BioWorld International Correspondent

LONDON - Xenova Group plc is being taken private by the equity group Celtic Pharma in a deal that values the company at between £19.4 million (US$35.5 million) and £26.1 million.

The lower price is a cash offer equivalent to 4.5 pence per share, the higher a secured loan note worth just more than 6 pence per share. If neither appeals, a third option of a mixture of secured loan notes and cash worth £24.8 million, or 5.7 pence per share, also is offered.

John Mayo, co-founder and director of Celtic, told BioWorld International the deal represents a new model for financing biotechnology in the current funding desert.

"The objective is to buy a portfolio of later-stage products and then manage them through to approval for out-licensing to big pharma. Typically we want products at late Phase II."

Xenova shares rose 0.38 pence to 4.25 when the offer was announced June 24.

The acquisition of Xenova is Bermuda-based Celtic's first deal since its formation late last year. The fund is due shortly to make a second closing and expects to raise $300 million by the end of 2005.

Mayo said he is in talks to acquire products from a U.S. company and also to buy a company in continental Europe. "We are interested in in-licensing, buying products and buying companies," Mayo said. "But we will choose the right route each time; we don't have a religion about it."

With the $300 million Celtic would assemble a portfolio of 10 to 20 projects at an advanced stage of development in any therapeutic area. That approach would reduce risk and enable it to raise loans to finance Phase III development programs.

"At present there is no debt in biotech because the risks are so great no one wants to lend. As we build a broad portfolio of advanced-stage products the risk falls and we think we will be able to borrow," Mayo said. Loans will be on the basis of one dollar of Celtic's money for one dollar of debt.

"Lenders will have the security of a diverse and broad pool of secured assets, and of course we only need one or two projects to succeed to get a return," Mayo said.

Xenova will operate as a subsidiary of Celtic Pharma Development UK (CDP), a virtual operation set up to manage the clinical development programs. In some cases CDP will use contract research organizations, in others existing teams in acquired companies will continue the work. It also is possible that in-licensed products will be put into acquired subsidiaries for development.

Celtic's main interest in Slough, UK-based Xenova is its two anti-addiction vaccines designed to help cigarette smokers and cocaine users break the habit. They have been licensed to Celtic in return for a secured loan facility of up to $20 million to provide working capital for Xenova. Neither of the two agreements is dependent on the acquisition going through. Celtic will continue development of TransMid, a treatment for glioma that is halfway through Phase III, but Mayo said no decisions have been made on Xenova's other products because Celtic did not want to spend too much time on due diligence in case its interest leaked out to the market.

David Oxlade, CEO of Xenova, said the acquisition was in the best interests of the shareholders.

"Xenova's maturing portfolio will require significant funding to bring them to commercialization, which Celtic Pharma is in a position to provide. In the context of the current funding environment, this is the right solution for all Xenova stakeholders," he said.

Celtic's other co-founder is Stephen Evans-Freak, former CEO of Sugen Inc., a California-based cancer specialist that was bought by Pharmacia (now part of Pfizer Inc.) in 1999. Mayo himself returns to the spotlight four years after he was forced to leave his post as chief financial officer of Marconi plc, a telecommunications manufacturer that came unstuck in the dotcom bust. Before that he was chief financial officer of Zeneca plc at the point of its merger with Astra AB in 1999 to create AstraZeneca plc.

"The analysis of what happened at Marconi always lacked real insight and understanding," Mayo said. "Stories about me are bound to relate to the last public company I was at, but my record in creating value for investors in pharma speaks for itself: Shareholders in Zeneca saw a fourfold return."

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