By Jim Shrine

Special To BioWorld Today

Megabios Corp. and GeneMedicine Inc. decided Monday to pool their complementary nonviral gene-delivery technologies in a merger that will be accomplished through a straight stock swap.

Rather than continuing to butt heads in the search for partners, the companies decided to go at it together. The stock swap gives Megabios, of Burlingame, Calif., about 59 percent of the new company and GeneMedicine, of The Woodlands, Texas, about 41 percent. Together they have seven products in early clinical development and are expected to have $57 million in cash when the deal closes in the first quarter of 1999.

The name of the combined company should be finalized in about a week. The board will consist of five Megabios members and three from GeneMedicine. Megabios Chairman, CEO and President Benjamin McGraw III will keep those positions in the combined company, which will continue operating in both Texas and California.

Investors appeared to like the move, as the stocks of both companies gained Monday. Megabios (NASDAQ:MBIO) closed at $4.375, up $0.187 per share, and GeneMedicine (NASDAQ:GMED) closed at $2.281, a gain of 14 percent, or $0.281.

McGraw told BioWorld Today the move is one of the few "strategic mergers" he is aware of in the biotech industry, and should serve as an example of how to strengthen small-cap companies.

"We feel very strongly this is the right thing to do strategically for these two companies," McGraw said. "It increases our ability to execute a business plan much better and also helps resolve the primary issue facing the biotech industry: Too many companies that are too small in capitalization and liquidity, with too narrow a product portfolio."

Companies Competed For The Same Partners

The companies' technologies are so similar that they would often find themselves competing for the same partners, said Bennet Weintraub, Megabios' CFO and vice president, finance.

"As we were trying to operate our business we continued to run into GeneMedicine," Weintraub told BioWorld Today. "This merger allows us to simplify partnering decisions," since potential collaborators seeking nonviral delivery now have a clear choice, he said.

"Together, this is a stronger company than either of its parts," Weintraub said. That includes more leverage from intellectual property positions, a broader technology base that will lead to more partnering opportunities, and added financial strength, which he said could preclude the need to raise equity financing.

"With this deal we're looking to attract new partners, get the burn rate down and, with the cash we have in the bank and what we're spending, we should be able to turn cash-positive sooner than either company could by itself," Weintraub said.

GeneMedicine shareholders will get 0.571 shares of Megabios for each GeneMedicine share, for a total of 9.1 million shares valued at $38 million, based on Megabios' closing price Friday. Megabios has about 12.9 million shares outstanding. Megabios has about 80 employees and Gene-Medicine about 110.

Richard Waldron, GeneMedicine's vice president, finance, and chief financial officer, said his company's directors began investigating strategic alternatives at the beginning of the year to deal with the time frame and financial challenges small companies face in developing products.

"Megabios came up relatively early," Waldron told BioWorld Today. "This merger announcement is the result of months of discussion."

Both companies are committed to using nonviral, or plasmid-based, gene therapy to develop conventional therapeutics, Waldron said. Both are developing cancer products, and both are interested in corporate partnerships. "The focus of the company won't change, but how we obtain those objectives probably will," he said.

Megabios has developed in vivo plasmid-based gene-delivery systems. GeneMedicine's core technology includes lipid-, polymer- and peptide-based gene-delivery systems.

Megabios and London-based Glaxo Wellcome plc are developing an aerosol-plasmid formulation to deliver the cystic fibrosis transmembrane regulator gene to CF patients. They recently completed a Phase I/II study. Megabios, with Indianapolis-based Eli Lilly and Co., also is in Phase I/II with a BRCA-1 gene product for breast and ovarian cancers. A third product is delivery of the SEB/Interleukin-2 (IL-2) genes, which was being tested for malignant melanoma at the University of Denver.

The deals with Lilly and Glaxo generally involve up-front and milestone payments and royalties on sales.

GeneMedicine's partnership with the Corange International Ltd. subsidiary of Roche Holdings Ltd. was expanded in August to cover all cancer indications using the genes for IL-2, IL-12 and interferon-alpha. The research term of the deal was extended for two years, to February 2002.

The IL-2 product will be entering Phase II this quarter. A Phase I/II trial of interferon-alpha is expected early in 1999. And a Phase I/II trial of the IL-12 product is expected after that.

Upon successful completion of one of the trials Gene-Medicine may choose to receive up to 50 percent of profits by sharing development and commercialization costs, or to receive royalties on sales.

Separately, GeneMedicine's alpha-1 antitrypsin product has completed a Phase I study at Vanderbilt University, in Nashville, Tenn. *