From todays Boston Globe...
Cambridge-based Variagenics plans merger with California's Hyseq
$56m stock swap to form new entity
By Jeffrey Krasner, Globe Staff, 11/12/2002
In a move that acknowledges the failure of its efforts to build a business around pharmacogenomics, or personalized medicine, Variagenics Inc. of Cambridge said it would merge with Hyseq Pharmaceuticals Inc. of Sunnyvale, Calif., in a stock swap worth about $56 million at the two companies' predeal valuations.
Variagenics essentially will abandon much of its efforts to develop therapeutics tailored to the unique genetic structure of individual patients, and instead will invest its $60 million in cash in Hyseq's product candidates, which are led by a promising agent for dissolving blood clots.
The complex deal, called a reverse triangular merger, will create a new company, to be renamed, that will consist largely of technology and senior management from Hyseq, cash from Variagenics, and employees from both companies. If the deal is approved, Variagenics shareholders will wind up with 64 percent of the new company.
Investors will get 1.64 shares of Hyseq for each share of Variagenics. Based on the closing price of Hyseq shares last Friday, that suggests a price of $2.22 for each Variagenics share, or more than twice its closing price last week of 96 cents. Variagenics shares haven't closed above $2 since April.
With more than $60 million in cash and equivalents and about 24 million shares outstanding, the firm has been trading for significantly less than its liquidation value - a situation that has plagued many hard-hit biotech firms where investors are assigning a negative value to the firm's ongoing business.
''When a stock is trading at half cash value, you don't need a PhD in finance to know that investors would like to see a higher price,'' said Jean-Francoise Formela, managing partner of Atlas Venture Partners of Waltham and a director of Variagenics. ''As far as pharmacogenomics is concerned, it doesn't take a high school degree to realize that there was no business there. Look at the history of the revenues of the company, planned vs. actual: We needed to look at another business.''
In the past, both firms had pursued strategies of developing tools and services to sell to larger pharmaceutical firms. Yesterday, executives at both companies took pains to position the new, combined firm as a product company - that is, a biotech firm with an approved drug that can be sold to consumers. Still, Hyseq's clot-dissolving drug candidate, Alfimeprase, is only in phase 1 trials. Additional trials and an application to the Food and Drug Administration for approval to sell the new treatment could easily take three to five years. And the candidate still faces considerable odds: Only one of five drugs that are tested in human clinical trials successfully makes it to the market, according to studies.
Hyseq only had enough cash to last through the first quarter of next year, said Dr. Ted Love, president and chief executive. Variagenics, which had cut its burn rate, or level of spending, through layoffs and cutbacks this year, had enough cash to survive about 31/2 years. Combined, the two firms will have enough to survive until mid-2004 without the need to raise additional capital. Both companies are also holding biotech yard sales, seeking to sell off unwanted assets like patents, to raise extra cash.
''We plan to be out in the market by early 2004,'' said Joseph S. Mohr, Variagenics' president. ''By then we'll have reached a number of important milestones with which to capitalize the company.''
Love will continue as president and chief executive of the new company, and Dr. George Rathmann, Hyseq's chairman, will also retain his role. Mohr declined to say whether he would stay with the company past a transition period.
Variagenics has about 80 employees and Hyseq 115. Layoffs are planned after the deal closes next February, but the executives couldn't say how many employees would be affected.
Variagenics shares yesterday surged 49 cents, or 51 percent, to close at $1.45, on volume of 1.6 million shares. Hyseq stocks fell 27 cents, or 20 percent, to close at $1.08 on volume of 1.1 million shares.
The complex transaction will qualify as a reorganization under federal tax laws, meaning Variagenics shareholders won't be subject to taxes from the deal.
Jeffrey Krasner can be reached at krasner@globe.com.
This story ran on page D3 of the Boston Globe on 11/12/2002.
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