By Mary Welch

Palatin Technologies Inc. acquired Molecular Biosystems Inc. in a stock deal worth about $27 million.

Under the agreement, Molecular Biosystems' (MBI) stockholders will receive 0.5250 shares of Palatin common stock for each MBI share they own. MBI had 18.7 million shares outstanding as of Sept. 30. The stockholders of each company will own about 50 percent of the new company, which will retain the Palatin name and be headquartered in Princeton, N.J. The merger should be consummated in the first quarter of 2000.

"There's a lot of synergy here," said Edward Quilty, Palatin's chairman, president and CEO. "We both have the same partner [Mallinckrodt Inc., of St. Louis]. Molecular has a product, Optison, that Mallinckrodt has invested a lot of money in. We'll be able to shut down the San Diego operations [MBI's headquarters] and just sit back and collect the royalties."

Peter Cardillo, director of research for Westfalia Investments Inc. in New York, said the merger is "good for both. It gives Palatin more muscle as it achieves profitability," he said. "It'll give them more exposure, which is what this is all about. I think it's an attractive deal and will probably make a good marriage. It might finally get some recognition for Palatin."

Quilty agreed the merger could raise the company's profile. "Just as the big pharmas have to consolidate, the smaller companies have to do it, too, so that people will get interested in them. You've got to attract the attention of shareholders and move toward getting some sales and profitability as fast as you can."

Mallinckrodt will now take over the manufacturing of Optison and fund the Phase III trials of the ultrasound contrast agent for a second indication, the detection of myocardial perfusion. Mallinckrodt spent up to $47.5 million to extend an agreement with MBI for the product, including purchasing about $13 million in stock. Mallinckrodt will own about 6 percent to 7 percent of the merged company.

Optison is a perfluorocarbon-containing product that enhances ultrasound images by introducing gas-filled microspheres into the blood and allowing physicians to distinguish blood from anatomical structures, such as the ventricular heart wall. It was approved early in 1998 for use in patients with suboptimal echocardiograms to opacify the left ventricle and to improve the delineation of the left ventricular endocardial borders. (See BioWorld Today, Jan. 7, 1998, p. 1.)

However, initial sales of the product have not lived up to expectations. Coincidentally, a year to the day of the merger, MBI laid off about 28 percent of its staff, with promises of more layoffs due to smaller-than-predicted volume of Optison sales. At the time, analysts predicted Optison would produce first-year sales of $100 million. Quilty said 1999 sales would probably end up about $15 million. (See BioWorld Today, Nov. 12, 1998, p. 1.)

"Eight million dollars isn't bad," Quilty said. "Of course, it is if you promised $50 million. But Mallinckrodt understands it takes time to get things up and started with physicians. I think they've got the internal team now in place for it to succeed."

Part of Optison's problem was that insurance reimbursements covered either little or none of the $110-per-treatment cost.

"The reimbursement issue is still an ongoing problem," Quilty said. "I think it's closer to being resolved."

Quilty said Palatin will close MBI's operations, with most of the employees being laid off.

"Combined we have about 90 employees. We'll get that down to about 50 to 55 employees, so there will be a net reduction of about 40 persons," he said. "However, we haven't sat down and talked with anyone."

While Quilty will head the combined firm, Bobba Venkatadri, MBI's president and CEO, will serve as a consultant and remain on the board. After the merger, Palatin's board will consist of four members of the original Palatin board and two selected from MBI's existing board. Palatin was represented by Hambrecht & Quist LLC, of New York, and MBI by Prudential Vector Healthcare Group, of New York.

Quilty said that Palatin should file a biologics license application (BLA) this month for its lead product, LeuTech, an antibody-based infection imaging agent. The company's original timetable for filing was in July.

"We said we expected to file in July and we did expect to file in July," Quilty said. "But it's 12,000 pages, which is a lot of work. There was more to it than we thought and we'd rather get it right and file later than we said. However, when you think that we only started working on LeuTech less than four years ago and we're filing a BLA, that's pretty good. Not even a year ago it was still in Phase I."

LeuTech, a monoclonal antibody labeled with technetium, is injected intravenously and accumulates quickly at the site of an infection, giving a bright, clear image on a gamma camera. LeuTech also is in Phase II studies for the detection of osteomyelitis (bone infection).

Mallinckrodt signed a deal worth more than $30 million for worldwide licensing rights to LeuTech. (See BioWorld Today, April 27, 1999, p. 1; and May 17, 1999, p. 1.)

Palatin has two other products in development: PT-14, for sexual dysfunction, and MB-840, a liver-selective CT imaging agent with therapeutic potential.

Palatin's stock (NASDAQ:PLTN) closed Friday at $3.312, up 31.25 cents. MBI's stock (NYSE:MB) closed Friday at $1.312, up 18.75 cents.