West Coast Editor

As much as $154.9 million in cash gained from the sale of its sequencing subsidiary, 454 Life Sciences, to Roche Diagnostics Corp. will help CuraGen Corp. get at least one cancer drug into Phase III trials by next year - not a bad return for the $36.1 million investment made when 454 was founded.

Frank Armstrong, CuraGen's president and CEO, said the move is part of a larger strategic effort. Officials have spent "substantial time and made significant progress in reviewing the CuraGen business," he told investors during a conference call.

Wall Street, though, was less than thrilled, probably because of the lost revenue source. As CuraGen warned in its latest quarterly report, "We expect that our revenue or income sources for at least the next several years may be limited to: 454 product, service, grant, and milestone revenue; and interest income."

Piper Jaffray dropped its CuraGen revenue forecast for the year to $11.9 million from $53.3 million, and the company's stock (NASDAQ:CRGN) closed Thursday at $3.07, down 77 cents, or 20.1 percent, though Armstrong vowed those data from trials this year would be "transformational" for the company.

As of Sept. 30, CuraGen had about $181.1 million in cash and investments. Earlier this year, the firm paid off outstanding convertible debt of $66.2 million, and has enlisted Goldman Sachs to help sort options.

Meanwhile, Roche Diagnostics, a subsidiary of Roche Holding AG, is paying 454's shareholders up to $154.9 million in cash, of which Roche will pay $140 million directly, and $14.9 million or so will be received from the exercise of stock options issued and outstanding before the acquisition.

Of the $140 million from Basel, Switzerland-based Roche, $25 million will stay in escrow for 15 months. On a fully diluted basis (assuming all stock options are exercised), CuraGen should get about $85 million before fees and expenses, of which about $14 million will be held in escrow.

CuraGen started 454 as a majority-owned subsidiary to make and sell next-generation sequencing technology, and in May 2005, 454 and Roche signed a research and marketing deal (expiring in September 2010), under which Roche has been the worldwide distributor of the Genome Sequencer systems and associated reagents to all markets except regulated diagnostics.

Now Roche will get access to 454's future generations of sequencers and use of existing technology in regulated diagnostic applications. Roche plans to keep 454 operating in Branford, Conn., and its 167 employees will stay on. The deal is expected to close in the second quarter of this year.

CuraGen aims to use the money to keep data coming from several projects. Earlier this week, the firm (with partner TopoTarget A/S, of Copenhagen, Denmark) began dosing patients in a Phase II trial of intravenous belinostat, also known as PDX101, a small-molecule histone deacetylase inhibitor, in combination with Velcade (bortezomib), the approved therapy from Cambridge, Mass.-based Millennium Pharmaceuticals Inc. in multiple myeloma patients refractory to or who have rapidly relapsed from at least one previous bortezomib-containing regimen. The study is expected to enroll up to 35 patients, with results due by the end of this year.

Many more studies are under way with belinostat, Armstrong said, and results are expected this year from trials in ovarian and colorectal cancers as well as T-cell lymphoma.

Dosing began last May in the second Phase II study with velafermin, and the study "remains on track," Armstrong said. The 400-patient trial is designed to assess the safety and efficacy of 30 mcg/kg of the drug for preventing oral mucositis in cancer patients receiving high-dose chemotherapy, with or without radiotherapy, in the setting of autologous bone marrow transplantation. It will enroll about 400 patients. Data are expected during the third quarter.

Last June, the FDA cleared CuraGen's investigational new drug application for CR011-vcMMAE, a fully human monoclonal antibody-drug conjugate, and the firm began dosing a Phase I trial testing compound in metastatic melanoma. That trial is in the dose-escalation stage.

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