By Brady Huggett

ZymoGenetics Inc. raised $150 million through a private placement in a move that allowed the 19-year-old biotechnology company to regain its independence.

ZymoGenetics, of Seattle, has been a U.S. discovery arm for Novo Nordisk, of Bagsvaerd, Denmark, since Novo acquired it in 1988. Novo Nordisk retained 51 percent ownership of ZymoGenetics, but will not control ZymoGenetics because of the way voting rights are structured.

Novo is a leader in insulin and diabetes care and ZymoGenetics works with many diseases, so Bruce Carter, CEO and president of ZymoGenetics, said the spinning out of ZymoGenetics will benefit both companies.

"It gives both parties flexibility," Carter said. "Novo is heavily focused on diabetes; Zymo is technologically focused. We're busy trying to find protein therapeutics and we're opportunistic. We're going to discover some things that are outside of Novo's interest area and Novo realized that."

The private placement was led by E.M. Warburg Pincus & Co. LLC, of New York, and participated in by Patricof & Co. Ventures Inc., of Palo Alto, Calif.; Apax Partners & Co Ventures Ltd., of London; Novo A/S, of Copenhagen, Denmark; Frazier & Co., of Seattle; and individuals in biotechnology, including George Rathmann.

This investor group will own about 35 percent of ZymoGenetic's shares on a fully diluted basis, which puts the worth of the company around $428 million. The closing of the agreement is subject to antitrust clearance by relevant U.S. authorities and is expected before the end of the year.

In conjunction with the financing and subsequent independence, ZymoGenetics had three new members appointed to its board of directors: Jonathon Leff, managing director, E.M. Warburg; David Hirsh, professor and chairman, department of biochemistry and molecular biophysics at the College of Physicians and Surgeons, Columbia University; and Lori Rafield, general partner, Patricof & Co. Currently, Novo has two members on the nine-member board.

Novo will own 51 percent of Zymo's stock, but a fraction of the shares will be non-voting, giving Novo less than 50 percent of the votes. Whether Novo will continue to hold a substantial portion of Zymo's stock has not been decided.

"No decision has been made on that," Carter said. "What is for sure, is that they will never have more than 49 percent of the votes. Novo realized that if it maintained control then we wouldn't be able to attract the kind of people we attracted to our board of directors. By having control, it also enabled us to strengthen the management group."

In the agreement, Novo has an option to obtain certain commercialization rights to product candidates resulting from ZymoGenetics' research and development. Novo has a worldwide rights option for all diabetes product candidates, and an option for markets outside North America for other therapeutic categories.

Although the company will not relocate, the direction of the company now that it stands alone shifts slightly, Carter said.

"We need to change ourselves into a research-driven company from just a research company," Carter said. "We've been grabbing land as fast as we can get it. What we need to do is, look into our portfolio and decide which products we want to develop and which ones we want to license out."

Carter said the $150 million from the investors, added to the money Novo is contracted to give, means that ZymoGenetics should have the funding to take it through Christmas 2004.

ZymoGenetics has multiple protein candidates that it plans to take into development and Carter believes it can reach clinical trials for some of those products by 2002.

"We won't get to the clinic until 2002, and we expect the initial products we bring to the clinic to be in the autoimmune and oncology area," Carter said. "But we anticipate having other products in other areas in the future."

Five approved products resulting from ZymoGenetics' research are generating about $1.5 billion in sales each year. ZymoGenetics was founded in 1981 by professors at the universities of Washington and British Columbia. In 1988, following a cooperative venture in the area of insulin, Novo Nordisk purchased the company for about $30 million in cash.

The company's portfolio of approved products being sold by Novo Nordisk includes Novolin (human insulin); NovoSeven, a Factor VIIa product used to control bleeding in hemophiliacs; and Glucagon, used for severe hypoglycemia and as a diagnostic aid. It also developed a platelet-derived growth factor for non-healing diabetic ulcers, which is sold by Johnson & Johnson, and a tissue plasminogen activator sold in Japan by a Japanese partner.

In the past five years, ZymoGenetics has filed patent applications on over 500 novel gene sequences, a broad base of knowledge, but Carter said ZymoGenetics may not always have been first.

"You file for 500, but when the dust settles you are not always the first to file, although we anticipate that we were the first to file 50 percent of the time," Carter said. "That may bring us down to somewhere between 100 and 200 patents."

Carter sees the biotech world today as a race for intellectual property rights, a race that isn't over yet.

"We don't know how much longer this race will go on, but we intend to stay in it and keep filing patents until the end," he said.

Novo's stock (NYSE:NVO) closed at $103.937 Monday, down 94 cents.

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