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Executive Summary

Sandoz is placing a high value on cutting edge therapeutics with the company's offer to pay $ 392 mil. for 60% of Systemix, the stem cell and megakaryocyte technology R&D firm. The deal was announced on Dec. 16. The acquisition of the majority stake in Systemix will give Sandoz access to the R&D firm's patented stem cell technology based on human hematopoietic stem cells, the progenitors of all human blood cells. Sandoz also gets entry to the Systemix R&D on megakaryocytes and megakaryocyte progenitors, the basis for blood platelets. Under the terms of the acquisition agreement, Sandoz will make a public tender offer of $ 70 per share for just over 4 mil. shares of Systemix common stock, or about 49% on a fully diluted basis. The tender offer, which will cost Sandoz $ 280.8 mil., is expected to close on Feb. 15, 1992. In addition, Sandoz will make a $ 111 mil. equity investment through the purchase of nearly 2 mil. authorized but not yet issued shares of Systemix common stock at $ 56 per share. Sandoz had no prior investment in the firm. Sandoz has the option to bid for 100% of Systemix three years after the tender offer upon the recommendation of Systemix' independent directors. If the independent directors do not authorize the merger, the Swiss company is prohibited from increasing its share above 60% for seven years after the tender offer closes and from increasing its share above 75% for the next two years thereafter. Systemix currently has 7.3 mil. shares outstanding, of which 1.4 mil. are held by institutional investors and 54.6% by a group of investors who have pledged their 4.5 mil. shares to Sandoz. The company was established in 1988 and just went public in August at $ 18 per share. Based on the Dec. 13 closing price of $ 34.25 for Systemix common stock, Sandoz is paying a premium of roughly double the market price for the company. The offer values all of Systemix at about $ 650 mil.-$ 700 mil. The valuation of Systemix and the pricey premium Sandoz is paying could make Systemix the new benchmark for the purchase of cutting edge technology. The rationale for the Sandoz mega-investment in Systemix appears to encompass a number of factors: (1) the fact that the company's products and processes currently are not regulated by FDA; (2) a strong patent position covering stem cells; (3) synergies between Systemix technology and other collaborations Sandoz has entered into; (4) the potential for the megakaryocyte technology given the 3 mil. platelet infusions a year in the U.S. alone; and (5) the high price may assure the continued involvement in Systemix' R&D programs of company co-founder and leading scientist Irving Weissman, MD. As a financial maneuver, the Sandoz investment may make the Swiss company itself more attractive for future offerings. The size of the investment and its very early stage research could combine to make the financial community view Sandoz as leaping ahead of the pack of biotech projects. Sandoz can use the avant garde image as it shows more interest in its own ability to raise equity capital. The firm began making American Depositary Receipts (ADRs) available in early December. Systemix will commence a human pilot study in six volunteers with its autologous stem cell technology at Stanford University in the first quarter of 1992. The study will examine the use of stem cells as an adjunct to chemotherapy and radiotherapy related to autologous bone marrow transplants for leukemia patients. The stem cells are fractioned out of the bone marrow and maintained in a growth medium. The cells would then be reintroduced to patients whose bone marrow has been purged in the hope that they will reconstitute the complete spectrum of the human blood cell population. Systemix is forecasting a 1993 marketing date for the stem cell technology for the adjunctive use with autologous bone marrow transplants. The optimistic prediction of a speedy move to the marketplace is based, in part, on the fact that stem cell technology is not currently regulated by FDA. IND approval or final approval of the technology is not required by the agency prior to clinical use and marketing. Systemix' application of its stem cell technology in humans will require approval by individual institutional review boards. Systemix received a broad patent for its human stem cell factors on Oct. 31. The patent covers the separation of human hematopoietic stem cells from bone marrow and their cellular composition. In theory, the use of stem cells would eliminate graft-versus-host-disease rejection problems with bone marrow transplants because stem cells predate the body's T- and B- lymphocyte immune system cells. Also, the use of stem cells, in theory, may reduce the relapse rates for cancer of the blood and cancers that metastasize to the bone. The Systemix stem cell technology also could be useful for treating blood-borne genetic diseases, such as sickle cell anemia, and AIDS. Systemix predicts that its megakaryocyte technology could replace the use of donated blood infusions to boost patients' blood-clotting abilities. The company estimates 3 mil. blood platelet transfusions in the U.S. in 1990 for clotting disorders. Systemix said it believes that using a patient's own megakaryocytes for the transfusion could eliminate potential complications such as contamination with infectious organisms, rejection of the donor platelets, and the possibility of repeated transfusions. Sandoz is looking for Systemix' megakaryocyte technology to reach the market by 1995. The Systemix acquisition is part of the Sandoz $ 1 bil. "Innovascan" biotechnology investment initiative. The five-year program is now in its second year and includes some $ 200 mil. in investments prior to Systemix. Sandoz is taking a hands-off approach to Systemix. Current management and scientific staff are expected to remain at Systemix post-transaction, and the company will continue to operate independently. Systemix' 90 employees currently work in a leased 30,000 sq. ft. administrative and R&D facility in Palo Alto, Calif. The firm's management team is led by Chairman Joseph Ruvane, the former Glaxo, Inc. chairman and CEO. The company's president and CEO is Linda Sonntag, PhD. Sandoz will, however, control a majority of the Systemix board. Majority shareholders in the company currently include: investor and Baltimore Orioles owner Eli Jacobs, who owns approximately 38% of Systemix shares; Aetna Life & Casualty, with nearly 10%; Technology Funding (approximately 6%) and company co- founders Weissman and Joseph McCune, MD/PhD, who each control about 5.3% of Systemix common. Based on the per share price offered by Sandoz, Jacobs' stock would be valued at $ 189 mil. Jacobs has been trying to sell the Orioles for about $ 200 mil., reportedly due to financial pressures from his other investments. Weissman, the scientist upon whose research the company is based, would receive some $ 26.1 mil. for his stock. Systemix went public on Aug. 6, 1991 at $ 18 per share in an offering that netted $ 33.5 mil. The company has cash on hand of approximately $ 30 mil. and, following the closing of the Sandoz purchases of the nearly 2 mil. newly-issued shares, will have roughly $ 141 mil. in cash on hand. Sandoz approached Systemix in September about a collaborative R&D arrangement but subsequently decided to make the equity investment. Morgan Stanley is representing Sandoz; Systemix is advised by S. G. Warburg.

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