guilford's pipeline includes two cancer-related products: Gliadel is a small, dissolvable wafer that contains chemotherapy treatment for brain tumors; Aquavan, which remains in clinical trials, is a sedative that could be used in outpatient procedures.
MGI Pharma Inc. CEO Lonnie Moulder on Thursday portrayed Aquavan and its potential -- analysts expect its sales to exceed $250 million once its launched -- as key to the acquisition. But the drug also tripped up Guilford in recent months: The company had to stop Phase III clinical trials of Aquavan in March because of high dosage levels. Those trials are back under way.
Moulder said Guilford's drug portfolio offered valuable "synergies" to both companies. MGI Pharma Inc. is best known for its Aloxi product, which prevents chemotherapy-induced nausea and vomiting. The company has two other cancer-related drugs on the market.
MGI's 2004 sales eclipsed $195 million, up from $49 million in 2003. Its net loss was $85 million. MGI stock (Nasdaq: MOGN - News) was trading at $25.49 Thursday afternoon, down more than 7 percent.
Moulder predicted MGI's sales could exceed $1 billion in five years, adding: "We're very enthusiastic about the synergies this transaction brings to MGI Pharma both in the near term and the intermediate term."
Mitchell, who worked for almost two decades with some of the pharmaceutical industry's biggest players, was hired by Guilford late last year to move the company from a money-losing, research-focused one to a profitable company with drugs on the market.
In a February interview, he pronounced the company "too diverse" in its efforts and said a greater focus was needed to maximize the commercial value of its research efforts.
He unveiled a new strategic plan for the company in April. Guilford would be transformed "into a focused, market-driven pharmaceutical company positioned to deliver improved shareholder value" by focusing on its key products and enhancing its organizational structure accordingly. Mitchell expected Guilford to be profitable in 2008. Guilford lost almost $88 million in 2004 on revenues of $48 million.
Guilford had made attempts recently to shore up its balance sheet. The company said in May that it was laying off about 40 employees as part of a plan to save $6 million. Mitchell said Thursday Guilford -- which employs about 240 people -- had cut its burn rate considerably.
He also said the goals of that strategic plan would still be realized: "Everything that we were laying out will now happen as part of MGI."
Reaction from analysts on the morning conference call seemed mixed. Several who follow MGI Pharma Inc. questioned the potential of Aquavan given Guilford's need to halt Phase III clinical trials of the drug in March because of high dosage levels. Others wondered how successful MGI would be finding a buyer for Aggrastat, the drug Guilford acquired in 2003 for $84 million but decided in April it would try to sell.
Some Guilford analysts were also less than enthusiastic about the deal. One remarked during the conference call that he "thought I was calling 911 because as a Guilford shareholder I feel like I've just been robbed." Another more charitably observed that "it looks like Lonnie got a wonderful deal here."
That may prove to be the case, Rye of Janney Montgomery Scott pointed out. If Aquavan's sales do exceed $250 million, as many expect, MGI Pharma will have bought the company that developed that drug for far less than that. Still, Rye thinks the deal is a good one for Guilford shareholders -- overall market conditions and the company's own war chest (about $71 million in cash at the end of the first quarter) made it exceedingly difficult for Guilford to continue to go it alone.
"Strategically I think it's a very good fit," Rye said. "It's just that something always seemed to happen [to Guilford] along the way."
Published July 21, 2005 by the Baltimore Business Journal |
