Washington Editor

Procyon Biopharma Inc. is buying Cellpep SA, with the combined entity to emerge under the name Ambrilia Biopharma Inc.

Calling the definitive agreement "a truly transformational milestone," Procyon President and CEO Hans Mader detailed the company's future during a conference call. Because the acquisition includes a pair of near-term commercial opportunities, "it's like giving a turbo charge to Procyon," he added, noting that the new entity aims to reinvest profits from those two drugs into its future efforts.

The Montreal-based company, which has focused on cancer and HIV/AIDS, is paying for the C$39.1 million (US$33.6 million) transaction by issuing its nearly 120 million common shares in exchange for all of Cellpep's outstanding securities. The deal's value represents the volume-weighted average price of the last 20 days.

A private firm based in Paris, Cellpep's portfolio includes two generic cancer drugs that are expected to begin generating revenues next year, octreotide and goserelin. Procyon also made a secured loan of $1.9 million to fund the operations of Opep Pharma Inc., Cellpep's Canadian manufacturing subsidiary, to allow the newly formed entity to increase its future gross margin in production.

Concurrent with the buyout, Procyon agreed to a C$18.1 million private placement of special warrants and units. The warrants will entitle holders to receive common shares and warrants to purchase common shares in Procyon after it completes the acquisition.

More than 95 percent of Cellpep's shareholders have accepted Procyon's offer. The acquisition and private placement also have been approved by both companies' boards, but remain subject to approval by Procyon's shareholders, as does the name change. A special meeting is scheduled for Feb. 24. Following that, the new entity would have about 40 employees focused on oncology and infectious diseases, have operations in North America and Europe, and trade as "AMB" on the Toronto Stock Exchange.

"Because we have complementary pipelines and expertise," Julie Thibodeau, Procyon's director of communications, told BioWorld Today, "we feel we're going to be able to transition into a single entity fairly easily."

Notable to the new company's near-term future, Cellpep's octreotide eventually could generate C$75 million in annual revenues, said Bonabes de Rouge, the company's co-founder and its current president and CEO.

The product, which is used for a condition brought on by excess growth hormone, acromegaly, as well as intestinal tumor side effects, is expected to be launched next year in Europe and a year later in the U.S. Regulatory filings on both sides of the Atlantic are scheduled for the second half of this year; distribution agreements already are in place. Goserelin, which is expected to be launched for prostate cancer in Europe in 2008, could produce C$50 million per year in revenue. That type of horizon provides "a tremendous reduction of risk," Mader said.

"Our main objective is to meet our milestones with the two late-stage generics," Thibodeau said, adding that they "will allow us to reach profitability as soon as possible" and fund future product development of the new company's mid- to early stage pipeline "without going back to the market."

Procyon's pipeline includes PCK3145, a non-toxic peptide soon to enter a Phase II trial in North America for advanced metastatic prostate cancer, and the company expects to partner its future development. Its protease inhibitor, PPL-100, just moved into clinical development for drug-resistant HIV/AIDS, with a dose-escalating study recently under way. It could get partnered next year. Also within the next year, the company plans to file an investigational new drug application for TVT-Dox, a tumor vasculature-targeting technology to treat solid tumors. In addition, Cellpep's development efforts include a fusion inhibitor for HIV and several other peptides for undisclosed indications.

Mader said the combination of Procyon's early stage products with Cellpep's late-stage generics "should allow the new entity to achieve profitability and become cash-flow positive" in the next two years.

He would keep his positions at the new entity, and de Rouge would serve as Ambrilia's chief scientific officer. Max Link would remain as chairman, and Procyon's co-founder, Chandra Panchal, would assume the responsibilities of business development, licensing and intellectual property.

The concurrent financing consists partly of the issuance of about 61.7 million special warrants priced at C23 cents apiece for total consideration of C$14.2 million. Upon the acquisition's settlement, each special warrant holder can receive, for no further consideration, a unit made of one common share and one warrant to subscribe for one common share at C35 cents at any time within five years from its issue date. The remaining $3.9 million of the financing consists of about 17 million similar units to be issued to European investors as part of the Cellpep transaction.

If the special warrant holders do not receive a notice certifying the completion of all matters on or before March 22, Procyon would repurchase their warrants at C23 cents apiece, plus applicable interest.

The new entity would have C$25 million in cash reserves, sufficient for three years, as well as 293 million shares outstanding. A reverse split of them is planned at a later date this year, following the acquisition's settlement.

The private placement has been placed in escrow pending completion of the acquisition, including approval by Procyon shareholders and securing a final receipt for the prospectus. In the event the acquisition is not completed, the escrowed funds will be returned to the subscribers.

The financing was completed through a syndicate of agents, led by Dundee Securities Corp. in Toronto, and also including Loewen, Ondaatje, McCutcheon Ltd., also of Toronto. Also participating was Desjardins Securities Inc., of Montreal, and Dundee acted as Procyon's adviser on the acquisition.

On Thursday, Procyon's stock (TSX:PBP) lost C4 cents, or 14 percent, to close at C32 cents.

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