By Mary Welch

In a deal valued at $177 million, Cell Pathways Inc. will acquire and merge with Tseng Labs Inc. in exchange for more than 5 million Cell Pathways shares.

Privately held Cell Pathways expects to have $45 million in cash and about 24 million publicly traded shares when the deal is finalized. Through the merger, Cell Pathways gains $28 million in cash from Tseng.

In the transaction, which Tseng's Chairman and CEO Jack Gibbons calls "unique," Tseng's stockholders will exchange all of their stock tax-free for about 5.5 million Cell Pathways shares.

With this exchange, the former Tseng shareholders will own about 23 percent of the new company. Tseng, of Norristown, Pa., currently has 15 million shares outstanding. Based on the $2.69 closing price of Tseng's stock (NASDAQ:TSNG) June 23, the proposed transaction has a total value of about $177 million.

"The value of the companies [is] reflected in the deal," said Robert Towarnicki, president and CEO of Horsham, Pa.-based Cell Pathways. "We took the market cap of Tseng and did the math."

Upon approval by shareholders of both companies and the Securities and Exchange Commission, Cell Pathways will be listed on the Nasdaq exchange and Tseng will be delisted. It is expected the deal will close in early October.

The new holding company will be called Cell Pathways Inc. and it will have two subsidiaries, Tseng and CPI, both with limited functions.

New York-based Salomon Smith Barney assisted Cell Pathways in the deal; Janney Montgomery Scott, of Philadelphia, represented Tseng.

Lead Product Under Study In Seven Indications

Founded in 1990, Cell Pathways focuses on the prevention and treatment of cancer. The company's lead compound, FGN-1 exisulind, is in or will soon start clinical trials in seven indications, including three Phase II/III trials for prevention of breast and colon cancer recurrence and for the treatment of sporadic adenomatous colonic polyps.

Another Phase III trial is ongoing for adenomatous polyposis coli, a disease characterized by numerous precancerous colon polyps.

A pilot study for the treatment of lung cancer was started in December 1997, and plans are under way for Phase II trials for treatment of Barrett's esophagus syndrome and cervical dysplasia later this year.

Cell Pathways' technology is based on sparking selective apoptosis, or programmed cell death, in precancerous or cancerous cells without harming healthy ones.

"It's a financial transaction," Towarnicki, who will head the new company, said of the deal. "We filed for an initial public offering [IPO] last October [trying to raise about $30 million]. But the market was not receptive to IPOs at that time. We pulled the registration in April and did a private placement. That gave us another year and a half of life. But we saw this as a good opportunity to have access to more money, which will help us as we very aggressively pursue clinical trials.

"For us, it's business as usual," he added.

Cell Pathways raised $18 million in May through private financing and secured another $3.6 million from current shareholders who exercised their rights of first refusal for the purchase of additional shares. The company also raised $17.6 million in 1997. (See BioWorld Today, May 15, 1998, p. 1.)

Tseng Labs was founded by five partners in 1983 as a graphics chips company. "Our stock was worth 10 cents when we started out," said Gibbons. "We grew and in 1990 we had sales of $80 million and $14 million after taxes. Then we started feeling the competitive pressure and decided to save what was left."

In December 1997, four of the partners bought out the fifth partner, Jack Tseng, a Taiwanese immigrant, for $5.2 million. Also that month, Tseng Labs sold its graphic design assets to ATI Technologies Inc., of Toronto, for $3 million.

Forty of those associated with Tseng, including two of the founders, David Hui and Lou Aynat, joined ATI. The two remaining founders, Barbara Hawkins and Gibbons, remained with Tseng and probably will become directors of the new company, Gibbons said. "I don't expect to have any active role in the new company."

The company, currently down to seven employees, essentially has no operations.

"I applaud our board for making this decision. It took courage," he said. "We looked at about 100 potential deals and this one worked."

Tseng's stock Wednesday closed at $2.375, down $0.312. *

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