West Coast Editor

With its approved h-Patch delivery system, Valeritas Inc. - soon to be majority owned by Paramount Acquisition Corp. - hopes to capture the burgeoning market for insulin that Type II diabetics find easy to use.

"We wanted to create some clever, differentiating tools to deliver molecules and go around the oral route," said Robert Gonnelli, who founded Westborough, Mass.-based BioValve Technologies Inc. in 1998, and spun out Valeritas about two weeks ago.

The h-Patch, recently the subject of 510(k) clearance from the FDA, drew the attention of Paramount, of New York, an affiliate of Paramount Biosciences, also of New York, which will continue to develop in-licensed drugs and serve as a life sciences merchant bank.

"This is the first health care use of a special purpose acquisition company [SPAC]," said Gonnelli, chairman and CEO of Valeritas, noting that the firms typically have been used to buy out other types of industrial concerns.

But the arrangement does recall public shell Orthodontix Inc.'s merger with the Israeli firm Protalix Ltd., disclosed about a week ago, and somewhat resembles a reverse merger of the sort that is under way between Infinity Pharmaceuticals Inc. and publicly traded Discovery Partners International Inc. (See BioWorld Today, April 13, 2006, and Aug. 23, 2006.)

In any case, at closing of the deal by the end of this year, Ramsey, N.J.-based Valeritas will have $43.5 million of capital to take forward its plans, and on redemption of warrants involved, will raise another $98 million, Gonnelli said.

"Between those two chunks of capital, it will have more than enough money to launch its product [in the second half of next year] and go to revenues," he said.

Thirty-four of BioValve's 38 employees will staff Valeritas, whose name derives from two Latin words that mean "rapid healing" and "good health." Other applications of the patch are in the works, but Type II diabetes seemed the obvious first choice, Gonnelli said. As baby boomers age, so does their glucose intolerance - though many patients prefer to deny the condition. The Type II "epidemic is [striking] frighteningly younger" patients, too, and the disease is not always deemed "adult onset" anymore, he noted.

"Friendly ways of treating with insulin have certainly made dents in these markets," Gonnelli allowed, with a nod to strong-selling Lantus (insulin glargine), from Paris-based Sanofi-Aventis. "Now we can give a patient one shot a day in the comfort of their bathroom and safety zone. But they'll get more and more need for insulin, and they'll need prandial control," which means taking their injection system to work.

"You have to [provide insulin] in a way where people won't say, 'Oh no, that'll screw up my whole life,'" Gonnelli said, which is where Valeritas' patch comes in. "At mealtime, you reach right through your clothes and push the button."

In Valeritas' rather complex agreement, Paramount will get as many as 11.9 million membership units in the firm, or about 58 percent of the company, and BioValve, with its wholly owned subsidiary corporation, BTI Tech Inc., will get about 8.6 million units, or about 42 percent.

Holders of Valeritas' $6.9 million in senior bridge debt are getting warrants to buy, after the closing of the transaction, 644,860 shares of Paramount common stock at an exercise price of $5.35 (subject to adjustment) and will have the chance to exchange their debt into Paramount common stock based upon the same price. Paramount's stock (OTC BB:PMQC) closed Tuesday at $5.24, up 2 cents.

The SPAC also is paying BioValve $10 million in cash and will contribute the balance of its funds to Valeritas. As of June 30, Paramount's trust account contained about $53.5 million.

Membership units issued to Paramount will be reduced on a 1-for-1 basis, with the number of shares of Paramount common stock, if any, redeemed by stockholders for cash, and Paramount is getting warrants to acquire 19.5 million more membership units, which are exercisable on a 1-for-1 basis upon the exercise of any of the 19.5 million outstanding publicly traded warrants issued by the SPAC in its initial public offering.

The agreement also carries, for Paramount, an option to acquire 425,000 membership units and warrants for 850,000 more, which are to be exercised upon the exercise of the option issued by Paramount to EarlyBird Capital Inc.

Finally, Paramount has the right to a number of membership units equal to the number of shares issued by Paramount upon exchange of the notes or exercise of the warrants issued to the holders of Valeritas' senior bridge debt. All cash received by Paramount upon exercise of the outstanding warrants or options would be contributed to Valeritas in exchange for the additional membership units.

BioValve will earn $15 million upon the redemption or exercise of all of Paramount's outstanding public warrants and will be entitled to a 4 percent royalty on Valeritas' sales, up to $25 million.

As many as 15.75 million membership units may be issued to BioValve on achievement of milestones related to launch of the h-Patch, sales and the stock price of Valeritas, which will be applying to trade on a public exchange.