National Editor

Genome Therapeutics Inc. and Genesoft Pharmaceuticals Inc. said they have entered a definitive agreement for an all-stock merger that would leave the new entity with one antibiotic preparing to launch and another in Phase III trials.

The merger "completely changes" Genome Therapeutics, said Steven Rauscher, chairman and CEO, who will serve as president and CEO of the new company.

David Singer, founder, chairman and CEO of Genesoft, said officials at his firm "found ourselves strategically in an interesting position" - one that was "probably unique in the history of the industry. I don't know of any private companies that have an approved product."

Under the terms of the deal, which has been approved by both boards, Genome Therapeutics would issue about 28 million shares of common stock to existing security holders of Genesoft, and would assume debt of $24 million. At Monday's closing price of $2.85, Genome Therapeutics' shares would be worth about $79.8 million.

Genome Therapeutics' stock (NASDAQ:GENE) rose 22 cents Tuesday to close at $3.07.

Expected to qualify as a tax-free reorganization, the transaction is subject to some third-party approvals and consents - as well as the vote of shareholders - and the raising of about $30 million in added capital to fund the merged company. Both sides hope to finish the deal by the end of the first quarter of 2004.

The $30 million is not to pay off the debt, which will be restructured to five-year note, with a 5 percent interest rate and convertible into stock in the new company, Rauscher said. Instead, the fresh capital would be used to build the commercial organization and launch Factive (gemifloxacin mesylate tablets), Genesoft's FDA-approved, orally administered, broad-spectrum fluoroquinolone antibiotic, expected to hit the market in the summer of next year.

"As you might imagine, we have some documents we need to file with the SEC before we can give a lot of background information [on the necessary financing]," he said, but most is expected to come from new investors.

Factive is indicated for community-acquired pneumonia of mild to moderate severity and acute bacterial exacerbations of chronic bronchitis. Genesoft also brings a preclinical pipeline that is further along than Genome Therapeutics', Rauscher noted, such as a series of oral peptide deformylase inhibitors for respiratory tract infections.

Singer told BioWorld Today that Genesoft officials "in more ebullient moments" have speculated the PDF inhibitors will be the company's "biggest thing," though "people don't focus on [the program] and they probably shouldn't," given Factive's readiness for market.

The merged company would keep the name Genome Therapeutics and trade under the "GENE" ticker until a new name is chosen. The publicly held company has 55 employees and Genesoft has 25. About 75 salespersons will be hired for the launch of Factive, Rauscher said.

"As we get sales results, we'll add from there," he said. Whether layoffs will happen as a result of the merger is still being sorted out.

"There may be some duplication," he said.

Headquarters will be at Genome Therapeutics in Waltham, Mass., with activity continuing for now in Genesoft's facility in South San Francisco, Singer said.

"The discovery research will continue in California," but for how long is "up in the air," he said, adding that "you have to get the big things in place" before moving on with details of the merger.

Genome Therapeutics' antibiotic Ramoplanin is in a Phase III trial for the prevention of bloodstream infections caused by vancomycin-resistant enterococci and a Phase II study for the treatment of Clostridium difficile-associated diarrhea.

Last month, the company offered six posters on Ramoplanin at the Infectious Diseases Society of America meeting in San Diego, showing, among other things, that Ramoplanin - licensed from Vicuron Pharmaceuticals Inc., of King of Prussia, Pa. - did not induce the two most common genes that cause vancomycin resistance, vanA and vanB.

Meanwhile, the market for Factive looks strong, Rauscher said.

"There are only about six brands that compete for this particular marketplace, and three of those brands are coming off patent or their patent expiration is within the next couple of years," he told BioWorld Today. "Factive is hitting this market at exactly the right time."

Its patent protection extends to 2015, he added, with an option to push the coverage to 2017.

Big pharmaceutical firms have shifted their emphasis from antibiotics to chronic conditions, where direct-to-consumer advertising can be used and where products are slower to take off, but patients "stay on for years at a time," Rauscher said.

The shift has left the door wide open for the likes of Genome Therapeutics and Genesoft, he said - whose market is driven by physicians' impressions instead.

"People don't need to be told to go to their doctors if they have bronchitis or pneumonia," he said. "And our entire marketplace turns over a new group of patients every couple of weeks."

Singer said products going off patent should increase the merged company's ability to "grab share of mind" of physicians in a market where the need is increasing and the competition is slowing.

"Three or four years from now, people are going to wake up and look back and say, This [deal] is so obvious,'" he said.