By Randall Osborne

Sequana Therapeutics Inc., which went public two years ago at $9 per share, said it agreed to a $166 million buyout by Arris Pharmaceutical Corp. in a stock swap that forms a new company and pays Sequana's stockholders about $16.20 per share.

The firms characterized the merger between genomics-based Sequana, of La Jolla, Calif., and drug development company Arris, of South San Francisco, as the wave of the future, but some analysts said the deal was more straightforward — a smart business move by Sequana, which has had its ups and downs.

In this case, said Kevin Kinsella, Sequana's president and CEO, "it's the same thing."

John Walker, president and CEO of Arris, said it's even more. Walker called the deal "a seminal event in the biotechnology industry."

The new entity brought about by the merger, named AxyS Pharmaceuticals Inc., will begin operating early next year at Arris' site and represents "the first true gene-to-drug company," said Walker, who will serve as CEO of AxyS.

"Where Sequana ends, Arris begins," Walker said.

Kinsella will step down from day-to-day operations but remain a board member during the transition. "Beyond that, I have no future plans," said Kinsella, adding that he was "delighted to have this coincidence of events."

Under terms of the merger, Arris will issue 1.35 shares of common stock for every share of Sequana's. Based on the $12 closing price Friday of Arris' stock, Sequana's shares would be valued at $16.20. Sequana has $10.25 million shares outstanding. (See BioWorld Today, Special News Bulletin, Nov. 3, 1997.)

Sequana's deal with Arris seems to follow a trend, of which another strong example is January's takeover by Millennium Pharmaceuticals Inc. of ChemGenics Pharmaceuticals Inc., with the Cambridge, Mass.-based firms exchanging nearly $90 million worth of stock. (See BioWorld Today, Jan. 22, 1997, p. 1.)

Sequana's stock has risen as high as $29, Kinsella noted, and hit $18.75 in the past year, but has dropped as low as $8.1. Lately it has traded in the low teens.

Wall Street reacted appropriately to news of the merger, with the company's shares (NASDAQ:SQNA) closing at $13.937, up $2.687.

The takeover is pending approval by the Securities and Exchange Commission and at least 50 percent of the shareholders of both companies. Twenty percent of Sequana's shareholders already have said they favor the merger.

Mary Ann Gray, an analyst with SBC Warburg Dillon Read Inc., of New York, said Sequana's deal with Arris or some other company was almost inevitable.

"It was just a realization of what's going to happen with companies with limited things to offer," Gray said. "There's a maturing in investors' minds concerning genomics and what it means. For a while, people were all excited when companies could say, 'We have the asthma gene.' But that kind of news release has lost its impact."

Mike King, an analyst with Vector Securities International, of Deerfield, Ill., said the deal with Arris could be a way for Sequana to revitalize, but not entirely. "I don't think John Walker would fall for that," King said.

Said Walker: "We did our homework along these lines." Sequana was not well-covered by analysts — who failed to give Sequana proper credit for its "creative deal-making in functional genomics," Walker said.

Also, Sequana had not done a deal in a long time. "We believe that was answered in spades today," Walker added.

King said companies such as Sequana must integrate or lose royalties to multiple collaborators. "They have to present the pharmaceutical industry with a compound or family of compounds that's ready to go," he said.

Both companies will benefit from rounding out their technology, Gray agreed. "In the drug-discovery area, it's gotten pretty fragmented," she said. "A lot of companies have been popping up, in genomics and all around, and the pie is carved up in too many small pieces."

Kinsella said Sequana followed King and Gray's line of thinking. "We have a very healthy company, and our obligation is to look to the future and plan for further out," Kinsella said. "The only model for long-term success has been bringing a therapeutic product to market. Not a diagnostic product, a therapeutic product."

AxyS, with more than 320 researchers and almost 400 total employees, will retain all Arris and Sequana sites, including the Cambridge, Mass., location of Sequana's subsidiary, NemaPharm Inc.

Even as its big deal with Arris was in the works, Sequana was shopping for collaborators. Sequana officials said they have negotiated a five-year partnership worth up to $103 million with the Parke-Davis division of the Warner-Lambert Co., of Morris Plains, N.J., to develop drugs for schizophrenia and bipolar disorder.

AxyS, using Sequana's technology, will receive nearly half of the money involved in the Warner-Lambert deal in up-front licensing fees and research funding. More may be earned in milestone payments and additional research funding, and the agreement can be extended in one-year increments to a period of eight years.

"It's only [Sequana's] fourth deal," King noted. Parke-Davis retains the rights to small-molecule drugs associated with the discovered genes, while AxyS keeps the rights to protein therapeutics or diagnostics, Walker said.

Sequana, Arris Both Undervalued By Wall Street

King said Arris' stock, like Sequana's, has been undervalued. "Here's a company with $300 million-plus in guaranteed funding from pharmaceutical collaborators," King said. "Since they weren't getting a premium for their drug- discovery technology, the risk of doing a dilutive deal like they've done is minimal."

Sequana's alliances combined with Arris' add up to $500 million in funding for AxyS.

Also, Sequana officials said the company and Glaxo Wellcome plc, of London, will renegotiate the terms of their alliance in diabetes and obesity, allowing each to retain rights to certain gene discoveries. The companies said they hope to realign their partnership in accordance with the needs of each.

Sequana and Glaxo signed their agreement in 1994 for diabetes and expanded it two years later to include obesity. In September, they announced they had identified distinct regions of DNA believed to contain genes associated with non-insulin-dependent diabetes.

In the next several weeks, Walker said, AxyS will announce another collaboration out of the Arris pipeline.

Sequana has about $50 million in cash, Kinsella said, with a net loss of $12.5 million for the first nine months of 1997.

As of Sept. 30, Arris had $56.31 million in cash, with a net loss of $7.75 million for the first nine months of 1997. Arris' stock (NASDAQ:ARRS) closed Monday at $11.125, down $0.875. *

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