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Surmodics Buys Southern Research Institute's Brookwood for $40M; Pledges Not to Relocate

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Brookwood Pharmaceuticals, a drug-delivery spinout of the Southern Research Institute, has been acquired by Surmodics for $40 million in cash, Southern Research and Surmodics said last week.
 
According to Southern Research, the one-time payment of $40 million — which could eventually balloon to as much as $62 million based on the achievement of certain milestones — is the largest one-time payment in Southern Research’s history.
 
In addition, Southern Research, which is based in Birmingham, Ala., said that it sees the acquisition as a win for economic development in the region because of Surmodics’ plan to keep Brookwood’s offices in Birmingham.
 
Brookwood is a 2005 spinout of Southern Research’s in-house pharmaceutical formulations group, which focused on developing time-released formulations for pharmaceutical delivery.
 
Continuing that work, Brookwood provides proprietary polymer-based technologies and research services to companies developing improved pharmaceutical products. In particular, the company specializes in injectable microparticles and implants based on biodegradable polymers to provide sustained drug delivery.
 
Brookwood generated approximately $12.7 million in revenue in 2006, primarily from research and development fees, polymer sales, and undisclosed royalty-generating licenses, according to Southern Research. It currently has “nearly 30” paid development projects in progress with undisclosed pharmaceutical and medical device companies.
 
Surmodics, based in Eden Prairie, Minn., has a number of specialty healthcare product business units, including drug delivery, tissue engineering, and biocompatible and pro-healing coatings.
 
Arthur Tipton, president and CEO of Brookwood, told BTW this week that the deal came about because Brookwood was seeking potential investors to further some expansion plans. Meanwhile, Surmodics was scanning potential acquisitions to help it broaden its technology base.
 
Surmodics said in a statement that its acquisition of Brookwood will, among other things, bolster its drug delivery capabilities to include both systemic and site-specific drug release; broaden the range of markets Surmodics participates in to include diabetes, oncology, ophthalmology, orthopedics, and alcoholism; and enhance its product manufacturing capabilities.
 
“When we launched [Brookwood], we pulled that group out of Southern Research as the basis for launching the company,” Arthur Tipton, president and CEO of Brookwood, told BTW this week. “All the people came out, all the equipment came out, and all the intellectual property came out.”
 
Tipton added that the IP portfolio comprises roughly 20 patents, all of which are related to polymer-based drug-delivery compositions and methods.
 
Under the terms of the deal, Surmodics has paid Southern Research $40 million in cash, and may pay the institute up to an additional $22 million in cash upon the successful achievement of undisclosed revenue targets, as well as development, regulatory, and other milestones associated with customer projects, Surmodics said in a statement.
 
It is unclear how Southern Research will use the money received in the acquisition. Representatives from the institute did not return phone calls in time for this publication.
 
The institute is an independent, non-profit scientific research center, and as such typically reinvests licensing, royalty, or other income back into scientific research. According to the Southern Research’s 2005 tax-exemption form filed with the Internal Revenue Service, it garnered approximately $79 million in total revenues that year.
  
Tipton said that Southern Research officials are just beginning the process of determining how best to implement the new funds. “My impression is that Southern Research is there to develop new technologies, and to advance those technologies, so that is what they’ll do with that money.”
 
The University of Alabama-Birmingham, which is affiliated with Southern Research Institute, may also stand to benefit from the influx of cash and any research that it supports.
 
Although Southern Research operates as a separate entity from UAB, Carol Garrison, UAB’s president, serves as chairman of Southern Research’s board of directors, and had a say in the decision to sell Brookwood to Surmodics. In addition, according to Southern Research, several UAB administrative staff members also serve on the board.
 
Garrison was unavailable for comment. However, according to the Southern Research website, the affiliation between Southern Research and UAB “serves as a more formal way to facilitate research interactions between Southern Research scientists and UAB scientists when appropriate.”
 

“That level of know-how and expertise is not replaceable, so a lot of what Surmodics was acquiring was a very, very talented workforce.”

Brookwood’s Tipton told BTW that “understanding that there is world-class talent at UAB, particularly in the medical space, certainly our hope is to take advantage of that and further [UAB’s] ongoing relationship with Brookwood and [with] Surmodics.”
 
One of the key aspects of the acquisition, according to Southern Research, was the opportunity to keep Brookwood’s offices in the Birmingham area, where Southern Research is also located. Surmodics said that Brookwood will operate as one of its business units, and will remain in Birmingham.
 
Brookwood and its subsidiaries Lakeshore Biomaterials and Aeon Biosciences employ approximately 70 people
 
“The Birmingham community has benefited from Brookwood’s growth and presence, and we are very pleased that Surmodics plans to retain Brookwood in Birmingham,” John Secrist, president and CEO of SRI, said in a statement.
 
Tipton, who joined Southern Research in 2004 specifically to spin out Brookwood, will retain the title of president of Brookwood, and will also be named a vice president at Surmodics.
 
Tipton told BTW that Brookwood specifically sought a commitment from Surmodics to keep Brookwood in Birmingham because of the long history of the founding research group in the area.
 
“But part of it is that our technology base, which is profound, does require some very talented people,” Tipton said. “One of the wonderful things about Brookwood is, through pulling the group out of Southern Research Institute, we’ve got a number of people who have worked on these technologies for 20 years or more. That level of know-how and expertise is not replaceable, so a lot of what Surmodics was acquiring was a very, very talented workforce.”
 
Tipton also said that Brookwood maintains specialized facilities in Birmingham that are required to meet the needs of its clients, and those are also not readily transferable.
 
“Everyone has all the requisite knowledge about how difficult it is to move a workforce from one point to another point,” Tipton said. “Keeping those people together will be necessary to realize all the value out of the transaction.”

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