By Randall Osborne
What began as partnership talks between two genomics companies evolved into a first-of-its-kind buyout, with Gene Logic Inc. agreeing to acquire Oncormed Inc. in a stock swap valued at up to $38 million.
"We've been speaking with them since late 1996," said Michael Brennan, president and CEO of Gaithersburg, Md.-based Gene Logic. "As we discussed how we could work together, it became apparent that it made sense to do a transaction like this."
Under terms of the agreement, Gene Logic will acquire all of Oncormed's outstanding stock for Gene Logic stock. Gene Logic will issue about 4.8 million shares, a number that could be reduced, based on the value of Gene Logic's stock at the time of closing, with the deal's total worth not to exceed $38 million. Gene Logic also will assume outstanding warrants to buy Oncormed stock.
The merger, expected to close in October, is the first between two companies focused mainly on genomics, and Brennan said more are likely in that realm of the industry.
"Specifically in the genomics and bioinformatics arenas, there are going to be big advantages from [achieving larger] scale and critical mass," he told BioWorld Today. "It's more and more difficult to manage many small relationships."
The deal already has been approved by the boards of both companies, and is expected to qualify as a tax-free reorganization.
Oncormed, also of Gaithersburg, will move its operations to Gene Logic's facility. "They're literally within walking distance of us," Brennan said. "The integration is going to be fairly straightforward."
Oncormed's Tissue Repository A Big Attraction
He said the merger offers two main benefits. First, it gives Gene Logic more technology, especially Oncormed's tissue repository, which is used to characterize genes, establishing their clinical relevance and their significance in patient profiles.
"[The repository] has been very carefully assembled from a variety of human organ types, normal and diseased," Brennan said. "This allows us to expand out our database business more rapidly than we could do if we had to acquire [tissue samples] independently."
Gene Logic has extended a line of credit worth up to $1.5 million to Oncormed, based on the tissue repository asset, until the agreement closes.
"We don't expect them to need it," Brennan said. "They've got their own cash, but we'll see."
As of March 31, Oncormed had $3.16 million in cash, with a net loss for the quarter of $2.89 million. Gene Logic had $41.8 million cash for the quarter, with a net loss of $2.1 million.
The second benefit to the merger is Gene Logic's chance to use its database and screening capabilities to broaden Oncormed's partnerships with companies that include Merck & Co., of Whitehouse Station, N.J.; Schering-Plough Corp., of Madison, N.J.; and Rhone-Poulenc Rorer Inc., of Collegeville, Pa.
"We're not going to be an integrated pharmaceutical company," Brennan said. "We're always going to be a discovery business. But we can make [Oncormed's collaborations] more comprehensive deals, embracing larger pieces of the drug development pipeline."
The buyout is described as a "forward triangular merger." Brennan said the phrase is "acquisition legalese. Really what it means is that we created a merger subsidiary, and Oncormed is merged into that subsidiary" which exists only on paper.
"From a practical standpoint, it's run as a single corporation," he said.
A functional genomics company, Gene Logic uses what it calls Restriction Enzyme Analysis of Differentially Expressed Sequences, or READS, technology to create a molecular topography "snapshot" of all genes in a tissue sample. A series of snapshots are compared in a "movie" to track changes in gene expression as disease develops.
Along with a suite of databases, the company is developing a reusable Flow-thru Chip for high-throughput analysis of changes in gene expression.
Gene Logic went public with a $24 million initial public offering late last year and entered deals earlier this month with Hoechst Schering AgrEvo GmbH, of Frankfurt, Germany, and Madison, N.J.-based American Home Products. The Hoechst partnership is worth at least $45 million; terms of the AHP deal were not disclosed. (See BioWorld Today, Nov. 24, 1997, p. 1, and July 2, 1998, p. 1.)
Brennan will remain as president and CEO of Gene Logic. Douglas Dolginow, president and chief operating officer of Oncormed, will become a senior vice president of Gene Logic, working initially in the pharmacogenomics area. Timothy Triche, chairman and CEO of Oncormed, will step down but will remain as a consultant to Gene Logic.
Acting as financial advisors in the merger were Furman Selz LLC, of New York, for Gene Logic, and Hambrecht and Quist LLC, of New York, for Oncormed.
Gene Logic's stock (NASDAQ:GLGC) closed Tuesday at $7.937, down $0.25. Oncormed's shares (AMEX:ONM) ended the day at $3.312. unchanged. *