By Debbie Strickland

In the wake of product setbacks and the pull-out of big pharma partners, Cortech Inc. is merging into a fellow Colorado firm, BioStar Inc., a privately held, Denver-based diagnostics company that will gain public trading status and Cortech's cash, along with the thus far disappointing anti-inflammatory therapeutics portfolio.

BioStar's shareholders will receive 28.5 million newly issued shares of Cortech stock, giving them about 60 percent ownership of the merged company. Cortech shareholders will retain a 40 percent stake. The stock transaction is valued at $15.13 million, based on the $0.531 Tuesday close of Cortech's shares (NASDAQ:CRTQ).

BioStar also gains Cortech's cash, which as of Sept. 30 totaled $16.1 million, following a nine-month net loss of $4.7 million. At that point, the company had already "substantially discontinued its research and development operations," according to its third-quarter report.

The merger transaction, which is subject to stockholder approvals, is expected to close in the second quarter of 1998. Whether the merged firm will use Cortech's facilities is uncertain, though some of its 15 employees will join BioStar. Kenneth Lynn, Cortech's chairman and CEO, will serve as a consultant.

The new company, which will be given a name in the coming weeks, will not internally pursue Cortech's therapeutic projects, said Teresa Ayers, president and CEO of Boulder-based BioStar and of the newly merged firm.

Instead, she said, options for developing those products include "outlicensing, an outright sale, or the creation of a separate company that would seek separate funding."

"It's too early for us to know which might be the right answer," Ayers said.

BioStar's expertise centers on making and marketing point-of-care in vitro diagnostics based on its Optical ImmunoAssay technology. The company sells tests for Strep A, which causes strep throat; Strep B, which causes neonatal septicemia; and chlamydia. BioStar, whose revenue growth has averaged nearly 90 percent annually over the last four years, is developing tests for influenza, pneumonia and gonorrhea as well.

The company is projecting 1997 revenues of more than $15 million and a net loss of about $1.9 million for the year.

Cortech's lead product was Bradycor, a bradykinin antagonist that in Phase II brain injury trials had no significant effect on the primary endpoint, intracranial pressure. In late March, London-based Smithkline Beecham plc discontinued development.

The company also lost Hoechst Marion Roussel at the Phase II level as a partner for CE-1037, a parenteral human neutrophil elastase inhibitor designed to treat acute respiratory distress syndrome and cystic fibrosis. *