BioWorld International Correspondent

LONDON - The long-called-for restructuring of the UK biotech sector looked to have taken a major step last week when Cambridge Antibody Technology Group plc said it would acquire Oxford GlycoSciences plc in an all-share deal valuing OGS at £109.6 million (US$179.8 million).

The deal would bring together two of the most loaded companies in the sector, creating a company with a £260 million cash pile and a market capitalization of around £289 million.

Peter Chambre, CEO of CAT, told BioWorld International, "When we talked after our results last November we said we wanted to create a leading biopharmaceutical company, which by 2008 was both profitable and had world-leading products. This merger is a significant step forward."

Shareholders in CAT will receive 0.3620 new CAT shares for each OGS share. That values OGS shares at £1.995, a premium of 28.2 pence to the closing price on Jan. 22. However, the £109.6 million valuation is a significant discount to OGS's cash balance, which stood at £136.4 million on Dec. 31.

David Ebsworth, CEO of OGS, told BioWorld International that despite the discount this is a good deal for OGS shareholders. "I can disagree in theory at what the market values my company at, but the fact is that the share price has remained consistent at around £1.50 for the past five months, despite positive news flow."

Ebsworth said that since he became CEO in July 2002 he had considered "all the options" for OGS's future, from leaving the company as it was to giving the cash back to shareholders, and had engaged in detailed merger discussions with a number of other companies.

"With this deal, my shareholders get 36 percent of the new company, and so get a very big chunk of a bigger, better company."

The deal was announced Thursday. OGS shares rose 23 percent to £1.84 last week, while CAT's fell 10.5 percent to £5.10.

UK analysts reacted favorably. Lehman Brothers said, "It is a pragmatic solution for both companies and CAT gets much-needed cash at a discount." Morgan Stanley said, "The proposed merger looks like a good deal for both sets of shareholders."

Analysts also agreed the merger was likely to prompt further consolidation. Schroder SalomonSmithBarney said, "We believe this is a major event for the European biotechnology industry and could trigger more much-needed consolidation within the sector." WestLB Panmure said the merger "kick-starts the consolidation and drive toward critical mass we have long said that this sector needs."

Chambre, who will retain his position in the merged company, said there are four core reasons for the merger. "It adds products to the portfolio, with two approved products, seven in clinical development and seven preclinical. We have previously said we wanted to build an oncology focus and OGS has a significant number of early stage oncology products and targets."

The move also strengthens CAT's discovery and development skills. In particular, OGS has a strong medicinal chemistry group, giving CAT the ability to develop small-molecule drugs as well as antibodies. "Most major biopharmaceutical companies have large- and small-molecule capabilities. When you look over time we will have a leading position in antibodies and small molecules," Chambre said.

OGS also has more clinical development skills than CAT, having taken its lead product, Zavesca, all the way through to market, while CAT's lead in-house product is in Phase III.

OGS has collaborations with Genmab A/S, of Copenhagen, Denmark, and with BioInvent International AB, of Lund, Sweden, in the discovery and development of antibodies, but Ebsworth said, "In these deals we have to share the value; here [in the merged CAT/OGS company] it is all in-house."

Ebsworth is to join the board of CAT for six months to oversee the integration and will then become a nonexecutive director. "Staying on as a nonexecutive was my idea during the course of the [merger] discussions. I have seen too many deals fall apart because the details of how integration would work and who would run the company were not agreed upon in advance."

Given the significant extra financial strength, Chambre said it would be possible to select products for internal development and to retain more value. CAT's leading antibody, Humira, due to be launched this month by Abbott Laboratories, is expected to sell more than $1 billion per annum, but CAT's royalty rate is below 5 percent.

Chambre added that doubling CAT's cash "reduces the chance that we will have to go back to the capital markets for more money."

As separate companies the two were planning to spend £80 million in total on R&D this year. "This is too much," Chambre said. "We have identified overlaps in administration and real estate and some in R&D, which will generate savings of £10 million in the first year."

Further savings are expected from a portfolio review to decide which products to take forward. The results of the review will be announced in November.

OGS brings with it one product, Zavesca, for treating Gaucher's disease that has European approval. But otherwise the pipeline is very thin, with just one clinical-stage product, OGT923, an analogue of Zavesca, in Phase I trials. As a result, although the merger gives CAT more scale and cash, it is unlikely to accelerate its progress to profitability.

Chambre said OGS will remain at its site in Abingdon, though the facility will be scaled down. The corporate headquarters will be in Cambridge, where CAT has just moved into new premises, named after Cesar Milstein, the discoverer of the monoclonal antibody technology around which CAT was formed. The name of the company will be changed at some point in the future.