Evotec BioSystems AG, of Hamburg, Germany, is looking to create a European power in small-molecule drug discovery and development services through a proposed all-stock purchase of chemistry specialist Oxford Asymmetry International plc (OAI) of Abingdon, England.

OAI's shareholders will receive 0.1287 newly issued Evotec shares for each share held, which will give them about 31 percent of the combined company's equity. The exchange ratio values OAI at approximately #316 million (EUR484.7 million), based on Evotec's share price of EUR91 at Friday's close. However, Evotec was off by 9.9 percent by the close of trading Monday, the day it announced the takeover.

The deal, which is due to close in November, valued OAI's share price at 722 pence (US$10.83) prior to Evotec's fall. OAI's stock had been in play since mid-July, when it reported it was in merger discussions in response to share price movements on July 18. The purchase price represents a 46 percent premium on its closing share price immediately beforehand.

"I think it's a very good price. The only question is it's in paper, and it's Neuer Markt paper. The price has taken some account of that," said analyst Eva Haas at the Old Mutual Securities arm of London-based Old Mutual plc.

The deal is part of a recent wave of consolidation in the European biotechnology sector. It is the first German-British biotechnology link-up, and it brings together companies that are listed on markets with widely divergent attitudes to the sector. Biotechnology stocks on the Neuer Markt have enjoyed something of a bull run of late, leading some UK analysts to suggest that the sector is overvalued, while many smaller UK stocks have faltered. Haas said that more German-British mergers could be on the horizon, as German firms seek to exploit their current high valuations.

The deal unites Evotec's ultra-high-throughput screening platform and assay development capabilities with OAI's integrated portfolio of chemistry services that range from the generation of compound libraries to the production of kilogram quantities of clinical grade material. "To have a jump start here is of the essence for us," said Evotec CEO Karsten Henco, who will head up the combined company.

Post-merger, the company will have a market capitalization of around EUR1.5 billion, based on current share prices. It will seek a Nasdaq listing in a secondary share offering, Henco said. It intends to set up a U.S. operation by early next year. The move will provide some OAI institutional shareholders that are mandated to invest only in UK-listed stocks with an opportunity to exit.

Evotec will continue to partner with other providers of chemistry libraries, Henco said, but it also will integrate this activity with OAI's downstream services. The merged company will run with the strategies that Evotec and OAI both adopted, of providing outsourced services to pharmaceutical and biotechnology firms. "We do not intend to become a fully integrated drug development company," Henco said.

Evotec has several internal drug discovery programs, but it aims to partner these out before they reach the clinic.

OAI will have just one representative, Michael Redmond, on the six-member board of the merged company. Executive duties will be equally shared between the two firms, however. Evotec Chief Financial Officer

Joern Aldag will join Henco on the enlarged company's management team as CFO. OAI executive chairman Edwin Moses will become president, while OAI CEO designate Mario Polywka will serve as chief operating officer of the enlarged company.

In addition to his role as CEO, Henco will assume the post of chief scientific officer for the overall organization, which will be headquartered in Hamburg. The two companies will retain their individual names, he said, in recognition of their strong brand identities.

The deal will be immediately earnings-enhancing to Evotec. OAI posted pretax earnings of #3.7 million on #20.2 million in revenues in fiscal 1999. Evotec reported a net loss of DM 18.5 million on DM 19.1 million revenues for the same period.

UBS Warburg, the investment banking arm of UBS AG of Zurich, Switzerland, advised OAI, while Lehman Brothers Holdings, Inc., of New York, advised Evotec.

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