By Lisa Seachrist

Washington Editor

Seeing a means to boost its early stage pipeline and enhance development of its current technologies, Celgene Corp. will acquire privately held Signal Pharmaceuticals Inc. in a stock swap worth roughly $216 million.

The deal merges Warren, N.J.-based Celgene's experience advancing products to the market with San Diego-based Signal's expertise in discovering and developing drug targets and optimizing lead compounds. The merged company will continue to focus on cancer and immunology.

"I think this deal is a great strategic fit," said Celgene spokesman Robert Hugin. "We think we got great value with this deal, and their shareholders got liquidity at an increased value."

Under the terms of the merger, which has been approved by the boards of both companies, Celgene will acquire all Signal outstanding shares in a tax-free stock-for-stock merger. Upon completion of the transaction, Celgene will issue 3,674,800 shares of common stock in exchange for all of the outstanding capital stock of Signal. The exchange ratio is 0.1257 Celgene shares for each share of Signal. The shares Celgene will issue as part of the transaction represent 4.4 percent of the company's total shares outstanding.

Celgene's stock (NASDAQ:CELG) closed Friday at $58.875, up $5.375, or 10 percent. The deal is valued at about $216 million based on the closing price.

Celgene expects the transaction to be dilutive to earnings for the next two years, but neutral in fiscal year 2002.

Once the transaction is complete, Signal will operate as a wholly owned independent subsidiary of Celgene. Signal will remain in its San Diego facilities.

Signal has developed a platform of target and drug discovery technologies to accelerate the application of genomics to the discovery of gene-regulating drugs. The company's pipeline includes development programs in cancer, inflammation, bone metabolism, neurological and cardiovascular disease and virology.

"We think they have a great team out there," Hugin said. "We wanted to enhance their operations, not take them over. We really want to accelerate their activities."

Michael King, vice president and senior analyst with Robertson Stephens in San Francisco, viewed the merger as a smart move for both Celgene and Signal. For Celgene, "Signal's development candidates will backfill the company's oncology and immunology pipeline and will diversify the company's target development portfolio.

"For Signal, they are going out at a valuation consistent with an IPO," King said. "They are getting very good currency with Celgene stock as well. These companies are very complementary."

Signal has, in fact, attempted to go public twice, most recently in February. The company pulled the registration statement for the IPO in conjunction with the merger announcement Friday.

Celgene discovers, develops, and commercializes small-molecule drugs for the treatment of cancer and immunological diseases. The company's lead drug, Thalomid, received FDA approval as a treatment for the cutaneous manifestations of moderate to severe erythema nodosum leprosum (a debilitating condition associated with leprosy). Celgene continues to develop that drug for use in multiple myeloma and other cancers.

In addition to Thalomid, Celgene is looking to structural analogues of thalidomide known as Immunomodulatory Drugs (IMiDs) to provide more potent drugs with fewer side effects. The company's two leading IMiDs have completed initial Phase I studies and were found to be well tolerated and non-sedating. Phase II/III studies in multiple myeloma will begin in the next 60 days. Celgene has recently entered into a five-year collaboration with the National Cancer Institute for preclinical and clinical studies of the drug.

"This is where Signal could really enhance the development of our products," Hugin said. "We don't fully understand what these drugs do and how they do it. That's what Signal has expertise in. If we hadn't concluded this merger, there is no doubt we would have entered into a collaboration with them at some point."

Celgene also is developing Selective Cytokine Inhibitory Drugs (SelCIDs) to inhibit tumor necrosis factor-alpha. These drugs act through the selective inhibition of the enzyme phosphodiesterase 4. The company is developing its lead SelCID in a Phase II trial in Crohn's disease.

For its part, Signal is focused on gene-regulating pathways. The company has programs in the JNK gene-regulating pathway, NF-k-beta pathway and selective estrogen receptor modulators (SERM). The SERM program has identified drug leads with the potential to prevent and treat breast, prostate and other cancers. In addition, the company has a SERM program in osteoporosis.

The JNK program is targeted at blocking a number of pathogenic genes related to breast cancer, prostate cancer, lung cancer, leukemia and melanoma. In addition, the drug candidates from the JNK program have shown activity in animal arthritis models.

Signal's NF-k-beta program could produce drugs to treat cancer, arthritis, inflammation and cardiovascular diseases.

The merged company, however, will focus on developing drugs to treat cancer and immune disorders. Other indications are likely to be licensed out to marketing and development partners. Hugin said the merger will allow Signal to develop its drug candidates more fully before having to find partners.

"We bring the ability to bring these drugs further along the development pathway so we are on much stronger footing when we do search for a marketing partner," Hugin said. "As a general rule, we believe the further along we develop a product, the better. You don' t want to give them away."

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