Diagnostics & Imaging Week Associate Managing Editors

Looking to find a new identity after the decline of its vascular brachytherapy (VBT) business due in large part to the success of drug-eluting stents, Novoste (Norcross, Georgia) said last week that it has entered into a merger agreement with ONI Medical Systems (Wilmington, Massachusetts), a privately held maker of dedicated-purpose MRI systems.

The company said that if completed, the merger would result in a "complete change in the nature of Novoste's business and operations."

"We are extremely pleased to announce this important transaction," said Alfred Novak, president and CEO of Novoste, in a statement. "The combination of the Novoste financial resources with the successful MRI product business of ONI is the culmination of a comprehensive effort by the board and management of Novoste to determine the best use of our assets and we believe that this transaction will create significant opportunities for the stockholders of both companies."

During a conference call on the merger, Novak noted that ONI is "the only company on the market offering a high-field MRI system for the office practices of orthopedic surgeons," with its OrthoOne system. ONI received regulatory clearance from the FDA in 2000 to market the system.

The OrthoOne device, according to Novak, is a physician- and patient-friendly MRI that provides significant advantages for the orthopedic surgeons and the hospitals and diagnostics centers seeking a dedicated orthopedic system.

"As a result," he said, "we believe the company is well-positioned to significantly penetrate the more than 10,000 orthopedic practices, hospitals and imaging centers that are ideal candidates for the OrthoOne device."

He added that he believes the transaction also offers Novoste's shareholders the opportunity to realize increased value "that was unavailable to Novoste given the significant decline in our vascular brachytherapy business."

Robert Kwolyk, ONI's president and CEO, said during the conference call that the OrthoOne system's images are "superior in quality to those of low-field extremity systems and rival those of whole-body systems."

He noted that unlike the larger higher-priced whole-body systems, the ONI system could easily be integrated into an orthopedic practice.

The OrthoOne has the functionality to scan six of the seven critical extremities. These include hands, wrists, el-bows, knees, ankles and feet, but exclude shoulders.

"These six extremities represent approximately 80% of all extremity orthopedic-related scans," said Kwolyk. He added that orthopedic extremity-related scans represent about 25% of total MRI scans performed in the U.S.

The system list price for the device is $450,000, "a fraction of the $1.5 million cost of a whole-body system," Kwolyk said.

Under the terms of the merger agreement, Novoste will issue shares of its common stock in exchange for all of the outstanding shares of capital stock of ONI. The actual number of shares to be issued by Novoste will be determined at the closing of the transaction based on a formula that values ONI for purposes of this transaction at about $20 million subject to various adjustment provisions, including certain operating performance measurements of ONI from January 2005 to May 2005.

The merger also values Novoste at the value of its net cash assets at closing. Novoste and ONI said they anticipate that the transaction will result in the current ONI stockholders owning a majority interest, on a fully diluted basis, in the combined company.

In addition, Novoste has provided ONI with an 18-month, senior unsecured loan in the principal amount of $3 million, bearing interest at a rate of 8% per annum. In connection with the loan, ONI has granted to Novoste a warrant to purchase up to an aggregate of 2,325,581 shares of ONI Series A preferred stock.

Upon the closing of the merger, ONI will become a wholly owned subsidiary of Novoste and the combined company will be renamed ONI Medical Systems.

The existing management of ONI will become the management of the combined company. The board of directors of the combined company will include a majority of independent directors.

Closing of the transaction is expected to occur in 3Q05, subject to approval by the stockholders of Novoste of an increase in the authorized capital stock of the company and the issuance by Novoste of shares of its common stock in the merger.

A majority of the stockholders of ONI already have approved the transaction through written consent.

First Albany Capital acted as financial advisor to ONI and Asante Partners acted as financial advisor to Novoste in this transaction.

On a related note, Novak said Novoste has received expressions of interest from several parties to acquire the assets of its existing vascular brachytherapy (VBT) business, which the company said in February it was discontinuing (Medical Device Daily, Feb, 25, 2005).

As a result, he said the company is modifying its wind-down plan and is actively selling its VBT products to its physician customers. Novoste also is accepting new contracts to supply radiation source trains and transfer devices, as well as renewing existing contracts. He said the company is focused on concluding a transaction with a buyer who is capable of continuing to supply VBT products as well as meet the clinical regulatory and radiation regulatory requirements.

"If we're successful in selling these assets," said Novak, "current Novoste shareholders are likely to receive an increased ownership stake in the combined company."

In other dealmaking news:

American HealthChoice (Flower Mound, Texas) reported that it has signed a letter of intent to acquire the assets of Micro Health Systems (MHS; Parkland, Florida), a company that provides medical infrared imaging technology with diagnostic research and measurement software to physicians worldwide.

MHS infrared systems are used in the identification of vascular thermal patterns in the breast that signal the early development of breast cancer. These vascular conditions, called neo-angiogenesis, show up as hot spots with MHS's thermal imaging equipment five to seven years before any mass can be detected in a mammogram.

Unlike mammography, there is no compression, pain, discomfort or radiation with thermal imaging.

"With our acquisition of MHS's intellectual property and proprietary software, we plan on making this adjunctive early detection imaging technology available to the medical community across America on a much broader scale then ever before," said J.W. Stucki, MD, American Health-Choice chairman and CEO.

American HealthChoice is a medical services company comprised of a parent company and 30 owned and affiliated medical clinics in Texas.

Arrowhead Research (Pasadena, California) reported last week that it has acquired a suite of patent and patent applications covering nanosensor technology developed by Dr. Hermann Gaub, a professor of biophysics at the Center for Nanoscience at Ludwig-Maximilians University (Munich, Germany).

Arrowhead and its subsidiaries now own or have licenses to more than 250 U.S. and international patents and patent applications.

"Nanosensors are expected to radically change the way we diagnose disease. Now, we go to the doctor's office to have large samples of blood taken and then wait for days to get the results from a remote laboratory," said R. Bruce Stewart, Arrowhead's president.

He added: "With a nanosensor-enabled device, tests could be performed with a single drop of blood and the results obtained within minutes."

The portfolio covers techniques for measuring biomolecular interactions by single-molecule force spectroscopy.

As reported in Science in 2003, the devices are sensitive enough to detect single-base pair mismatches of DNA and have demonstrated significant improvement over state-of-the-art instrumentation.

The patent applications also cover construction of parallel assays for placing millions of sensors on a chip. These patent and patent applications were acquired for a cash payment and are complementary to other patents to which Arrowhead already has rights, the company said.

Arrowhead is a development-stage nanotechnology company. It operates four majority owned subsidiary companies: Aonex Technologies, developing semi-conductor nanomaterial technology; Insert Therapeutics, developing a nanoscale drug delivery system; Nanotechnica, developing a variety of nanoscale devices and systems, including lab-on-a-chip; and Calando, a company developing nanostructures for delivery and therapeutic use of RNA interference.