By Mary Welch

Sweden's Karo Bio AB has agreed to buy U.S.-based Novalon Pharmaceutical Corp. in a deal worth about $100 million. The deal marks the third time in about a week that a European company has purchased an American biotechnology firm.

"The acquisition of Novalon will strengthen Karo Bio's technology base for the development of new drug substances that act upon nuclear receptors," said Per-Olof Martensson, president and CEO of the Huddinge, Sweden-based company. That, he said, will "make it possible [for Karo] to start several new projects and partnerships."

He added that the deal provides his company with "an opportunity to develop research programs in new areas such as the identification of therapeutics that act upon new pharmaceutical targets derived from discoveries coming from genomics research."

Martensson also noted that having operations in both Europe and the U.S. will give Karo Bio "better exposure" to future collaborators and institutional investors.

"It's a nice deal for us," said D. Joe Smith, president of Novalon. "We were actively involved in seeking private financing, as well as the acquisition - sort of parallel talks. If we did the private financing, it would have let us go public in about a year. Who could predict the IPO [initial public offering] market a year from now? It's impossible. We weren't sure about going public next summer when there might not be an IPO window open."

Instead, Karo and Durham, N.C.-based Novalon did a non-cash merger. Karo, which has about 9.17 million shares outstanding on the Stockholm Stock Market, will issue another 2.3 million shares - or about 20 percent of the company - to Novalon shareholders. Both companies' boards of directors have approved the acquisition, and Karo's shareholders are slated to vote on the issue in late April.

Currently Karo's stock is trading at about $46.50. "So, if you do the math, our 2.3 million shares are worth about $107 million," Smith said.

The combined company eventually will apply for a dual listing on Nasdaq.

The acquisition comes quickly on the heels of two Germany companies buying American firms. GPC AG, of Munich, bought Mitotix Inc., which has offices in Cambridge, Mass., and Princeton, N.J., in an all-share transaction. The companies refused to release financial details, but the value of the combined companies is estimated to be about $100 million.

In addition, Morphochem AG, also of Munich, acquired Small Molecule Therapeutics Inc. (SMT), of Princeton, N.J. Morphochem assumed all of SMT's shares in a transaction of cash and Morphochem stock.

The Novalon acquisition is positive in two ways, Smith said.

"From a scientific standpoint, Karo is pretty much the leader in Europe in nuclear receptor work, with an unsurpassed patent position in Europe and great collaborations. We have substantial nuclear receptor programs. We are developing new drug substances that act upon nuclear receptors. There is a lot of synergy."

From a management point of view, the two companies are very similar, Smith said. "If you took our business plan and theirs and switched them, you'd see they're pretty much alike. We have a common mindset. We both stick to our knitting, spend carefully, and believe that collaborations are a way to get current revenues. We both also have internal programs to develop drugs that we will own. Very similar philosophies."

Karo, which has about 85 employees in its headquarters just outside Stockholm, has three different research programs based on nuclear receptors under way. It is working with New York-based Bristol-Myers Squibb & Co. to develop drugs to treat obesity and elevated cholesterol, and with Merck & Co. Inc., of Whitehouse Station, N.J., to develop drugs targeting the estrogen receptors alfa and beta. It also is collaborating with Abbott Laboratories, of Abbott Park, Ill., on a method to treat Type II diabetes and inflammatory diseases. Internally, Karo has programs for skin disorders, cardiac arrhythmia and glaucoma.

Founded in 1996, Novalon has developed technology based on the use of peptides of BioKeys (small proteins) that can bind biologically active areas on proteins, such as nuclear receptors, that are targets for drug development. These peptides are key components in new screening systems with a high capacity for identification of new pharmaceuticals. In addition, the technology allows for the rapid validation of new proteins as targets for drug discovery, Smith said.

Novalon enhanced the BioKey technology by developing a method known as molecular braille, which makes it possible to quickly link the action of a substance on a nuclear receptor to tissue-selective biological activities. Patents for both BioKeys and molecular braille are pending.

Novalon will operate as a wholly owned subsidiary of Karo, with no staffing or directional changes anticipated.