Zonagen Inc., searching for ways to benefit shareholders for some time, said it is merging with Lavipharm Corp. in a move that should please Zonagen stockholders and fulfill Lavipharm's desire to become a public company.

"We've been searching for strategic alternatives for our shareholders for two years now," said Joe Podolski, president and CEO of Zonagen, adding that many companies Zonagen was evaluating for mergers were so early stage, it seemed like merging would be like tossing Zonagen "into a black hole."

"[Those companies] had higher risks in their products than even our own," he said. "And we understand there are risks in our products."

Zonagen will issue Lavipharm Corp. about 7.7 million shares of stock at the close of the merger, plus it will issue 2 million shares to Lavipharm SA to cover $10 million in debt owed by Lavipharm Corp. There are corporate milestones set in the deal that would allow Lavipharm Corp. to earn another 20 percent of ownership if it consummates certain deals before December 2003. Initially, holders of Zonagen stock would own most of the combined company, with a stake of about 60 percent.

Zonagen's stock (NASDAQ:ZONA) fell 9 cents Thursday to close at $1.25.

Lavipharm, of East Windsor, N.J., does not appear to be a black hole. The company's major stockholder is Lavipharm SA, located in Peania, Greece, about 20 kilometers outside of Athens. Lavipharm SA was established in 1911 and is an integrated group of companies that develops, manufactures, markets and distributes pharmaceutical, cosmetic and consumer health products in Greece and internationally. With 17 affiliated companies that are at least partially owned by Lavipharm SA, it is hardly early stage.

In the mid-1990s, Lavipharm Laboratories Inc. was established in the U.S. as a research center. Lavipharm Corp. is the headquarters for worldwide corporate research and development, business development and marketing and sales outside of Greece.

What it isn't is a public company, something it wanted but found daunting in the face of floundering U.S. markets. The merger with Zonagen opens that door.

"It's fantastic for us," said Andrew Koven, senior vice president and general counsel at Lavipharm Corp. "It allows us to become a publicly traded company on Nasdaq, which is a wonderful thing. We think this will give us the recognition we need and deserve." Not to mention the ability to tap the public markets for funds, he added.

Both sides of the merger suggested that Zonagen's cash - $28.2 million at the end of the second quarter - could build Lavipharm Corp. a financial bridge until it can begin pulling in revenue. Koven said the company anticipates its first product, a transdermal patch for pain being developed with Endo Pharmaceuticals Holdings Inc., hitting the market in 2004.

Zonagen's best chance for an approved drug might also be its biggest disappointment. A new drug application for Vasomax, an oral product for erectile dysfunction, was submitted in 1998, but the FDA asked that a rodent study be completed before the agency would consider the drug for approval. In July, Zonagen submitted results from a one-year mechanistic study of phentolamine-induced brown fat proliferation in rats, but the drug remains under an FDA clinical hold. Zonagen also announced at that time that it had lost Schering-Plough Corp., of Madison, N.J., as a worldwide partner for the technologies that included Vasomax. In May, Schering-Plough had said it was pulling the marketing application for the drug in the UK. (See BioWorld Today, May 1, 2002, and July 16, 2002.)

Podolski said Zonagen recently had a meeting with the FDA, but said that even if the clinical hold were lifted, "some work has to be done" before the drug could be approved.

"The market has changed," he said. "Sexual dysfunction is a lifestyle drug. You need to be as good as [Viagra] to make any difference in the sector. And Vasomax doesn't measure up.

"In order to get the drug approved, it would take money. You would have to show that in a subset of individuals you have an advantage. It's still an uphill fight. The disappointment is that we were probably a year too late. If we had gotten there first, we would have had a chance. That was the toughest pill for us to swallow."

Signs point to the end of the U.S. and European road for Vasomax, although the drug is approved in nine countries, mostly in Latin America. Even though Lavipharm's Koven said his company doesn't know yet what will happen to Vasomax, it is clear that Zonagen is a drug discovery company and Lavipharm is a drug delivery and formulation company. Still, Koven said Lavipharm was "excited about the merger" and some young projects Zonagen has under way.

"They are early stage, and we haven't done a thorough evaluation, but we plan to in the next couple of months," he said.

If and when the merger completes, Zonagen's Texas operations would be shut down. Athanase Lavidase, chairman of Lavipharm Corp., would become chairman of the new entity and Podolski no longer would be needed. But even as he backs away from a management role, Podolski likes the latest move.

"This is a reasonable opportunity for our shareholders, and I'm saying that as a shareholder, not a president," he said. But if the new company is to flourish, "Lavipharm management has to execute," he said. "They have to execute."