Mallinckrodt

Michael Tweedle

Ed Quilty

Molecular Biosystems

Lindsay Rosenwald

Corrections or additions?

Published in U.S. 1 Newspaper on March 22, 2000. All rights reserved.

Palatin Technologies

Star Trek’s Dr. McCoy had a nifty little gizmo in his

pocket. He’d whip it out, wave it over Captain Kirk after he’d been

hit on the head by one of those big fake styrofoam rocks, and presto!

Instant diagnosis.

Pure science fiction, of course, but the idea behind Dr. McCoy’s gizmo

— diagnosing nearly all internal conditions and injuries by non-invasive

means — moves ever closer to becoming science fact. And a number

of Princeton-area companies are leading the way.

Bracco, Nycomed, Cytogen, EchoCath, and a whole range of start-ups

percolating in the basement at Sarnoff are working to make imaging

technologies — CT-scans, MRIs, ultrasound, and a whole range of

x-ray-like diagnostic imaging machines — more accurate and more

useful for a wider range of conditions.

One of the newer entrants on the Princeton imaging scene, Carnegie

Center-based Palatin Technologies, made the news last week. It had

been scheduled to do a stock swap merger with San Diego-based Molecular

Biosystems. Palatin is working to get a product approved by the FDA

to diagnose appendicitis, and Molecular Biosystems has a second-generation

product on the market for heart diagnostics.

But on the very day that a joint press release announced continued

progress on the merger, Palatin pulled the plug. Why did Palatin cancel?

It may have been partly because the groom felt that the bride’s hope

chest was too small. Palatin’s stock had risen faster and higher than

Molecular Biosystems’ stock.

"The merger did make sense for us last fall at $3 a share,"

says Edward Quilty, president, CEO, and chairman of Palatin Technologies.

Last month the stock rose to $7 and $8. Biotech stocks in general

went up over the last several weeks, but it didn’t hurt Palatin’s

stock when the company was mentioned prominently in a New York Times

article regarding its secondary product for erectile dysfunction.

"From a cost benefit standpoint, it doesn’t make any sense now."

Another source says that the price was not the only reason and points

to worries about intellectual property and marketing potential of

the Molecular Biosystems product.

The Palatin/Molecular Biosystems merger was canceled within the legal

time frame of the contract. Still, the bride was in shock. "The

joint news release was approved on Friday afternoon and was released

on Monday morning. We found out the news on Monday afternoon,"

says Patty Sullivan, investor relations manager of San Diego-based

Molecular Biosystems. "We are very disappointed. We were very

excited about going forward and the critical mass we were going to

have as a joint company. We are reviewing our options."

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Mallinckrodt

Stakeholders in the merger were also surprised. "We were prepared

to work with them as a single entity," says Barbara Abbott, spokesperson

for Mallinckrodt, the $2.6 billion 120-year-old healthcare products

company based in St. Louis and one of the 10 top hospital products

firms in the nation. "Both Palatin and Molecular Biosystems are

marketing distribution partners with which we have agreements for

imaging products."

As with Bracco and most of the other Princeton-area imaging companies,

the researchers of Palatin and Molecular Biosystems seek not to improve

basic imaging technologies, but rather to develop chemical agents

that when introduced into the body help existing imaging machines

to see an ever-wider array of soft tissues implicated in conditions

ranging from cancer to infections to cardiovascular disease.

Palatin’s story: In November of last year Palatin applied

to the FDA for approval of its LeuTech infection imaging agent for

use in the diagnosis of appendicitis.

Appendicitis, as we all know, is an infection of the appendix, a vestigial

tube-like structure stuck to the large intestine in the lower right

abdomen. If an infection proceeds to the point where the appendix

bursts, the infection spreads and in untreated cases can lead to death.

Luckily, most cases of appendicitis are easy for doctors to diagnose;

and in any event, most doctors follow the "when in doubt, cut

it out" school of thought on appendicitis. Because an appendectomy

is a relatively low-risk procedure that removes an organ with no known

function, most doctors will take the appendix out of any patient who

presents the classic symptoms of appendicitis, which include a sharp

pain in the lower right abdomen, nausea, vomiting, and foul breath.

