By Karen Pihl-Carey

Genzyme General plans to acquire Cell Genesys for about $350 million in a stock-for-stock exchange, then transfer some of the acquired company's programs to Genzyme Molecular Oncology.

The deal will give Genzyme Molecular two additional clinical cancer candidates and other Cell Genesys technologies, valued at $20 million, as well as $60 million in cash.

The board of directors at both Genzyme and Cell Genesys approved the tax-free stock-for-stock exchange, which is expected to close in the first quarter of 2000. The merger still requires the approval of Cell Genesys shareholders.

Under terms of the merger, Cell Genesys shareholders will receive a fraction of a share of Genzyme common stock for each Cell Genesys common stock they own. The ratio will be determined by dividing $10 by the average closing price of Genzyme shares during a designated 20 trading days before the merger is completed. The ratio, however, will not be greater than 0.317 share or less than 0.181 share for each Cell Genesys share. Cell Genesys has about 35 million fully diluted shares outstanding.

Genzyme's stock (NASDAQ:GENZ) closed Monday at $36.312, down $3.062. Genzyme Molecular's stock (NASDAQ:GZMO) closed at $5.031, up 46.88 cents. And Cell Genesys' stock (NASDAQ:CEGE) closed at $8.375, up $1.375.

The acquisition, which will be accounted for as a purchase transaction, will result in a one-time charge in the first quarter of 2000. It will dilute Genzyme General's shares by about 10 percent, but it is "a major investment" that will add in the long run to the company's current programs, including its Gaucher and Fabry program, said Genzyme's chairman and CEO, Henri Termeer.

Termeer said the acquisition increases Genzyme's technology base and provides it with a strong intellectual property position.

"Cell Genesys has had over 10 years of very active programs in protein therapies and gene therapies and cell-based gene therapies," Termeer told BioWorld Today. "Both of these programs are very, very complementary. What we have here is two companies, two programs getting together, creating tremendous leverage for both companies by combining them."

Cell Genesys owns about 22 percent of Abgenix Inc., of Fremont, Calif., and has development capabilities in gene therapy, gene activation and related technologies. The company employs 115 people at its headquarters in Foster City, Calif., and has about $60 million in cash, equity ownership in Abgenix Inc. valued at about $130 million, as well as research and manufacturing facilities.

"This is a transaction that we think provides significant strategic value to Cell Genesys and its shareholders," said Stephen Sherwin, chairman and CEO of Cell Genesys. "And, we believe, that this is an opportunity that will provide future opportunities for value creation in our technologies and products that could exceed what we could do on our own.

"There are no planned layoffs or relocation," Sherwin told BioWorld Today. "Genzyme plans to continue our research and development and manufacturing activities here, and to use Cell Genesys in the future as a base for their West Coast operations, and may in the future expand certain areas of our business."

Cell Genesys will become Genzyme when the acquisition closes early next year, said Genzyme spokeswoman Caren Arnstein. "We hope to keep all of their employees, and keep that [the Foster City headquarters] as a West Coast base for Genzyme."

Cell Genesys will bring to Genzyme its gene activation and gene therapy technology, which includes a number of proprietary advanced vector systems for delivering genes into cells.

The Genzyme board decided to allocate Cell Genesys' clinical-stage cancer vaccine programs and $60 million in cash to Genzyme Molecular in exchange for about 12.5 million of Genzyme Molecular's designated shares. The number of shares is based on a $6.41 price, the average closing price of Genzyme Molecular's shares for 20 consecutive days. Prior to the transaction, Genzyme Molecular had 13.4 million shares outstanding.

Genzyme is trying to decide whether to sell the 12.5 million Genzyme Molecular shares to financial or strategic investors or in a registered public offering in 2000. If they are not sold, they will be distributed as a dividend to holders of Genzyme stock.

Gail Maderis, president of Genzyme Molecular, said the transaction not only recapitalizes her company, but it also doubles its clinical pipeline and strengthens its ability to excel in development and commercialization of novel cancer therapies.

"One aspect of what Cell Genesys brings is the GVAX technology," Termeer said. "They are in the clinic for prostate and lung cancer and that program will transfer to Genzyme Molecular Oncology. With the $60 million in cash, the transaction will recapitalize Genzyme Molecular Oncology at least through the year 2001."

Cell Genesys' GVAX cancer vaccine is in a Phase II prostate cancer trial and in a Phase I/II lung cancer study. These are gene-modified tumor cell vaccines expressing GM-CSF. The GVAX candidates are being developed through a collaboration with Japan Tobacco Inc., of Osaka, which holds 50 percent of worldwide rights to the potential products.

The GVAX candidates will add to Genzyme Molecular's other immunotherapy programs. The company has a candidate for melanoma in a Phase I/II trial expected to be completed in 2000. And in September, the company initiated a Phase I trial of its breast cancer candidate.

As part of the transaction, Genzyme Molecular also will gain access to Cell Genesys' portfolio of in vivo and ex vivo gene therapy intellectual property, which includes more than 200 patents and more than 330 patent applications. It will receive access to new vectors with additional anti-angiogenic genes from Cell Genesys. The vectors will help Genzyme Molecular develop inhibitors of angiogenesis using small molecules, proteins and gene therapy.

Cell Genesys has collaborations with EntreMed Inc., of Rockville, Md., which is exploring using the gene therapy vectors to deliver genes encoding EntreMed's Endostatin and Angiostatin, and with Mitotix Inc., of Cambridge, Mass., which will complement Genzyme Molecular's work in the p53 tumor suppressor gene pathway.

Cell Genesys' functional genomics collaboration and license agreement with Rigel Pharmaceuticals Inc., of Sunnyvale, Calif., will supplement Genzyme Molecular's cancer gene discovery efforts with its Serial Analysis of Gene Expression (SAGE) technology. Rigel will use its technology to identify novel genes for treatment of cancer, and Genzyme Molecular will gain exclusive, worldwide rights to these genes.