By Charles Craig

Cell Genesys Inc. has proposed a takeover of struggling Somatix Therapy Corp. in a stock swap valued at $115 million.

The anticipated merger of the two gene therapy companies was reported in Monday's issue of BioWorld Today. The firms, both developing gene therapy products, confirmed the article Monday. The takeover, approved by both boards, is expected to be complete by April following shareholder acceptance.

In the agreement, Cell Genesys will pay 0.385 shares for each Somatix share. Somatix has about 33 million fully diluted shares. Based on Cell Genesys' $9.125 closing price Friday of its stock (NASDAQ:CEGE), the swap is valued at $115 million. Following the takeover, Cell Genesys will have about 30 million shares outstanding. The deal values Somatix shares at $3.51.

Cell Genesys ended Monday down $0.313 to $8.812. Somatix (NASDAQ:SOMA) finished at $3.187, down $0.625.

Officials of the companies said Somatix's Alameda, Calif., offices will be closed and operations will be merged will Cell Genesys at its Foster City, Calif., headquarters. The consolidation will result in a 20 percent reduction in the combined work force.

The merged companies, which will adopt a new name, will be headed by Cell Genesys' chairman, president and CEO, Stephen Sherwin, and his senior management team.

In October 1996, Somatix, short of cash, postponed a Phase III trial of its lead product, a GVAX cancer vaccine for melanoma, and reduced its work force by 30.

Edward Lanphier, Somatix's chief financial officer, said the company currently has 100 employees. In addition to its gene therapy programs, Somatix brings to Cell Genesys $9.7 million, the amount of cash it had as of Dec. 31, 1996.

Somatix's fiscal year ended June 30, 1996. The company reported a net loss of $21 million for the year.

Somatix chairman, president and CEO, David Carter, will not remain with the merged companies, but will become a director on the new board. Lanphier said he also is leaving Somatix.

Both Somatix and Cell Genesys have developed ex vivo and in vivo gene therapy programs.

Somatix's financial difficulties were caused, in part, by its failure to attract a corporate partner for the GVAX cancer vaccine program. Analysts noted the treatment procedure being evaluated in Phase III studies was expensive and time-consuming.

Kathleen Glaub, Cell Genesys' chief financial officer, said the postponed Phase III GVAX cancer trial will not go forward. Instead, Cell Genesys and Somatix will begin clinical trials with a second generation product described by Lanphier as faster and less costly.

The initial GVAX cancer vaccine used a retroviral vector to modify a cancer patient's tumor cells with genes to secrete granulocyte macrophage colony stimulating factor (GM-CSF), a protein that stimulates the immune system to attack cancer cells.

Lanphier said the second generation product, still using autologous tumor cells, employs an adenoviral vector to transduce the cells with GM-CSF genes.

Somatix also is developing an even simpler GVAX product, which uses allogeneic tumor cell lines, eliminating the process of removing patients' tumor cells for genetic manipulation and allowing the vaccine to be manufactured on a commercial scale.

In addition, Somatix has a gene therapy program targeting central nervous system disorders and stem cell gene therapy initiatives for infectious diseases and cancer.

New York-based Bristol-Myers Squibb, in 1995, agreed to buy $20 million worth of Somatix stock in return for getting right of first offer to co-develop the GVAX cancer vaccine. Bristol-Myers, which favored the Cell Genesys buyout of Somatix, is not expected to collaborate on the GVAX program.

Cell Genesys' most advanced product is its ex vivo AIDS gene therapy under evaluation in Phase II trials. The company is developing the treatment in a potential $160 million collaboration with Hoechst Marion Roussel, of Frankfurt, Germany.

Cell Genesys officials said they expect a burn rate of $20 million in 1997 for the combined Somatix-Cell Genesys operations. *