By Kim Coghill

Washington Editor

SangStat Medical Corp.'s decision to restructure and grow its core business in high-value therapeutics resulted Tuesday in a 21 percent drop in its stock price.

Although industry analysts said the restructuring likely will benefit the company and its stockholders, Alex Zisson, managing director of New York-based Chase H&Q, said because of SangStat's past failure to accurately forecast its revenue, the Fremont, Calif.-based company will have to regain Wall Street's confidence before the numbers are reflected in the stock.

"This is a company that has disappointed Wall Street so many times over the past few years that they don't get the benefit of the doubt anymore," Zisson told BioWorld Today. "Part of the problem in the past has been management teams. It is a company that has always had very good technology and they've been able to generate a lot of revenue, but they've never been able to bring it to the bottom line."

But different leadership and a new vision will reduce operating expenses by 20 percent and enhance shareholder value, according to a statement released by the company late Monday. The company also is changing its name to SangStat Inc.

Jean-Jacques Bienaime, CEO and president, was elected chairman of the board and the company said its restructured strategy will focus on redirecting its resources into high-value therapeutics in niche markets. Meanwhile, SangStat will terminate clinical development programs including SangCya Oral Solution, Cyclo Tech and diagnostic or monitoring products.

These changes will allow the company to focus clinical and marketing support on Thymoglobulin, a profitable product that prevents organ loss for kidney transplant recipients experiencing acute rejection. The transition from "The Transplant Company" to a global biotechnology company gives SangStat the flexibility to take advantage of other collaboration opportunities in the broader therapeutic areas of inflammation, hematology and oncology.

"SangStat was initially focused on organ transplantation with a particular focus on cyclosporine," Bienaime said.

But growing generic competition for cyclosporine has forced the company to rethink its direction.

And while Gengraf was facing competition, Bienaime said Thymoglobulin became very successful. "Cyclosporine makes money, but it is just less profitable than Thymoglobulin," he said. Gengraf capsules are indicated for the prophylaxis of organ rejection in kidney, liver and heart allogeneic transplants.

In addition to the focus on solid organ transplantation with the ongoing induction trial comparing Thymoglobulin to Simulect and the DGF (Delayed Graft Function) trial initiated with the National Institutes of Health, SangStat said it received orphan drug designation for MDS (myelodysplastic syndrome, also known as pre-leukemia). Use of the product in these additional therapeutic areas would double the current sales of Thymoglobulin in the U.S. SangStat expects to seek approval in the MDS indication in 2002.

The restructuring plan also calls for a one-third reduction of the company's U.S. work force (about 50 people) and the sale of The Transplant Pharmacy, a specialty mail order pharmacy with revenues of about $20 million annually.

SangStat is involved in negotiations to sell the pharmacy business.

"The Transplant Pharmacy was critical four or five years ago before SangStat had products to sell," Bienaime said. "One way to get SangStat known throughout the transplant community was through the pharmacy. But we have products on the market now so it is really not needed. It puts us in competition with some of our customers and that's not healthy."

Also as part of its restructuring, Bienaime said SangStat will address some of Wall Street's concerns by resetting its expectations. "The forecast we have given Wall Street is very realistic," he said.

For example, the company reduced its revenue estimates for Gengraf to $20 million for 2001. Bienaime said this represents a 10 percent market share at a 50 percent discount.

In a research report, Zisson said, "While Gengraf has had a solid if not spectacular launch, steep price discounting by Eon's generic cyclosporine has slowed sales growth in the third quarter." Zisson estimated $23 million in sales for Gengraf in 2001, down from his earlier estimate of $65 million.

Zisson said Thymoglobulin continues to report strong gains, selling about $7.3 million in North America in the third quarter.

Bienaime said the company expects Thymoglobulin's sales in 2001 to range from $39 million to $42 million. The company also anticipates $23 million to $25 million in European sales.

"We hope this restructuring marks a new era of fiscal discipline for the company, which seems perpetually on the verge of becoming one of the few biotech companies to successfully transition into profitability," Zisson wrote.

He recommends SangStat to investors but cautions, "They have to be patient. This is probably not an ideal stock for short-term investors."

SangStat has several products in the pipeline, including RDP58 (a TNF inhibitor), which has the potential for being used in inflammatory bowel disease. It is scheduled to enter human clinical trials in early 2001. ABX-CBL, in Phase II/III clinical trials, is a product used in the treatment of steroid-resistant graft-vs.-host disease. Development of this product is in collaboration with Abgenix Inc.

Third-quarter earnings will be reported Oct. 31 and SangStat expects a loss per share of 58 cents to 62 cents, which includes about 22 cents associated with the Abgenix agreement, on net revenues of $20.5 million to $21.5 million. SangStat expects a loss per share of 30 cents to 35 cents for the fourth quarter, which includes potential expenses or a possible restructuring charge relating to the implementation of the new strategic plan and is based on net revenues of $22 million to $24 million.

The company's stock (NASDAQ:SANG) fell $2.50 Tuesday to close at $9.50.