National Editor

Spurning an eleventh-hour suitor that made an offer last week, diagnostic testing firm Variagenics Inc. said its board wants to go ahead with the previously planned merger with Hyseq Inc.

The newcomer's proposed deal "could potentially be a reasonable play, but it wasn't the direction we were interested in going," said Rick Shea, chief operating officer and chief financial officer of Cambridge, Mass.-based Variagenics, which heard from Acacia Research Corp. on Thursday.

"We actually didn't do a lot of talking with them," Shea told BioWorld Today, noting that Variagenics is bound by provisions of its signed agreement with Hyseq.

"We got a letter and some information and they made phone calls to our board members," he added, who didn't say much "other than acknowledging receipt of the correspondence."

Newport Beach, Calif.-based Acacia was acting on behalf of its CombiMatrix group, which acquires and licenses life sciences technologies. Acacia proposed a stock-for-stock merger in which it would issue its A/R CombiMatrix class of common stock in exchange for all outstanding shares of Variagenics.

According to papers filed with the Securities and Exchange Commission, Acacia would have issued its stock in exchange for outstanding shares of Variagenics common stock at a price of $1.60 per share, determined on the basis of the average price of Acacia Research's A/R CombiMatrix class of common stock 20 trading days prior to closing the deal.

"On a diluted basis at that price level, the number of shares that would come into play is roughly 25 million, so the deal would have been worth about $40 million," Shea said.

Variagenics officials "spent three or four days doing the due diligence we could, based on the available public information," Shea said. On Monday, they decided to turn down the deal and recommend that stockholders at a special meeting Jan. 28 approve voting in favor of the $55.9 million Hyseq reverse-stock merger, disclosed late last year. (See BioWorld Today, Nov. 12, 2002.)

Under the terms of that deal, Hyseq will form a wholly owned subsidiary that will merge into Variagenics, and the company formed by the move will then merge back into Hyseq. Each share of Variagenics' stock will be exchanged for Hyseq common stock at a ratio of 1-to-1.6451, and the deal is valued based on the Nov. 8 purchase price of $2.22 per Variagenics share (NASDAQ:VGNX).

In turning down Acacia, Variagenics noted that CombiMatrix is focused on business tools and would not allow the forward integration into diagnostics that the Hyseq merger would afford. Also, the trading history of Acacia Research/CombiMatrix stock is limited, as opposed to Hyseq's.

Only in December did Acacia's two new classes of common stock begin trading: Acacia Research-CombiMatrix (NASDAQ:CBMX) and Acacia Research-Acacia Technologies (NASDAQ:ACTG). They were created as a result of Acacia's recapitalization, and intended to reflect the performance of the life sciences business as distinct from the media-technology enterprise.

The dual-stock structure was another risk cited by Variagenics, which said investors might have difficulty understanding it.

"It's brand new and has essentially no trading history, and they don't have any institutional investors," Shea said. "One objective of [Variagenics] is to increase liquidity, so that was potentially problematic."

He acknowledged Acacia's $1.60 price offer is "a premium to what we're being traded at now, but it's hard to say where that would have gone."

Last, and hardly least, Variagenics noted uncertainty around Acacia's biochip technology.

"Their competitive advantage is unproven," Shea said.

On the upside were potentially more financial resources and synergies between Variagenics' diagnostic program for cancer (as well as its database of single nucleotide polymorphisms) with CombiMatrix's array processor system, not to mention CombiMatrix's DNA-microarray collaboration with Roche Applied Science, a unit of F. Hoffmann-La Roche Ltd., of Basel, Switzerland.

But those weren't enough. The decision to reject Acacia "was really a combination of all the factors," Shea said.

"The board of directors has been more interested in going in a therapeutics [direction] rather than a tools direction," he said. "That seems to be where the market is putting value."

Variagenics' stock closed Tuesday at $1.31, down 4 cents. Acacia's CombiMatrix shares ended the day at $2.70, down 44 cents, or 14 percent, and the Acacia Technologies stock closed at $1.43, down 16 cents. Hyseq's shares (NASDAQ:HYSQ) ended the day at 86 cents, down 2 cents.