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As part of the company's effort to expand into niche markets and to respond to mounting competition in the generic drug market as well as rivals to its first and most profitable original product, Copaxone, Teva Pharmaceutical Industries last week entered into nonbinding memoranda of understanding with Clal Biotechnology Industries subsidiaries MediWound (55% ) and Polyheal (41% ).

The essence of the agreements is the gradual acquisition of full ownership of Polyheal from MediWound and the formation of a single company in the field of wound care under the control of Teva. The new company will start by marketing two products and will attempt to take a bite out of the $9 billion annual wound-care market. Teva could end up putting $503 million in total into the deal.

Meet Polyheal and MediWound

Polyheal is developing a product to treat chronic and acute wounds from a variety of causes, including venous or arterial insufficiency, trauma, radiation, Behcet's disease, rheumatoid arthritis and pressure ulcers.

Polyheal was founded in 1996 to develop products based on the research of Dr. Vladimir Ritter. To date $15 million has been invested in it. The company employs five people and has received authorization to market the product in Europe and in Israel.

Even without a formal distribution system in Israel, within a few months sales reached an annual rate of $200,000. Marketing has not begun in Europe because Polyheal preferred not to tie itself down to marketing agreements in particular countries and regions before choosing a strategic partner.

Polyheal is competing in the chronic wound market against companies that include Convatec, Systagenix Wound Management, Smith & Nephew and that offers a range of treatment solutions such as bandages, foams and gels. Sources close to Clal Biotechnology note that the company was in advanced negotiations with these companies as well as with Lohmann & Rauscher and Beiersdorf.

By going with Teva rather than one of the established leaders in the field, Clal Biotechnology, MediWound and Polyheal are betting on Teva's ability to get into the sector, with all that entails: creating sales and marketing networks for the main two wound-care markets, hospitals and burn treatment centers.

Teva plans to develop a marketing and sales system to target the 60 chronic wound centers in Europe and the United States.

Sources close to Clal Biotechnology confirm that the agreement was signed Wednesday night after a discussion of Teva's inexperience in the field, relative to the other three candidates. Apparently another consideration was concern that an established firm might not be in any hurry to get Polyheal's products to market because they could cut into sales of their own products.

MediWound was founded in 2000 and has around 24 employees. It develops and manufactures wound and burn treatments. Debrase was developed to selectively remove tissue damaged in second- or third-degree burns without harming healthy tissue, and is an alternative to surgery, which also removes healthy tissue. The gel dressing, which is based on a mixture of enzymes from pineapple stems and sterile gel, significantly shortens burn treatment, and reduces the risk of infection and the extent of scarring, according to MediWound.

MediWound reported three weeks ago that it had reached all its primary and secondary goals in the critical Phase III clinical trials. Debrase reduced the percentage of patients needing surgical intervention as well as the size of the area requiring surgical removal of damaged tissue.

In addition, Debrase reduced the number of patients requiring skin grafts. Based on the results of the Phase III trial, MediWound is planning to apply to the European Medicines Agency this year for marketing authorization in Europe. Company sources said they expect the approval process to take about a year. MediWound received orphan drug status which ensured it exclusivity for ten years in Europe and seven years in North America after receipt of marketing authorization.

Clal Biotechnology betting on Teva

On the closing of the transaction, Teva will invest $7 million in MediWound at the market valuation of $200 million before the money. It will concurrently purchase $5 million of shares from the current MediWound shareholders, so that its holdings in MediWound will rise from 12% to 17% by the date of conclusion.

The funds Teva will invest in the first stage will be used by MediWound to purchase $7 million of shares in Polyheal at a market valuation of $90 million, while simultaneously purchasing from MediWound the right to develop and manufacture Polyheal products.

Teva will acquire an exclusive global merchandising license for Polyheal products and finance the continued development of its range. MediWound will at a future date acquire Polyheal shares at $193 million at a company valuation of $270 million-$290 million, depending on meeting certain benchmarks in the progress of Polyheal products.

Teva has committed to investing $65 million in MediWound, subject to the fulfillment of certain Polyheal product benchmarks, at a company valuation of $200 million-$300 million before the money. Teva will also pay MediWound $145 million, depending on sales and royalties for Polyheal products.

Teva has promised MediWound shareholders a profit on their investment in the company as well as payments and royalties subject to obtaining authorization to market in Europe and the United States and subject to reaching sales figures which will reduce Teva's investment risk in the field.

Teva will acquire from MediWound shareholders $22 million of shares at a company valuation of $271 million upon receipt of authorization to market MediWound products in Europe. Additionally, Teva will also purchase from MediWound shareholders shares at $64 million at a company valuation of $593 million upon receipt of authorization to market MediWound products in the United States.

At the end of the day, upon conclusion of all the stages of the deal and realization of all the options the Clal Biotechnology Industries share of MediWound will be down to 29%, while the latter will control Polyheal. Teva holdings in MediWound will rise to 51%.