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Executive Summary

Schering and Monsanto, the two major health care investors in Biogen, have sold their equity positions in the biotechnology company. Biogen disclosed the large sales of common stock by Schering-Plough and Monsanto in the prospectus for its recently completed 3 mil. share secondary offering. Together, Schering and Monsanto held almost 22% of Biogen's common stock prior to the recent offering. During the first eight months of this year, Biogen reported, "Monsanto Company and Schering Corporation, holders [at the beginning of 1986] of approximately 2 mil. shares (10.8%) and 2.02 mil. shares (10.9%), respectively . . . sold all of their shares in open market transactions." Inco, a Canadian nickel mining concern, continues to own a major stake in Biogen. With 2.3 mil. shares at the time of the secondary offering, Inco owns over 10% of the post-offering common float. Inco initially planned to sell 300,000 shares in the recent offering, but decided instead to hold the stock. Inco would have made over $12 per share, on a 20› per share initial investment. The nickel company's decision to hold on to the stock indicates that the recent sell-off by Monsanto and Schering was not primarily an effort to take early profits. Schering explained that it originally took an equity position in Biogen to have a "window" on recombinant DNA technology and to have access to specific Biogen products. However, Schering subsequently developed in-house capability through the acquisition of the DNAX research institute, and made a pretax profit of more than $21 mil. on the sale of its Biogen stock. The sell-off of Biogen shares by the two major health care companies may mark an unheralded milestone for Biogen. Schering has been closely tied to Biogen since 1979 and Monsanto since 1980. The sale of their positions should allow Biogen more autonomy in the health/pharmaceuticals business. The departure of Schering and Monsanto and the $35.4 mil. raised for the company from the secondary offering (primarily to European investors) are major accomplishments by the new Biogen management under ex-Abbott exec James Vincent. They mark a step in the progress of Biogen from a start-up stage company to an independent participant in the pharmaceutical business. Despite the private sales of the 4 mil. Schering and Monsanto shares and the 3 mil. share offering, Biogen's stock at the end of August was steady for the year at 14-3/4 compared to a 14-5/8 close at the end of 1985. As part of their research/development agreements and equity investments, both Schering and Monsanto had rights to one position each on Biogen's board of supervisory directors. Schering Exec VP Hugh D'Andrade and ex-Monsanto Chairman Louis Fernandez are still on Biogen's board of supervisors. Biogen has reported that Schering's position on the board was required until 1989 or until Schering owned less than 8.5% of the common stock. In addition to the board rights, the two companies also received the right to designate representatives to the scientific board. Schering explained that its participation on the Biogen scientific board is "by contract" and "unaffected" by the sale of its shares, noting that it has made no decision to resign from the board. Schering And Monsanto Retain Look-In Rights Without Equity Clout Monsanto further had a right "under certain conditions, to designate certain of its employees to work in [Biogen] laboratories, and . . . [Biogen had] a similar right to place employees in Monsanto facilities." Monsanto and Schering continue to have look-in rights regarding Biogen research projects. However, without the equity positions and with board of directors representation in the future not guaranteed, the relationship to Biogen will be more distanced. The awkwardness of the three-way relationship was exacerbated after Monsanto purchased Searle last year and scaled up its own effort in the pharmaceutical business. The logistics of having three interested parties (Biogen, Schering and Monsanto) involved at the board level in Biogen development decisions could have been a deterrent to Biogen's commercial goals. Under its agreement with Schering, Biogen is required to advise Schering of its proprietary work in "specified fields." Schering has the right to make an offer for commercial development of those projects. Although Biogen provided the first interferon to Schering for Intron A and is receiving royalties for the products, Biogen does not list any other products in development for which Schering is the commercial rights holder. In fact, the two companies have become competitors in other DNA product classes, specifically gamma interferon. While increasing Biogen's independence, the departure of Schering and Monsanto as equity investors may make the company a more viable merger or takeover target. However, the float of 21.6 mil. shares and the wide array of licenses to different partners (such as TPA to SmithKline-Beckman) argue against a full sale. Bristol-Myers and Lilly have proven that major pharmaceutical manufacturers are willing to pay a substantial premium to purchase biotech R&D. Lilly's $300 mil. purchase of Hybritech a year ago ("The Pink Sheet" Sept. 23, 1985, p. 3) was followed a month later by a Bristol-Myers stock swap for Genetic Systems valued at the same amount ("The Pink Sheet" Oct. 28, 1985, p. 7).

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