CETUS INSPECTED FOR PROLEUKIN ELA IN EARLY OCTOBER; SHAREHOLDER APPROVAL OF MERGER WITH CHIRON AWAITS OUTCOME OF NOV. 17 HEARING ON KODAK PCR INJUNCTION
Cetus was inspected between Oct. 8 and 11 for its establishment licensing application (ELA) for Proleukin (interleukin-2), the company said in an Oct. 15 preliminary joint proxy statement/prospectus for its proposed merger with Chiron. The proxy statement explains "while such an inspection is a necessary precondition to PLA approval, the management of Cetus does not expect Proleukin to be placed on the agenda of the November 1991 meeting of the FDA [Biological Response Modifiers] Advisory Committee and no additional meeting of the FDA Advisory Committee is expected in 1991." The advisory committee on Nov. 25- 26 will look at Schering-Plough's Intron A for hepatitis B and Centocor's Myoscint as an adjunct to myocardial infarct diagnosis ("The Pink Sheet" Oct. 21, In Brief). Proleukin was not given an approval recommendation by the advisory committee for treatment of metastatic renal cell carcinoma in July 1990 ("The Pink Sheet" Aug. 6, 1990, p. 6). Cetus provided FDA with a reanalysis of the Proleukin clinical trial data in December ("The Pink Sheet" Nov. 19, T&G-6). The PLA was filed in November 1988. Proleukin has orphan drug status for the cancer indication, which covers about 10,000 new cases per year. A joint shareholder meeting to vote on the merger is tentatively scheduled for Dec. 10. The proxies may be mailed to shareholders on Oct. 30. Chiron and Cetus announced the merger agreement on July 22 ("The Pink Sheet" July 29, p. 16). The agreement must be approved separately by a majority of shareholders of each company. Cetus shareholders will also vote on the sale of the company's GeneAmp PCR gene amplification technology to Roche for $ 300 mil. plus royalties. The merger agreement is contingent upon the approval of the PCR sale. Chiron expects to take a charge of about $ 384 mil. to account for the merger, the proxy calculates. Chiron said at the time of the merger that it would post a loss for all of 1992 if the merger is approved, before returning to profitability in 1993. "The timing of the return to profitability is primarily dependent upon the regulatory approval and commercial acceptance of Proleukin in the U.S.," the proxy notes. Proleukin currently is marketed in eight European countries. However, "the actual level of Proleukin sales in Europe have been lower than Cetus had anticipated and there can be no assurance as to the extent to which Proleukin sales in the U.S., if and when they occur, will be sufficient to offset operating losses," the proxy states. Chiron was notified that Cetus' EuroCetus subsidiary "had been operating at a substantial loss." Chiron, however, was "favorably impressed by the operations and prospects of EuroCetus," the proxy states. "Cetus has insisted, and the merger agreement so provides, that Chiron accept the risk of further delay in regulatory approval for the marketing of Proleukin in the U.S.," the proxy states. Chiron was willing to accept the risk, the proxy statement says, after reviewing the reanalyzed data Cetus submitted to FDA. Cetus began its search for a corporate partner in August 1990 following the Proleukin advisory committee meeting. Beginning in Oct. 1990, Cetus contacted 75 companies (20 in the U.S., 33 in Europe, and 22 in Japan) through its financial advisors Lehman Brothers and Wasserstein Perella to solicit interest in strategic alliances, the proxy statement notes. Confidentiality agreements were executed with 32 companies, and management-level meetings were held with 12 companies (including European and Japanese ones), the proxy states. Of these companies, only Roche was interested in acquiring the PCR business, the proxy discloses, and only Chiron "expressed an interest in a strategic alliance or collaboration that was broad enough to address the strategic and financial concerns" of Cetus. Among reasons cited by companies that were not interested in a partnership were the pre-existing PCR licensing deal with Roche and a lack of confidence in Cetus' financial prospects, the proxy notes. Roche first indicated an interest in acquiring PCR "in early 1990" before the Proleukin advisory committee meeting, the proxy says, but no "substantive discussions ensued" until Cetus changed its plans in August. However, the company "recognized that even a significant amount of cash realized from the sale of the PCR business was unlikely to provide adequate long-term capital" in the absence of a timely approval of Proleukin and so also sought a merger. "Informal discussions" with Chiron about possible business relationships had occurred "prior to and during 1990" as a result of the "proximity of the facilities" of the two Emeryville, Calif. corporations which are located across the street from one another, the proxy notes, and the first meetings to discuss a formal combination of the two biotechs were held in November 1990. The Cetus board approved the PCR sale on July 19, but did not announce it at the insistence of Chiron until the merger deal was also signed on July 21, the proxy notes. In agreeing to the merger deal, Chiron said it believed that Cetus would bring to the company "a well-positioned product portfolio," a "fully integrated therapeutics business" and "important and complementary manufacturing capabilities." If the merger is not approved, Chiron intends to pursue a manufacturing agreement with Cetus. Cetus will also be adding about $ 250 mil. in cash from the PCR sale: the company expects to pay $ 50 mil. in taxes on the deal after using its loss-carryforwards of about $ 159 mil., the proxy statement says. The remaining cash will be reserved for working capital. A court hearing on the preliminary injunction requested by Kodak to delay the sale of PCR to Roche has been scheduled for Nov. 19, the proxy discloses. "If an injunction is granted it would have the likely indirect effect of preventing the consummation of the merger" because "the merger is conditioned on the PCR sale having occurred," the proxy states. Both the PCR and merger agreements are subject to termination if not completed by Dec. 31. Kodak filed suit in Delaware chancery court on Aug. 12 to prevent the proposed sale. The company sought to prevent the PCR transfer until arbitration between Kodak and Cetus over PCR rights is concluded. Kodak and Cetus jointly had researched PCR from 1986 to 1989. Kodak filed for arbitration on April 18 seeking to resolve a disagreement about the extent of its rights to the technology following the deal's dissolution. Cetus maintains that Kodak has no grounds for injunctive relief because its rights will not be impaired by the transfer. Chiron is an intervenor in the suit. Chiron and Cetus also face "eight purported class actions" on behalf of "certain alleged Cetus stockholders." The actions have been consolidated, and the parties have agreed that the companies do not have to respond until after the mailing of the proxy statement. "Cetus and Chiron intend to oppose these actions vigorously," the proxy states. The consideration paid to Cetus shareholders seems likely to change from the base value of .3 shares of Chiron stock. If Chiron shares trade above $ 67 per day in a 15-day period prior to the shareholders votes, Cetus shareholders will be paid $ 20.10 per share. Chiron shares have been trading in the low- to mid-70's. Shares in both companies initially tumbled on word of the merger, but Chiron and Cetus apparently have been successful in winning investors over to support their vision of the new company. The two biotechs sponsored an analysts meeting in San Francisco on Aug. 2 to discuss the merger, and Chiron also appeared at Montgomery Securities and Cowen and Co. analysts conferences during September. In preparing for the merger, Cetus has been focusing on its oncology businesses. In August, Cetus and Berlex altered their development agreement for Betaseron beta interferon under development for multiple sclerosis. A 1985 joint venture agreement was terminated and replaced by a licensing and supply agreement giving Berlex rights to the product in exchange for royalties. Berlex will also fund an expansion of the Cetus manufacturing facilities during 1992. The proxy also reveals that Warner-Lambert terminated an R&D agreement with Chiron for nerve growth factor research on Aug. 13. Chiron said it intends to develop the factors on a proprietary basis.
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