But not every case of appendicitis — which affects about 200 of

every 100,000 people in the U.S. each year — is so easy to diagnose,

because not every patient displays the classic symptoms, and because

some of the symptoms of appendicitis are very similar to the symptoms

of other conditions, including kidney and ovarian problems. In these

cases, called "equivocal" appendicitis, Palatin believes its

LeuTech will come in very handy.

Here’s how it works: Palatin owns a proprietary antibody with an affinity

for white blood cells. When those antibodies are injected into the

body, they attach themselves to the white blood cells they come in

contact with.

But the antibodies alone are not particularly helpful by themselves.

Palatin’s LeuTech product provides a way for hospital technicians

to label these antibodies with a radio-isotope called technetium-99m,

so that the white blood cells with the radio-labeled antibody attached

can be tracked as they travel through the body with an X-ray-like

machine called a gamma camera.

White blood cells gravitate to the site of every infection; that’s

how the body fights infections off. With LeuTech, a major site of

infection like an inflamed appendix shows up brightly on an image

taken with the gamma camera, enabling doctors to determine quite easily

whether a patient has appendicitis or not.

Top Of Page
Michael Tweedle

"Palatin thinks it has that market niche covered," says Tweedle

of Bracco. "The images that I saw at the Society of Nuclear Medicine

meeting last June looked crisp and good."

Radiologists already use a similar method to diagnose equivocal appendicitis

and other internal infections, by removing white blood cells from

a patient’s body, radiolabeling the cells, and injecting them back

into the patient. But this currently available method is expensive,

involves much blood handling, and takes up to 12 hours, which if you’ve

every had appendicitis you know is a very long time. The LeuTech product,

in contrast, is simpler and easier to use and produces a diagnostically

useful image in about 90 minutes, according to the company.

Palatin hopes to receive FDA approval to begin marketing LeuTech in

partnership with Mallinckrodt by the end of the year. But the indication

for equivocal appendicitis, a relatively small market, is just the

beginning, according to Palatin founder, chairman, and CEO Edward

Quilty.

"The reason we went with the appendix in clinical trials for the

first indication is because we could show very easily that the product

was effective in the diagnosis of appendicitis," says Quilty,

48, who founded Palatin in 1995 with business partner and Palatin

CFO Stephen Wills.

"But one thing we found in the clinical trials is that when we

imaged people with suspected appendicitis who as it turned out did

not have appendicitis, the surgeon was able to look at the scan and

make another, correct diagnosis for such things as abscesses or diverticulitis,

and could use that finding to give proper treatment," Quilty continues.

"Which is why we believe LeuTech is a valuable diagnostic tool

in helping to assess a wide variety of infections."

In theory, LeuTech should be useful in diagnosing all kinds of internal

infections, because every infection attracts lots of white blood cells.

To that end, the company has already begun trials on the use of LeuTech

in osteomyelitis, a bacterial infection of the bone and bone marrow.

Other indications the company expects to explore include ulcerative

colitis and abdominal and other abscesses, including bone abscesses

commonly suffered by people with prostheses.

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Ed Quilty

Quilty founded Palatin after a 20-year career in a variety of jobs

in the healthcare products industry. A Yonkers native with an undergraduate

degree from Southern Missouri University and an MBA from Ohio University,

Quilty served in a number of marketing and management positions at

Baxter, a large diversified health products company, from 1974 to

1987. From there, he became executive vice president of a company

called McGaw, which was involved in infusion therapy. In 1992, he

came to Princeton to serve as president and CEO of Life Medical Sciences,

a wound-care company, where he oversaw the company’s IPO.

Quilty later joined MedChem and brought along a wound-care product

called SureClosure from Life Medical, and then promptly sold the company

at what he calls "a healthy profit." He then branched out

in two directions: on the one hand into a company called Derma Sciences,

a $13 million revenues wound-care company of which he remains CEO

but now leaves day-to-day operations to his chief operating officer,

and Palatin.

At first, Palatin was just a shell, which Quilty and a number of associates

he had met in his earlier jobs in Princeton used to acquire interesting

technologies. These associates include Palatin CFO Stephen Wills,

who is also president of Alexander Road-based Golomb, Wills & Company,

an accounting firm; Carl Spana, formerly an immunology researcher

at Bristol-Myers Squibb and now Palatin’s chief technology officer;

and Charles Putnam, formerly vice president of Life Medical and now

Palatin’s COO.

