National Editor

Aiming to sharpen its diagnostic capabilities and ride the wave of targeted therapies for cancer, ViroLogic Inc. has hatched a plan to take over Aclara BioSciences Inc. in a deal that could be worth more than $180 million.

"This is a perfect fit for what the world of oncology needs," said William Young, chairman and CEO of South San Francisco-based ViroLogic, who will continue in those roles at the merged company. Tom Klopack, Aclara's CEO, will serve as a consultant for the new firm.

ViroLogic's stock (NASDAQ:VLGC) closed Tuesday at $2.28, down 53 cents, or 18.9 percent. Aclara's shares (NASDAQ:ACLA) ended the day at $4.14, up 29 cents.

"We've been doing resistance testing in HIV since about the end of 1999," Young said. "We have a whole set of technologies that measure a virus' ability to be affected by 19 approved drugs, and for the last two or three years, at least, we have been interested in broadening to other disease categories."

ViroLogic has a hepatitis program, he said, and "we've been on the lookout for technologies that might be applicable to oncology." In Aclara, of Mountain View, Calif., that's been found.

Under the terms, each outstanding share of Aclara stock will be exchanged for 1.7 shares of ViroLogic stock and 1.7 contingent value rights (CVRs). The common stock portion of the consideration equals $4.78 per share of Aclara based on ViroLogic's closing price of $2.81 on May 28, and is worth about $180 million.

CVRs are used in mergers and acquisitions as a type of insurance that shareholders in the acquired company get a consistently valued stake in the resulting firm. In this case, the CVRs provide a potential cash payment of up to 50 cents per CVR (equivalent to 85 cents per Aclara share), depending on the ViroLogic stock price 12 months following completion of the merger, which is expected to happen in the fourth quarter.

If ViroLogic's stock rises above $2.90 in the 12-month period, the CVRs would have no value. If the price falls below $2.40, the CVRs would be worth up to 85 cents per Aclara share, of which there are 37 million, Young told BioWorld Today.

After the closing, ViroLogic expects to have about $75 million in cash, cash equivalents and marketable securities net of the estimated transaction and integration costs, before any CVR payment.

ViroLogic already offers a line of drug-resistance tests: PhenoSense HIV, GeneSeq and its combination assay, PhenoSenseGT, all used in management of people with HIV and in the development of new antiviral drugs for that disease, as well as hepatitis. Aclara brings to the table its eTag System, a protein-based technology that can be formatted to test biopsy-sized samples of patient tumors, including formalin-fixed, paraffin-embedded tissue, which is the industry standard for storing patient samples.

With eTag, many different molecular markers in those patient tissues can be quantified simultaneously, such as signaling proteins, protein complexes and activated receptors. Thus, Aclara has a platform for developing cancer diagnostics, and ViroLogic has the commercial infrastructure to market them, thanks to its HIV tests.

"We know how to do a lot of things they need to learn how to do," Young said, noting that Aclara, for its part, "has pretty well worked out targets for the EGF receptor family." Next come validation and clinical data showing benefit.

"That's going to be the most time-consuming part of this, and it's already under way at Aclara," he said. ViroLogic's high-throughput laboratory will be deployed, and the merged company will collaborate with drug companies for its work and then move to patient testing, Young said.

The new firm will have about 250 employees when the deal is done, with all operations transferred from Mountain View to ViroLogic's headquarters in South San Francisco. Two current members of Aclara's board, Tom Baruch and John Mundelein, will become part of the new firm's board, which will be expanded to include them.

Lazard Freres & Co. LLC, of New York, acted as financial adviser to ViroLogic, and Palo Alto, Calif.-based Cooley Godward LLP provided legal counsel. Lehman Bros. Inc., of New York, acted as financial adviser to Aclara, and Latham & Watkins LLP, of Los Angeles, provided legal counsel.