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BRISTOL-MYERS ENGINEERS GENETIC SYSTEMS ACQUISITION FOR NEARLY $300 MIL.; PURCHASE WILL MOVE BRISTOL INTO HOSPITAL DIAGNOSTICS, COMPLEMENT CANCER WORK

Executive Summary

Bristol-Myers is paying nearly $300 mil. in stock to get complete control of the DNA research at Genetic Systems. The definitive purchase agreement, announced October 25, comes four weeks after Lilly's acquisition of Hybritech, and in time to foreclose an increase in equity investment in Genetic Systems by Syntex. Under an agreement in principle announced Oct. 23, Bristol-Myers is bidding $10.50 a share in stock for Genetic Systems. With about 23.2 mil. shares of Genetic Systems outstanding, an additional 4.8 mil. shares issuable upon exercise of outstanding warrants and options, the whole deal is worth $294 mil. The Genetic Systems deal has interesting similarities to Lilly's Hybritech purchase. Like Lilly, Bristol-Myers is willing to pay a high price for its own in-house biotechnology business. The Bristol-Myers bid of $10.50 a share offers a premium of almost one-third over Genetic Systems' recent market price -- the stock closed September at 8-1/8, and has been trading in the 7-8 range for several months. In addition, with contract revenues likely approaching $10 mil. in 1985, Genetic Systems is going for nearly 30 times operating revenues. Through six months, Genetic Systems posted contract revenues of $5.1 mil. with operating losses of $4.3 mil. However, the biotech firm's large cash reserves have generated non-operating income of $6.2 mil. during the first half of the year, giving Genetic Systems a six-month net profit of $1.8 mil. Lilly's $300 mil. bid for Hybritech valued that company at about six times estimated 1985 operating revenues and at a 10% premium over Hybritech's market valuation ("The Pink Sheet" Sept. 23, p. 3). Based on six month figures, Hybritech operating revenues should top $50 mil. while net earnings could reach $2 mil. Lilly's offer included an initial cash payout of $236 mil. plus warrants worth a total of $43 mil. Minus Hybritech's $12 mil. in cash, Lilly's offer has an initial net value of $267 mil. If one substracts Genetic Systems' $48 mil. cash and cash equivalents, Bristol-Myers stock swap for the biotech firm comes to approximately $246 mil. Under the terms of the Bristol-Myers/Genetic Systems agreement, the exchange ratio of Bristol-Myers stock for Genetic Systems will be based on the average closing price of Bristol-Myers during the 10 trading days immediately preceding a meeting of Genetic Systems stockholders, which will be called to approve the transaction. The two companies expect that meeting to occur in December. Bristol-Myers stock, up 8% since the beginning of the year to around 57, has not kept pace with the price run-up of other drug/diversified stocks in 1985. The acquisition of Genetic Systems will prepare the way for Bristol-Myers' entry into the monoclonal antibody clinical and OTC test markets. Through agreements with Syntex' Syva subsidiary, Genetic Systems R&D has generated diagnostic products that are now reaching the market. However, unlike Hybritech, Genetic Systems has no self-marketing capability. Bristol-Myers already has an indirect interest in the Seattle firm via its one-third share in Oncogen, a joint venture set up by Genetic Systems and Syntex in 1983 to conduct cancer research. Bristol-Myers came on as a third partner in Oncogen last February, investing $12.75 mil. for the three-way partnership ("The Pink Sheet" Feb. 11, "In Brief"). Bristol-Myers will share the rights to any therapeutic products emerging from Oncogen with Genetic Systems, while Syntex and Genetic Systems will share rights to diagnostic products. Syntex already is a minority shareholder in Genetic Systems, holding about 2% of the company. In August, the two firms announced an arrangement whereby Syntex would be granted options to increase its stake to 18% by buying 4.7 mil. shares at $8.50 a share, as well as an option to acquire Genetic Systems' diagnostic business at some point in the future. That agreement currently is under review by the Securities and Exchange Commission. The contract also called for Syntex to fund $20 mil. in Genetic Systems R&D over the next five years, focusing on tests for infectious diseases. Both agreements are subject to Genetic Systems shareholders' approval. The Syntex ties with Genetic Systems also include a long-time collaboration between the firm's Syva subsidiary and the biotechnology company in the area of diagnostic tests for sexually transmitted diseases. Currently, Syva manufactures and markets three Microtrak tests -- a culture confirmation test for chlamydia, one for herpes simplex virus I and II, and a direct test for chlamydia -- under a royalty arrangement with Genetic Systems. A fourth diagnostic, a direct test for herpes, has been approved by FDA but not yet launched. Other Genetic Systems products include a test for acquired immune deficiency syndrome (AIDS) under development with the Institut Pasteur in France and a culture confirmation Legionella test developed under a limited R&D partnership for respiratory diseases. Outside of Oncogen, Genetic Systems therapeutic R&D in monoclonals has focused primarily on infectious diseases. A panel of monoclonal antibodies against pseudomonas has been delivered to Miles' Cutter Biologicals div. under a research agreement and will soon enter clinicals. In addition, Genetic Systems has reported work on a second panel of monoclonal antibodies for use against four other gram negative bacteria. That program is also under contract from Cutter. In 1984, Cutter contributed approximately 36%, or approximately $2 mil., of Genetic Systems contract revenues. The biotech firm is also involved in two limited partnerships, Genetic Systems Diagnostic Partners, with roughly $15 mil., and Genetic Systems Respiratory Partners, from which the firm received $2.8 mil. over the partnership's three years of operation ended in 1984. Under the definitive agreement, Genetic Systems will grant Bristol-Myers an option to acquire up to 18 mil. unissued stock at a price of $10.50. The agreement also granted Bristol-Myers an option to certain nonexclusive worldwide marketing rights with respect to all of the biotech firm's products and technology not already covered by agreements with other firms. Genetic Systems was taken public in 1983 by current Chairman Robert Nowinski and venture capitalists Isaac and David Blech. The Blech family, which held 2.8 mil. shares when Genetic Systems first went public, will receive nearly $9 mil. in Bristol-Myers stock for the 843,500 shares split evenly between the two brothers. Nowinski will garner about $8.5 mil. from his holding of 811,000 shares.
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