BioWorld International Correspondent

LONDON - Galapagos NV is to take over BioFocus plc in an all-share deal that values BioFocus at £20.2 million (US$37.8 million) or £1.24 per share, a 121 percent premium to the closing price of 56 pence the day before the deal was announced.

The merger will create a company with cash of £20 million, 2004 revenues of £19.4 million from services, and a development portfolio focused on bone and joint disorders with seven preclinical compounds.

BioFocus' listing on the Alternative Investment Market in London, and Galapagos' on Euronext in Brussels, Belgium, and Amsterdam, the Netherlands, will be retained. It is hoped that the market capitalization of just more than 100 million will enable the merged company to attract broader analyst coverage.

At analysts' meeting called to discuss the merger, Onno van de Stolpe, CEO of Galapagos, defended the valuation, pointing out it was a premium of 86 percent to the average closing price over the past month and 36 percent over the past year. "You have to look at the longer term," he said. "[BioFocus'] stock has been under pressure, and we think, along with our advisers, it has been undervalued." BioFocus shares rose 46 pence to £1.02 when the deal was announced.

Geoff McMillan, CEO of BioFocus, recommended the deal, saying, "This is a very exciting day for our shareholders. We are creating a truly new force in drug discovery in Europe - a revenue-generating services company with target generation and a drug development portfolio."

In December, BioFocus dropped internal drug development to save money and focus on the services business (which had revenues of £14 million in 2004), while retaining an interest in drug development through its collaborations, which have cumulative potential milestones and royalties of £100 million. Nine months later, shareholders might question why they are back in the high-risk, high-cost business of internal drug development, but van de Stolpe said the Galapagos portfolio is of superior quality.

"Unlike the public targets used by BioFocus, we have proprietary targets that are druggable," he said, adding, "We won't go to approval by ourselves, but will partner after Phase II, preferably. By combining the pipeline with selective licensing and a service engine, we have lowered risk but still offer an upside for investors."

McMillan has taken soundings and received informal support for the deal from BioFocus investors representing 29 percent of the shares. If it goes through, he will step down as CEO and become a nonexecutive director of the merged company.

Galapagos' expertise lies in its genomics-based target discovery and validation engines. It has a hybrid business model, making revenues of £5.4 million from services in 2004, while funding an internal drug development portfolio built around targets it has discovered.

The company was set up in 1999 as a joint venture between Crucell NV, of Leiden, the Netherlands, and Tibotec NV, a subsidiary, located in Mechelen, Belgium, of Johnson & Johnson . The founders made a joint investment of €10 million (US$12 million). Galapagos raised €23 million in its first private round in 2002, and then moved straight to an initial public offering, raising €22 million in May in the first life sciences IPO on Euronext in four years.

Galapagos shares have moved up from the IPO price €7 to €8.16 last week. The venture capital investors, who are locked in until May 2007, will own 32 percent of the merged entity, Tibotec and Crucell 25 percent between them, and BioFocus investors 29 percent.

BioFocus' skills start where Galapagos' leave off, in taking validated targets through lead discovery and optimization. Both boast a number of pharmaceutical companies as customers, but have only GlaxoSmithKline plc, of London, in common.

Van de Stolpe said, "The combined capabilities bridge across the drug discovery pipeline - there is no overlap." He hopes the merged company will be able to cross sell turnkey drug discovery services from target discovery to lead delivery, to all respective clients. BioFocus' skills also will be applied to Galapagos' internal portfolio. That could generate significant cost savings, as until now Galapagos had to outsource all its chemistry. Indeed, a year ago, BioFocus agreed to provide chemistry services to develop leads for a number of kinase targets discovered by Galapagos.

All of BioFocus' 112 employees at Chesterford Research Park, near Cambridge, UK, will be retained, as will Galapagos' 78 staff at its two sites in Leiden and Mechelen. "We will keep the BioFocus and Galapagos operations intact," van de Stolpe said, adding that the current cash burn of £4.8 million annually will stay the same.

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