Quilty’s first acquisition for Palatin — a made-up name meant

to sound generic enough to encompass a variety of technologies and

products, Quilty reports — had been RhoMed, a New Mexico company

that had licensed the LeuTech technology from its original academic

inventors, and on whose board Quilty served.

Subsequent acquisitions have brought the company a number of other

technologies, including a nasal spray for erectile dysfunction now

in development, and MIDAS, a proprietary peptide chemistry technology

that may enhance the use of peptides — short chains of amino acids

used by the body to regulate a wide variety of biological functions

— in discovering and enhancing the efficacy of new drugs.

Quilty believes these technologies offer Palatin a number of exciting

opportunities, including the possibility of the development of a drug

for obesity using the MIDAS technology. But his planned and now spurned

acquisition of Molecular Biosystems was to bring more than technology:

it would bring a marketable drug and double the size of his company.

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Molecular Biosystems

Molecular Biosystems has an FDA-approved product called Optison, a

contrast imaging agent used in ultrasound imaging of the heart wall

and cavity. This California firm was going to move to New Jersey,

effectively doubling Palatin’s size and bringing the roster up to

around 60, divided between the Carnegie Center and an 11,000 square-foot

research facility in Edison.

Optison is one of a new class of agents that can produce

better echocardiograms. It is the only contrast agent approved for

echocardiographic use in the United States. Other products have been

filed or are going to be filed by such companies as Nycomed, DuPont,

Schering Plough, and Bracco, but none have been approved. Molecular

Biosystems’ Sullivan says the market for Optison is $400 million and

the $10 or $12 million sales last year would have improved this year:

"The ramp-up is slower than we would like to see it, but we have

improved user sales quarter by quarter. We had a product on the market,

and we had clinical and regulatory experience — they outsource

a lot of that."

"When you change medical practice, new markets don’t just leap

up over night," says Michael Tweedle, CEO of Bracco Research USA

on College Road, speculating on why the ramp-up is so slow.

Quilty is not willing to wait. Palatin trades on the AMEX under symbol

PTN, and on a percentage basis at least, Palatin’s shareholders have

been on something of a wild ride. In the past year alone, the stock

has swung from a high above $7 to a low just over $2; until last month

it was trading around $4, giving the company a market cap of about

$30 million, but in mid February it jumped to $7 and $8. With prospects

for an acquisition gone, he is considering an equity offering.

Quilty, who according to SEC documents owns 7 percent of Palatin’s

stock, says he keeps Palatin’s largest investor, Lindsay A. Rosenwald

MD, well informed, but that Rosenwald did not vote on the merger breakup.

Rosenwald, based in Manhattan, controls 12 percent of Palatin Technologies

and other investors he is connected with own additional shares. Rosenwald,

who left the practice of cardiology to do investing, was also involved

in the funding for Transcell Technologies.

Top Of Page
Lindsay Rosenwald

Rosenwald is represented on the board by John K.A. Prendergast, formerly

managing director of Rosenwald’s Paramount Capital Investments, and

he is consulting to the company for $4,500 per month. Other directors

include James T. O’Brien, the former president and COO of Elan, the

Irish company that just bought Liposome; Robert G. Moussa, retired

president of Mallinckrodt International; and Robert K. deVeer Jr.,

retired head of the industrial group at Lehman Brothers.

"The problem is getting to the critical mass or market cap that

makes the stock attractive to a broad group of investors," says

Quilty. "In addition to high-net-worth investors, we also want

to attract institutional investors. The institutions look for liquidity,

and the ability to take a large position. Which is why we continue

to look at doing acquisitions. Once we get into the $20 million to

$50 million range in revenues, we’ll become interesting to institutional

and other investors."

There’s still a way for Palatin to go. The company posted a net loss

of slightly more than $12 million in the year to June 30, 1999, and

revenues of slightly more than $600,000. And the stock, like many

other biotech issues, has retreated in the week since the breakoff

of the merger to about 60 percent of its former high. But Quilty is

undeterred.

"I’m optimistic about biotech," he says. "I think that

we’re poised for some tremendous growth here."

— Christopher Mario

Palatin Technologies Inc. (PTN), 103 Carnegie Center,

Suite 200, Princeton 08540. Edward Quilty, CEO. 609-520-1911; fax,

609-452-0880. Home page: www.palatin.com.


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