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MEDCHEM'S PROPOSED SPINOFF OF ANIKA

This article was originally published in The Gray Sheet

Executive Summary

MEDCHEM'S PROPOSED SPINOFF OF ANIKA will serve as a fundraising vehicle for research and development of hyaluronic acid products. Following the spinoff, Anika, which will assume all of MedChem's HA research, will seek to raise at least $15 mil. in a public offering, MedChem says in a March 8 press release. MedChem is funding initial Anika operations with a $5.9 mil. capital contribution to the firm. The spinoff proposal provides that MedChem shareholders would receive one share of Anika stock for every 3.33 shares of MedChem common stock held. Among upcoming research projects at Anika are clinical studies for use of its Orthovisc HA in surgical treatment of temporomandibular joint dysfunction. The studies will be conducted under an investigational device exemption cleared by FDA in 1988. Anika hopes to amend the IDE in April to include other indications such as arthroscopic TMJ procedures. Additional preliminary research products include development of cross- linked HA molecules for post-surgical tissue adhesion prevention and the use of HA oligosaccharides to control proliferative diseases. Medchem established Anika in February 1992 as a separate subsidiary to focus on MedChem's HA-based products. The firm cites several benefits to the proposed spinoff of the business: each company can focus on its own core business ** investors can evaluate each firm more effectively ** both firms will have greater access to capital ** each firm will have enhanced ability to attract and retain qualified personnel ** and MedChem's near-term earnings will improve due to elimination of HA product development expenses. Among the HA expenses are obligations MedChem undertook as part of a January 1991 settlement of a patent dispute with Pharmacia over MedChem's Amvisc hyaluronic acid products for ophthalmic procedures ("The Gray Sheet" Jan. 21, 1991, p. 5). Under the settlement, MedChem was required to pay Pharmacia $12.2 mil. and "was granted freedom from suit to make and use non-ophthalmic HA-based products for research and testing purposes." The settlement allows MedChem to manufacture Amvisc products for sale by its exclusive distributor Iolab, which must pay Pharmacia royalties based on product sales. Pharmacia has assigned all of its HA-related patents and assets to Biomatrix, a developer of viscoelastic biomaterials whose chief executive officer developed the hyaluronic acid product marketed by Pharmacia as Healon. This month, Anika entered into a license agreement with Biomatrix relating to the sale of the Orthovisc TMJ treatment product. In December 1992, FDA accepted for filing a PMA for Orthovisc covering non-surgical TMJ injections. MedChem says in its SEC filing that "even if any of Anika's other non-TMJ products currently under development might be held to infringe the [Pharmacia] patent, Anika does not anticipate that any of these products will receive all required regulatory approvals and be available for commercial sale" before the patent expires in February 1996. After the Pharmacia suit, MedChem entered into a distribution agreement with Iolab, under which MedChem produced Amvisc for Iolab in return for a lump sum and per unit payments that approximate manufacturing costs. MedChem has assigned this agreement to Anika, which could incur losses associated with Amvisc production should Iolab sales volumes not reach anticipated levels. Following the stock distribution, Anika will sublet approximately 10,000 square feet of MedChem's Woburn, Massachusetts manufacturing facility, where Amvisc is produced. The firms made this agreement "because it is not practical for Anika to establish a new FDA-approved facility for Amvisc manufacturing in the near future," MedChem states in the SEC filing. Anika will also sublease approximately 21,000 square feet at MedChem's other Woburn facility, where the firm will house its executive and research and development operations. For up to two years following the agreement, Anika and MedChem will share certain "administrative functions and employee services," such as accounting, purchasing and regulatory affairs. Anika will reimburse MedChem for the services. Upon effectiveness of the spinoff, David Swann, MedChem's chairman of the board, will be Anika's chairman and chief executive officer. MedChem announced on March 18 its results for the second quarter ended Feb. 28. Revenues for the quarter were $8.8 mil., up 55.7% from the same period last year. The firm notes that the revenue increase is due to continued strong sales of Avitene; domestic sales of the collagen hemostat product increased 18% during the quarter to $4.5 mil. Revenues also were boosted by the acquisition of Gesco in August 1992 ("The Gray Sheet" July 20, 1992, p. 11). Gesco accounted for $2.4 mil. of the firm's $7.3 mil. in second quarter domestic sales. International sales declined to $1.4 mil. from $1.8 mil. in the second quarter last year. Net income for the period was $2.3 mil., up 12% over 1992's second quarter earnings of $2 mil.
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