LONDON - Pharmagene plc is merging with its privately held U.S. counterpart Asterand Inc. and axing its therapeutics division in favor of becoming a dedicated human tissue supply and services company.

Pharmagene will issue new shares worth £13 million (US$23.5 million), based on the closing share price on Sept. 16 of 24 pence. In addition, it will make a payment to Asterand's shareholders equivalent to five times the pretax profit of the merged company in the financial year ending December 2006.

Ronald Openshaw, Pharmagene's acting CEO, told BioWorld International, "We have made estimates of how much this payment will be, but as a quoted company, we can't make profit forecasts. The point is we are structuring the deal to look toward profitability."

The share exchange gives Asterand shareholders 50 percent of the merged entity. Holders of 45 percent of Pharmagene's shares have given informal consent to the merger.

Founded in 2000, Asterand, of Detroit, made a gross profit of $3.1 million on turnover of $8.2 million in the year ended December 2004, when it had gross assets of $5.3 million. London Stock Exchange-quoted Pharmagene had a similar turnover of £4.2 million and made a profit of £270,000 in its tissue-based drug discovery and development services division, but expenditure of £8.2 million on the internal drug portfolio pushed the company into an overall loss of £6.7 million. The Royston-based company had cash of £15.7 million.

The growth of Pharmagene's services division has been constrained by shortages of ethically sourced human tissue. Asterand has 50 sources of supply compared to Pharmagene's 20. But the merger is "much more than a way of dealing with the tissue supply issue," Openshaw said.

"It is a way of building a company for the long term that has the resources to serve drug discovery companies worldwide. The supply of tissue is a constraint for the industry in general, and we are putting in place resources to deal with that."

The companies have been talking for a couple of years.

"Our major clients include several European pharmas and we have been looking to set up a laboratory in Europe, or link up with someone such as Pharmagene," said Randal Charlton, CEO of Asterand. "The combination of our growth and Pharmagene's change in policy [away from its internal development program] brought the stars into alignment."

Charlton will be CEO of the merged company, Openshaw will become chief financial officer. Pharmagene will maintain its listing on the London Stock Exchange but is changing its name to Asterand. "The Pharmagene name is a little tired on the equity market, and Asterand is a name that is known in the U.S. and to pharma companies in general," Openshaw said.

Pharmagene's internal portfolio consists of five programs. With the recent failures of the two lead compounds in clinical trials, all its products are preclinical. The company will seek to out-license individual programs or sell the entire portfolio. "We intend to realize the value of those assets and deliver the value back to shareholders," Openshaw said. That task will fall to Chris Moyses, who joined Pharmagene as research and development director in January 2005, having been chief medical officer of Oxford GlyoSciences plc when it was taken over by Celltech Group plc.

The decision to focus on human tissue research services will see Pharmagene rationalize its operations and reduce head count from 65 to about 40. Asterand has 53 employees.

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