By Debbie Strickland

It's less than a month before shareholders vote on the proposed $166 million merger between ARRIS Pharmaceutical Corp. and Sequana Therapeutics Inc., and the head of a San Francisco investment fund with holdings in ARRIS is not holding his peace.

"They chose a structure that's terrible for ARRIS shareholders," said Mark Lampert, general partner of Biotechnology Value Fund LP, which owns 5 percent of ARRIS. "The problem is the acquisition format. They're not only pooling future efforts, but forcing us to trade half of ARRIS' historical assets for half of Sequana's."

ARRIS, which focuses on discovery of small-molecule drugs, has clinical-stage and near-clinical product candidates under double-digit royalty agreements, said Lampert, whereas genomics specialist Sequana has single-digit royalties "on things that are years away from the clinic."

In addition to the valuation concern, Lampert worried that the dilution of resources would lead to overhead cost increases and diversion of attention from ARRIS' established programs.

If approved, the merged company, AxyS Pharmaceuticals Inc., will have almost 400 employees, and will retain all ARRIS and Sequana sites, including the Cambridge, Mass., location of Sequana's subsidiary, NemaPharm Inc.

The merger goes before ARRIS shareholders for approval Jan. 7.

"We're not alone," Lampert said. "Based on our conversations, we believe like-minded shareholders own 20 to 25 percent of ARRIS."

A different deal structure — perhaps a joint venture — could perhaps produce a "win-win" outcome, he said.

"We're pushing for a restructuring of the deal," he said. "It makes more sense, as opposed to trying to haggle over the price."

He stressed that Biotechnology Value Fund's stance does not indicate a quarrel with ARRIS' programs or general direction, but rather a difference of opinion on this particular deal.

"ARRIS is a great company, and I love ARRIS' management," Lampert said, "but great management teams are only human."

Under terms of the deal, ARRIS, of South San Francisco, will take over Sequana, of La Jolla, Calif., by issuing 1.35 shares of common stock for each share of Sequana. ARRIS President and CEO John Walker will remain as CEO of AxyS, which will be headquartered at ARRIS. (See BioWorld Today, Nov. 4, 1997, p. 1.)

AxyS, Walker has said, will emerge as an integrated "gene-to-drug" company with expertise in combinatorial chemistry, genomics, medicinal chemistry and clinical testing.

Analysts Mike King and Mark Simon shared Lampert's admiration for Walker's leadership to date, but expressed cautious enthusiasm for the merger.

"They didn't overpay for Sequana," said King, of Vector Securities International Inc., in Deerfield, Ill.

Khepri Deal Also Criticized

King recalled ARRIS' late 1995 acquisition of Khepri Pharmaceuticals Inc. for $21 million was criticized at the time. But within a year of that acquisition, ARRIS inked a deal with Merck & Co., of Whitehouse Station, N.J., for Khepri's osteoporosis program — an agreement that was worth more than Khepri's purchase price.

King, however, did acknowledge that Sequana would not have been his first choice for an ARRIS genomics acquisition, but that he "can't really pass judgment" until he takes a closer look at the firm.

"John Walker's a good businessman, and I'm giving him the benefit of the doubt," he said. "I think ARRIS' management considered the merger very carefully and so did the board."

Simon has "friends on both sides of the fence," with each side offering "strong arguments."

"The people who are opposed to the merger are very excited, as we are, about the Delta technology [a tool for designing small molecules that are selective and potent inhibitors of protease]," said Simon, managing director of BancAmerica Robertson Stephens & Co., in San Francisco. "They would like to see John [Walker] continue to focus on commercializing the Delta technology rather than building the gene-to-drug company."

Like King, Simon's inclination is to trust the company's leadership for now.

"In the end," he said, "an investor in ARRIS prior to the Sequana announcement implicitly had faith in the management team, and therefore should have faith in their abilities to harness this merger."

Whichever way the vote goes, Simon said, "ARRIS will be a very strong company."

ARRIS' shares (NASDAQ:ARRS) closed Tuesday at $10.25, down $0.125. Sequana (NASDAQ:SQNA) was down $0.25, closing at $12.75. *