Cash flow is king as Cytogen pursuesstrategy of alliances and acquisitions

Raising capital is centerpiece of recent activity

Monoclonal antibody developer Cytogen has been the source of awhirlwind of corporate activity in recent months. The Princeton,NJ, company has inked a series of marketing deals, acquisitionsand equity investments in an effort to raise capital while itstruggles to build market acceptance for its OncoScint CR/OV imagingagent.

Cytogen's most recent activities include:

• Tentative deals reached late last month with two companiesfor European and Canadian sales and marketing of OncoScint CR/OV,which uses monoclonal antibodies to detect colorectal and ovariancancers;

• Another deal in August with Harvard Management Co., actingon behalf of Harvard University, to purchase 1.8 million sharesof common stock from Cytogen;

• An agreement reached in June to merge with biotechnologyfirm Cellcor (SCAN 7/20/95); and

• A deal completed in February in which Cytogen acquired CytoRad,the R&D arm of the company (SCAN 3/15/95).

A common thread connecting all these deals is money, as eachagreement contributes operating capital to Cytogen. The CytoRadmerger provided Cytogen with $11.7 million in cash and securities.The proposed Cellcor merger, which will be funded through a swapof Cytogen and Cellcor stock, will be accompanied by a subscriptionoffering of Cytogen stock that will put $12 million to $23.5 millionin Cytogen's pocket. The Harvard deal added another $7.3 million.

Incorporating a revenue stream as part of corporate deals isa necessary component of each transaction, according to Cytogenpresident and CEO Thomas McKearn.

That may be because Cytogen has yet to receive a lift fromsales of OncoScint CR/OV, which was approved by the Food and DrugAdministration in late 1992. Industry observers believe that salesof the product have suffered because of its price and the difficultiesin educating physicians about the novel technology.

Pamela Murphy, vice president of corporate communications,notes that Cytogen would prefer to have sufficient cash flow tooffset expenses.

"But as an emerging biotech company, we still have workto do to achieve those kinds of revenues, and that work involvesmoving our existing products as well as developing our second-generationtechnology," Murphy said.

Strategy for expansion. Acquiring capital is only one sideof a multifaceted strategy aimed at expanding product marketingthrough internal development and strategic alliances, while leveragingcore capabilities and experiences. The company hopes to fuel thisfrenetic level of activity in the future with a financing agreementwith Nomura Securities International for $49 million, an agreementannounced last March but still undergoing review by the Securitiesand Exchange Commission (SCAN 4/12/95).

If the SEC approves the arrangement, the resulting line ofequity investment would be used to pursue future alliances andto seize opportunities to acquire complementary products and technologies,McKearn said. Nomura has agreed to make investments in incrementsas small as a million dollars at times to be chosen by Cytogen.

"Our hope would be that over the two-year period (of theagreement), the company would see increases in its share price,thereby avoiding more dilution to our shareholders than wouldbe the case if we were to sell all $49 million at this particularmoment," McKearn said.

Each of the recent deals involving Cytogen has been equitablefor all parties. The stock deal in August, which added $7.3 millionto Cytogen coffers, was as much a windfall for Harvard as it wasfor Cytogen. Harvard made the purchase by exercising options forCytogen stock at a price of $4.06 per share on Aug. 15, when shareswere going for about $6 on the open market. At press time, Cytogenwas trading for $5.375. Harvard may purchase up to an additionalone million shares of Cytogen common stock through Nov. 15.

The Cellcor deal, if approved by the SEC, promises a rangeof benefits. Cytogen gains access to technology for the treatmentof cancer and infection, technology that could complement thecompany's own diagnostic products. The stock purchase could generateup to $23.5 million for Cytogen. In fact, the merger is predicatedon the offering generating at least $12 million, a condition thatwill very likely be met. Hillman Medical Ventures, a private investmentfirm that holds 50.5% of Cellcor common stock, has committed tothe $12 million purchase.

One of the most important moves for the company is the recruitmentof a distributor for OncoScint CR/OV for Europe. EuroCetus marketedOncoScint CR/OV in the region until the company was acquired byChiron. As a result of the merger, EuroCetus shifted its corporatefocus, resulting in a virtual shutdown of marketing activity ofOncoScint CR/OV in Europe during much of 1994 to the present,with predictable results.

"Demand literally dried up when it was not being marketed,"Murphy said.

In last month's agreement, CIS Bio International of Gif-SurYvette, France, agreed to step in and market OncoScint CR/OV inEurope.

In Canada, Cytogen inked a deal with Faulding of Montreal togive that company the exclusive right to sell and distribute OncoScintCR/OV in the country. The agent is not yet approved for sale inCanada, but a registration package is pending before the CanadianHealth Protection Branch. Faulding will be responsible for obtainingall necessary Canadian marketing authorization.

Cytogen still lacks a marketing partner for OncoScint CR/OVin the U.S. It had a relationship with Knoll Pharmaceutical ofWhippany, NJ, but that agreement was terminated last year whensales of OncoScint failed to take off (SCAN 4/20/94).

Capital obtained from the various Cytogen deals over the lastfew months is greasing the wheels for the company to launch aneffective marketing program for near-term products and for OncoScint,while developing a next generation of technology utilizing peptidesand synthetic genes, according to McKearn.

"We have always believed that we have to have a portfolioof activities near-term that would bring increasing amounts ofrevenue into the company year by year," McKearn said. "Wealso want to have (activities) that render obsolete at some pointour own current technology."