In a tight financing environment, companies look for creative solutions to attract investors.

At the same time, those shelling out the dough want some assurance of success, and management's faith in a product or platform is simply not good enough.

That's why some biotech companies are willing to forgo the traditional private or public stock offerings in favor of a uniquely structured merger. One in which the purchaser makes an up-front payment relative to current value, but offers more value downstream once milestones are achieved.

The structure made sense for VioQuest Pharmaceuticals Inc., of Monmouth Junction, N.J., which acquired New York-based Greenwich Therapeutics Inc. in May. VioQuest bought the private company for its two cancer compounds in early clinical trials, trading 47 percent of its stock for Greenwich, half of which remains in escrow until those compounds meet certain clinical goals. (See BioWorld Today, May 9, 2005.)

Based on VioQuest's closing stock price of 75 cents at the time of the transaction and its 17 million shares currently outstanding, it paid about $6 million in shares for Greenwich, with $3 million of them sitting in escrow.

VioQuest decided to keep 50 percent of its shares in escrow because of the uncertainty surrounding Greenwich's products, sodium stibogluconate and API-2.

"The main reason is that it's in the best interest of our shareholders," Dan Greenleaf, president and CEO of VioQuest, told BioWorld Today. "There is always risk associated with the in-licensing of products."

That risk may be the driving force that makes companies structure their merger agreements with milestones. In addition to VioQuest, several other companies have conducted such deals in recent months.

In late April, Beckman Coulter Inc., of Fullerton, Calif., announced plans to acquire Agencourt Bioscience Corp., of Beverly, Mass., for $100 million at closing and up to $40 million in contingent payments through 2007. In May, it was Adelaide, Australia-based Bionomics Ltd. that agreed to acquire Melbourne, Australia-based Iliad Chemicals Pty. Ltd. for $9 million, plus another $3 million if an Iliad product meets a certain objective. And in June, Montreal-based Theratechnologies Inc. agreed to sell its 37 percent investment in Celmed BioSciences Inc., also of Montreal, to Celmed shareholders for $8.4 million total, which was comprised of an up-front $2.8 million cash payment and future milestone payments based on the success of Celmed's products.

It's a structure that bodes well for both companies, giving one the money it needs to advance promising products, and giving the other an interest in those products, as well as control over how much it invests.

"At the end of the day, it better aligns the two companies," Greenleaf said. "In a merger, you don't necessarily want to be issuing a bunch of shares into the market with drugs that don't ultimately lead to some achievement."

And for the company being acquired, merging can be a better option than turning to the public or private markets to raise funds, especially when the outcome of a product is blurry at best.

"If it isn't successful, that doesn't help them either," Greenleaf said. "That's the key. [This type of merger] works for both parties. If it's not successful, they don't want a bunch of shares in the marketplace that dilute the heck out of the stock."

It's not just early clinical-stage companies like Greenwich that have considered mergers with milestone contingencies instead of typical financings. Salmedix Inc., of San Diego, decided to drop plans for an $86.25 million initial public offering in favor of an acquisition by Cephalon Inc., of Frazer, Pa. This spring, Cephalon agreed to buy Salmedix for $160 million in cash, plus another $40 million in potential milestone payments related to Treanda, a Phase II product for non-Hodgkin's lymphoma. (See BioWorld Today, May 16, 2005.)

Those payments would be triggered by the following milestones: $15 million upon the FDA's acceptance of the new drug application for Treanda, and $25 million when the drug is approved.

Greenleaf said VioQuest has had similar offers to merge with various companies willing to take contingent payments based on the achievements of their late-stage products.

"Frankly, there's risk with whatever stage you're in. There's risk with predictability of the outcome. There's risk with the clinical trials themselves," he said. "If I was to do a deal with a Phase III drug, I would unequivocally have it tied to an NDA filing and an FDA approval."

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