By Mary Welch

In a circular deal, UroGen Corp. paid stock for rights to Baxter Healthcare Corp.'s gene transfer method and the pharmaceutical company agreed to provide up to $25 million to fund joint development of gene therapies for blood disorders.

UroGen, in a related move, also sold slightly more than $1 million worth of unsecured convertible notes to outside institutional investors, such as Technology Funding, of San Mateo, Calif., and shareholders.

"The deals are complicated, but we're very excited about our alliance with Baxter," said Paul Quadros, president and CEO of UroGen.

"In terms of the $1 million, it was the first time we went outside for money since we were spun out and we think it went well. There are two ways to look at the deal with Baxter: What is the value of the deal today, and what is the corporate partnership worth to UroGen? They're two separate issues."

UroGen was formed in 1995 from Medstone International Inc., of Aliso Viejo, Calif.

The agreement combines Baxter's gene transfer technologies with UroGen's tumor sensitization and related technologies for gene therapies targeting cancer, particularly prostate cancer, and genetic disorders, including blood diseases.

Under the terms, UroGen bought exclusive rights to Baxter's adenoviral-based gene transfer technologies with stock, more precisely, 5,444 shares of Series A convertible preferred stock. Each share of the preferred stock is convertible into 1,000 shares of UroGen common stock. UroGen also will pay an additional 1.76 million common shares and 324 Series A preferred shares for rights to other technologies within Baxter's gene therapy program.

Quadros said if Baxter, which is headquartered in Deerfield, Ill., converted all its preferred shares into common stock today (which by the agreement, it cannot) the deal would be worth $7.6 million and Baxter would own half of UroGen.

Quadros is quick to point out the deal was structured so that Baxter is not a majority stockholder.

"They are clearly a meaningful but minority owner and will be for a significant period of time," Quadros said. "Their economic stake, at the moment, appears to be worth 50 percent of the company, but remember those notes can't be converted this year. As time goes on and other shareholders and investors come in, Baxter's stake will be diluted. They will not be a controlling influence, either in the specifics of this particular transaction or in the realities of running the business."

Already Baxter owns 19 percent of UroGen's common stock. "If you were to convert everything now, it would look like we would own 50 percent of the company," agreed Victor Schmitt, president of venture management for Baxter. "But that will never happen."

The agreement involves Baxter's recombinant adenoviral vector systems for the delivery of genes. The adenoviral vector is made by modifying an adenovirus, which is similar to a common cold virus, to carry genes into target cells to direct those cells to perform a desired therapeutic function.

Baxter has been conducting gene therapy research in hemophilia A, which involves Factor VII deficiencies. Preclinical results were "positively outstanding," Quadros said.

"We will begin clinical trials soon and plan to file an investigational new drug [IND] application with the FDA next year," he added.

In the collaboration, Baxter will have worldwide rights to market gene therapies for blood clotting disorders, and UroGen could receive from $22 million to $25 million in development funding for those products.

"We believe that our gene transfer technology has utility in a number of areas and we can't begin to fund them all," said Schmitt. "We figured the best way to get the full potency of the technology is to get into an environment, like with UroGen, where we fund some areas and let UroGen leverage our technology and manpower to develop applications that Baxter wouldn't or couldn't get into. However, we retain the exclusive sales, marketing and distribution rights in any blood clotting or blood disorder drugs."

From UroGen's point of view, leveraging the technologies would mean forming new research and development collaborations, "and we look forward to exploring them — not only in prostate cancer but in other cancers and diseases," said Quadros.

UroGen's stock (OTCBB:UROG) closed Thursday at $0.751, unchanged. *