AHP PAYING $ 666 MIL. FOR 60% OF GENETICS INSTITUTE: BIOTECH ENTRY WILL GIVE AHP ACCESS TO ROYALTY STREAM, BROAD PIPELINE, AND A LONG-SHOT BET AT EPO
American Home Products' first large-scale investment in the biotech business -- the $ 666 mil. cash offer for control of Genetics Institute -- looks like a classic AHP deal. AHP is showing no hesitancy about using its extensive cash resources; it is buying an established business (by biotech standards) with an ongoing stream of cash flow; Genetics Institute has a wide array of projects to which AHP can apply its management/financial skills; and, last but not least, there is a long-shot bet on a big win in the short-term. Genetic Institute's pending petition to the Supreme Court to overturn Amgen's Epogen decision gives AHP a wild card chance at a big product. Under the deal announced Sept. 19, AHP will purchase 40% of Genetics Institute's 14.6 mil. shares of outstanding common stock for $ 50 per share, or roughly $ 366 mil. AHP will put another $ 300 mil. directly into Genetics Institute's coffers with the purchase of 9.5 mil. newly-issued shares of common stock, giving AHP about 20% more of Genetics Institute ownership. As in the case of the A.H. Robins purchase, AHP will be getting a company with distinct image problems and limited prospects on its own, but not a desperation sale. Both companies had ongoing businesses at the time AHP approached them. AHP will benefit immediately post-merger from Genetics Institute's steady and growing stream of non-U.S. manufacturing and royalties fees. Genetics Institute's epoetin beta EPO product is sold in Europe through its licensee Boehringer Mannheim and in Japan through Chugai. Based largely on EPO, Genetics Institute reported revenues for six months (ended May 31) of $ 26.3 mil., nearly 50% higher than in the comparable period a year ago. The company is expected to report in early October that it had a breakeven or profitable quarter for the first time in the third quarter (ended Aug. 31). In the longer term, AHP is also buying into Genetics Institute's diverse biopharmaceutical pipeline. The move, along with AHP's recent Japanese joint venture announcement with Eisai ("The Pink Sheet" Sept. 9, T&G-10), could satisfy concerns in the investment community about holes in the Wyeth-Ayerst and Robins pipelines. Commenting on the deal, AHP Chairman John Stafford acknowledged that the majority purchase of Genetics Institute "represents a quantum leap towards our goal of becoming a premier company in the field of biotechnology." He stressed that AHP is "committed to maintaining a strong entrepreneurial culture within Genetics Institute." AHP is also boldly venturing into one of the most widely- connected and parceled-up biotech businesses. Genetics Institute has an extensive network of licensing and development agreements that it has used to fund its wide-ranging research projects. Products in Genetics Institute's intermediate pipeline include bone-inducing proteins (BMPs), interleukin-11, macrophage-colony stimulating factor (M-CSF) and antihemophilic factor (formerly Factor VIII). BMP-2 is the lead compound in development for use in repairing bone fractures and bone damage caused by disease, and for bone transplant alternatives. The company is developing BMPs with Yamanouchi under a royalty-bearing U.S. commercialization agreement reached in May 1990 ("The Pink Sheet" May 28, 1990, T&G- 6). That deal included a joint venture agreement by the firms to commercialize BMPs in Japan. IL-11 and M-CSF are being developed under an agreement with Schering-Plough announced in July that includes product royalties ("The Pink Sheet" July 15, T&G-12). M-CSF is in Phase I/II for a number of indications. The product is licensed to Morinago Industry, Japan, in the Far East. IL-11 is in early preclinicals and is being developed for the treatment of platelet depletion. The July agreement extended the relationship between the two companies establihed in 1988 for the joint development and marketing of Genetics Institute's granulocyte macrophage-colony stimulating factor (GM-CSF) Leucomax by Schering and worldwide licensee Sandoz. The PLA for Leucomax has been pending at FDA since February 1990. Genetics Institute's recombinant antihemophilic factor (AHF) will be marketed as Recombinate by Baxter Healthcare under a cross-licensing agreement, and Genetics Institute will receive manufacturing revenues from its supply agreement. The Recombinate PLA was filed in May 1990. The Genetics Institute pipeline also includes IL-3 and IL-6 for blood cell growth regulation, which are both licensed to Sandoz; tissue growth factors; immunomodulation agents; and anti- inflammatory agents. Beyond the licensing and royalty fees which constitute future revenue sources for Genetics Institute, President and CEO Gabriel Schmergel noted that the "significant cash infusion from American Home Products will allow us to direct more resources" to current R&D. After the two court losses in March (erythropoeitin and a Scripps Factor VIII:C decision), Genetics Institute has found the going tougher for public financing. The company had to cancel a 1.25 mil. share offering in mid-April because of the drop in its market price. The company is expected to spend approximately $ 80 mil. on R&D this year. The firm expects to add more than 125 employees to its 600-person staff. Following completion of the AHP acquisition, Genetics Institute will have a cash balance of approximately $ 330 mil. the $ 300 mil. the Genetics Institute will receive from AHP in one part of the merger transaction will combine with approximately $ 59.5 mil. that the company had in cash on hand as of May 31, less a $ 30 mil. one-time charge to earnings that Genetics Institute expects to take to cover the transaction costs. When Hoffmann-La Roche bought into biotechnology with its 60% acquisition of Genetech, the $ 2.1 bil. deal included $ 492 mil. paid to Genetech in the form of newly issued shares. With that cash infusion (less merger expenses) combined with Genetech's over $ 200 mil. in cash and equivalents, the company could boast of a total cash balance post-merger of around $ 600 mil. The proposed acquisition also provides that Genetics Institute shareholders will receive $ 20 in cash and a right to receive six- tenths of a share of new common stock for each share of Genetics Institute stock they hold. The new stock will be in the form of depositary receipts. AHP has the option to buy, on an all-or-nothing basis, these new common shares any time during a five-year period beginning Dec. 31, 1996 at prices per share escalating by about $ 1.85 a quarter from $ 50 to $ 85 per share. On top of the option, AHP also can purchase up to an additional 15% of Genetics Institute on the open market, for up to 75% control of the company. The way the deal is structured may, in part, reflect the bet that AHP is taking on Genetics Institute becoming a much larger revenue producer. That gamble is predicated on the slim chance that counsel Laurence Tribe's July 1 writ of certiorari persuades the Supreme Court to review the EPO patent case. Genetics Institute shareholders must approve the transaction, and the company hopes to put the deal before them in a vote in December or January. Under terms of the agreement, AHP would get two seats on Genetics Institute's board, which now has six members. AHP approached the company months ago through its financial advisor Morgan Stanley, Genetics Institute said. Lehman Brothers was Genetics Institute's advisor.
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