Interleukin Genetics Inc. is getting a makeover by selling the majority of its shares to Alticor Inc. as part of an alliance to develop personalized nutritional and skin care products for the latter's family of companies.
The Waltham, Mass.-based firm will provide intellectual property and its genomics knowledge to nutritional supplement-focused units of Alticor, which in turn is taking a majority equity investment in Interleukin. But Fenel Eloi, Interleukin's chief operating and financial officer, told BioWorld Today that Alticor is allowing Interleukin to run independently.
Nevertheless, Interleukin's near- and long-term financial dependence on Ada, Mich.-based Alticor is undeniable.
"The company had totally run out of cash," Eloi said. "For the last four or five months, we have been surviving on loans from Alticor because we were in negotiation with them. For all practical purposes, we were bankrupt on paper. We were surviving on loans and had negative net worth."
Over the past several months, the company has received four $500,000 installments as part of an interim financing from Alticor. Upon each installment, the funding provided Interleukin sufficient cash to meet its operating expenses through another month. The last promissory note was issued at the end of January. Interleukin reported about $508,000 in cash and cash equivalents as of Sept. 30, with a nine-month net loss through that date of $4.2 million.
Now Alticor is infusing Interleukin with significantly more funding, purchasing $7 million of equity in the form of 5 million shares of Series A preferred stock for $1.40 each. The preferred shares, convertible into about 28.1 million common shares at a conversion price equal to 25 cents, represent 50.3 percent of Interleukin's common stock on a fully diluted basis. Alticor would control 55 percent of Interleukin's shares on an undiluted basis.
Eloi said Interleukin had 23.1 million shares outstanding before the transaction.
The shares do not take into account the conversion into common stock of current and potential loans extended by Alticor, the parent company of Amway Corp., Access Business Group LLC and Quixtar Inc.
Alticor's interest in Interleukin lies in applying the latter's genomics technology to the nutritional supplement market. Eloi said the introduction of genomics into the nutritional industry could cause a substantial change in the supplement business.
"We knew that there was substantial value in our intellectual property, but now we have the opportunity to actually deliver," Eloi said. "I think the most important aspect of this deal is the fact that it is product-focused. This is not a research deal. We are working with a partner that is a worldwide consumer products company with a huge distribution channel."
While its nutritional business comprises one aspect of Interleukin's three core areas, the company also has developed diagnostics and therapeutics businesses from its genetic variation technology. Its TARxGET (Translating Advanced Research in Genomics into More Effective Therapeutics) technology entails programs to regulate inflammatory response, focusing on cardiovascular disease, osteoporosis, rheumatoid arthritis and Alzheimer's disease.
"We just happened to leverage the nutritional business first, but we fully intend to develop the other two legs of the business," Eloi said. "Although they have 50.3 percent of the shares, we are completely independent. Alticor wants us to pursue all three legs of our business."
Alticor will increase its total equity funding to $9 million at a conversion price of 32 cents after Interleukin, which also is receiving $5 million in research and development payments over the next two years, achieves an unspecified milestone.
Four of Interleukin's five directors have resigned, save for CEO Philip Reilly, in anticipation of four new members to be nominated and elected by the Series A shareholders. Alticor said it would name the new directors by the end of this month. In addition to Reilly and Eloi, the remainder of Interleukin's management team and its other 17 employees will remain on board.
Interleukin also is receiving more than $4 million in credit from Alticor, which reported worldwide sales of $4.5 billion in its most recent fiscal year. Interleukin will gain a $1.5 million working capital credit line to begin selected research agreements with third-party entities approved by its new board; a refinancing of the $2 million in notes previously held by Alticor, extending the maturity date and reducing the interest rate; and a $525,000 refinancing of bridge financing notes currently held by third parties, also extending the maturity date and reducing the interest rate.
The credit facilities will mature in December 2007, bear interest at 1 percent over the prime rate, are secured by an interest in Interleukin's intellectual property and are convertible at Alticor's discretion into common shares at a conversion price initially equal to 50 cents per share, subject to future adjustment.
Founded in 1987 in Texas, Interleukin went public a decade later. But in 2000 it essentially started anew after new management was brought on board, including Eloi and Reilly. Eloi, who said the company will begin to add new employees in the near term stopped short of calling this latest change an acquisition.
"The transaction is not an acquisition, it is not a merger," Eloi said. "They will control the company with respect to board control, but would our existing staff will not change. We remain an independent company."
Interleukin's stock (OTCBB:ILGN) remained unchanged Thursday at 56 cents.