By Kim Coghill

Washington Editor

Industry analysts say the $1 billion merger of Genzyme General and GelTex Pharmaceuticals Inc. is a good strategic fit for both companies, given their past joint-venture success selling the dialysis drug Renagel.

Cambridge, Mass.-based Genzyme Monday announced plans to acquire GelTex, a Waltham, Mass.-based company that develops and markets non-absorbed polymer drugs that bind and eliminate targeted substances within the gastrointestinal tract. The transaction is expected to close in the fourth quarter, pending regulatory and GelTex shareholder approval.

Genzyme stock (NASDAQ:GENZ) closed Monday at $57.69, down $7.62. GelTex stock (NASDAQ:GELX) closed at $43.25, up $5.87.

The deal values GelTex at approximately $1 billion. The company's shareholders will receive 0.7272 of a share of Genzyme General common stock or $47.50 in cash for each GelTex share owned, a 27 percent premium over the Sept. 8 closing price. The cash portion of the consideration is capped at 50 percent, or approximately $500 million. GelTex has 21.4 million shares outstanding.

The acquisition means Genzyme will obtain Renagel, WelChol (a cholesterol-reducing agent) and a significant pipeline of promising products, according to Bo Piela, Genzyme spokesman. Both Renagel and WelChol are patent-protected products, and Renagel is expected to be a major revenue producer in the next decade, company officials said in a conference call Monday. Renagel is a phosphate-binder for kidney dialysis patients.

"GelTex is good at discovering and developing products, but we are not good on the commercial side," said Mark Skaletsky, president and CEO of GelTex. Genzyme's resources and global commercial infrastructure, along with GelTex's ability to develop products, are expected to create a powerful company.

Michael Wood, vice president of Lehman Bros. in New York, said the merger is not unusual in the biotechnology industry. "There are a lot of consolidations - this is an ongoing trend. Genzyme had an interest in GelTex and by acquiring GelTex they will not be sharing revenues going forward (on Renagel)."

The longtime partners have a commercialization agreement dating back to June 1997 covering Renagel. The companies market the drug in the United States, Europe, Canada and Israel.

Henri Termeer, chairman and CEO of Genzyme, said that, unlike other products that are niche-oriented, Renagel has an expansive patient potential that is expected to reach 1.7 million during the next decade. Based on market penetration estimates and the availability of reimbursement, Genzyme expects Renagel revenues to reach $500 million within five years and $1 billion in 10 years.

In addition to Renagel, Genzyme's acquisition of GelTex also will bring WelChol, three products in clinical trials and three more product candidates potentially entering clinical trials next year.

WelChol, a cholesterol-lowering agent, is being launched this month by Sankyo-Parke Davis. A Phase II clinical trial of a second-generation version of WelChol will be completed this quarter, and further clinical trials are planned.

GelTex has several other products in development. Its lead pipeline product is a toxin binder known as GT160-246 for Clostridium difficile, a major cause of antibiotic-associated colitis, a condition common in hospitals and nursing homes. A Phase I trial in normal volunteers was completed last month and a Phase II clinical trial should begin later this year.

Researchers with GelTex have made significant progress toward discovery of a new class of fat-absorption inhibitors. The company has identified a family of polymers that inhibit pancreatic lipase, the key enzyme involved in fat digestion in the intestine.

GelTex employs about 110 people and Genyzme intends to retain the administrative offices and laboratories in Waltham. In addition to its marketed products, its pipeline and polymer technology, GelTex has assets that include about $119 million in cash, usable net operating loss tax carry-forwards, intellectual property protecting Renagel and other products, and research facilities.

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