Diagnostics & Imaging Week

Two innovative providers of molecular diagnostic tools for life sciences research efforts, Caliper Life Science (Hopkinton, Massachusetts) and Xenogen (Alameda, California), yesterday unveiled plans to merge. In the deal, Caliper will issue common stock and warrants valued at $80 million in exchange for all of Xenogen's securities outstanding at closing.

Caliper called the acquisition "a defining step" in its strategy to become a leading provider of tools and services that increase the productivity and clinical relevance of life science and drug discovery efforts.

In a Monday morning conference call, Caliper president and CEO Kevin Hrosovsky said the key to the combination is the chance to build a "bridge" between in vitro and in vivo tools for drug researchers.

Caliper has focused on developing microfluidic tools, and the addition of Xenogen, Hrosovsky said, "catapults Caliper into the attractive and fast-growing molecular imaging market." The result, he said, will be to provide pharmaceutical researchers "clinically relevant insights earlier in the drug discovery process," which he described as a key need as defined by the company's conversations with these developers.

He cited the FDA's Critical Path Initiative, and the need for better experimentation models to improve predictability and efficiency along the critical path from laboratory to commercialization.

Overall, he said that the merger produces a higher level of "critical mass" and positions Caliper to increase its growth in revenue from "the high single digits to the low double digits" and expand revenue by 50%.

The combined company will have available cash and funds from operations to carry it through 2006, including the integration process, he said, with Caliper becoming cash-flow positive in 2007.

"This transaction is a transformational event for Caliper," said Hrosovsky. "The acquisitions of Zymark [Hop- kinton, Massachusetts] and NovaScreen [Hanover, Maryland], organic growth of Caliper's LabChip products, and the financial turnaround of our company have set the stage for the merger with Xenogen. We are achieving our goal of building a unique company with first-mover advantage in bridging in vitro and in vivo experimentation."

Caliper acquired Zymark, a provider of laboratory automation, liquid-handling and robotics solutions, in 2003 and NovaScreen Biosciences, a provider of assay development services, last year.

David Carter, CEO of Xenogen, said, "The combined company can deliver Xenogen's technology to more customers more efficiently. In the near future the development of sophisticated molecular-level products aimed at providing new solutions for our customers will be enhanced by the combination of microfluidics and optical imaging. Our two companies share a common vision for leading innovative preclinical drug discovery."

The merger transaction is also expected to be earnings-per-share-accretive in 2008.

Caliper said it has identified more than $10 million in potential annual cost savings through consolidation of infrastructure with Xenogen, the result primarily of eliminating duplicate public company costs, redundant positions and facilities costs.

In exchange for Xenogen's outstanding common shares and warrants to purchase common shares, Caliper will issue about 13.2 million common shares and about 5.125 million warrants to purchase additional shares. These warrants will have a term of five years from the closing and an exercise price of $6.79 a share.

The final exchange ratios for the issuance of Caliper common shares and warrants will be based on the capitalization of Xenogen at the closing of the proposed transaction. Based on Xenogen's current capitalization and other assumptions, each holder of a Xenogen common share would receive about 0.575 of a share of Caliper common stock and 0.223 of a warrant to acquire one Caliper common share. Xenogen warrant holders will be entitled to receive the same number of Caliper common shares and warrants as Xenogen's stockholders.

With the closing, Xenogen stockholders will own about 26% of Caliper's outstanding common stock. Assuming the exercise of the outstanding Xenogen warrants, Xenogen stockholders would own about 32% of the combined company on a fully diluted basis.

The transaction – expected to close in the second quarter – is subject to the approval of both Caliper and Xenogen stockholders and standard regulatory approvals.

Caliper reports serving around 80% of the world's leading pharmaceutical companies in 30 countries.

Xenogen's VivoVision Systems non-invasively illuminate and monitor biological processes within living mammals, at the molecular level, in real time.

In other dealmaking news:

• Novadaq Technologies (Toronto) reported signing an agreement with the University of Rochester (Rochester, New York) to license a portfolio of patents in the field of intra-operative fluorescence-guided imaging of nerves, including image-guided conventional and minimally invasive nerve-sparing radical prostatectomy.

Financial terms were not disclosed.

Novadaq said that the agreement enables it to develop and commercialize the resulting proprietary nerve imaging technologies.

Novadaq's SPY Intra-operative Imaging System enables cardiac surgeons to visually assess coronary vasculature and bypass graft functionality during the course of open-heart bypass surgery.

Dr. Arun Menawat, president and CEO of Novadaq, said, "The research team at the University of Rochester Medical Center has been studying Novadaq's fluorescence imaging technology as a unique approach to visualize nerves … We are confident that the combination of this technology with our existing and commercially proven SPY System in cardiac surgery, will provide us an opportunity to lead the way in medical imaging for urologic and other operating room procedures."

Novadaq's fluorescence imaging technology, used to visualize arteries during cardiac surgery, is designed to reduce nerve damage and other side effects, such as erectile dysfunction, following prostatectomy.

Diagnostic kit maker Hemagen Diagnostics (Columbia, Maryland) reported that it purchased the remaining 16.3% ownership of its Brazilian subsidiary, Hemagen Diagnosticos Comercio, Importacao Exportacao.

Hemagen Brazil was established in 1993 as a distributor for the company's Virgo line of autoimmune and infectious disease test kits. Three partners originally owned 49%, and Hemagen owned 51%. In June 2004, Hemagen purchased about 32.6% from two of the former partners. "The decision to own 100% of Hemagen Brazil was a key strategic goal established some time ago to facilitate growth and management control in Brazil and South America," said William Hales, president and CEO of Hemagen.

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