U.S. Federal Trade Commission (FTC) conditions for clearance ofthe mega-merger between Swiss drug makers Ciba-Geigy Ltd. andSandoz Ltd. to form Novartis AG has resulted in a $60 millionwindfall for Chiron Corp.

The FTC said Novartis' patents in gene therapy, based primarily onCiba's alliance with Chiron, of Emeryville, Calif., and Sandoz's 1995takeover of Genetic Therapy Inc., of Gaithersburg, Md., threatenedcompetition in four broad development areas.

To resolve the antitrust concerns, Novartis, of Basel, Switzerland,agreed to grant non-exclusive licenses for the various gene therapytechnologies to competitors.

One area involved Chiron's patents for gene therapy applications ofthe herpes simplex virus-thymadine kinase (HSV-tk) gene. The FTCsaid that technology had to be licensed to Rhone-Poulenc Rorer Inc.,of Collegeville, Pa.

Because Ciba, and now Novartis, is only a 49.9 percent owner ofChiron, the FTC requirements put the pharmaceutical company in theposition of licensing technology it did not own outright, observedDavid Stone, analyst with Cowen & Co. in Boston.

As a result, Novartis will pay Chiron $60 million over the next fiveyears to compensate it for relinquishing its technology to acompetitor. Chiron will receive royalties for any marketed productusing the HSV-tk gene and also could be paid an up-front licensingfee from Rorer.

In addition, Chiron received cross-licenses from Novartis in anothermajor technology area, Genetic Therapy's broad patent for ex vivogene therapy.

Larry Kurtz, Chiron's vice president of corporate communications,said the cross licensing agreements give his company "a muchstronger gene therapy program," which will compete with bothNovartis and Rorer.

Chiron's stock (NASDAQ:CHIR) closed Tuesday down $0.25 to$18.75.

"Chiron," said Stone, "is a near-term beneficiary of being almost, butnot quite married to Ciba."

Genetic Therapy's ex vivo gene therapy patent is considered by WallStreet analysts so far reaching it will not be enforceable. In addition,some analysts have speculated in vivo gene therapy will become thedominant therapeutic technique.

The other two gene therapy technologies in the FTC's consent decreewith Novartis are use of the Factor VIII gene for treatment ofhemophilia and chemoresistance, which involves making cancer cellsmore susceptible to chemotherapy.

Chiron's cross-licensing agreement with Novartis also gives it accessto Factor VIII for hemophilia gene therapy.

Novartis is required to negotiate licenses with Rorer for Factor VIIIand HSV-tk gene therapies by Sept. 1, 1997. The FTC requiredNovartis to grant licenses specifically to Rorer because of its progressin those gene therapy areas.

"The goal is to put Rhone-Poulenc in a position to compete against[Novartis], thereby resolving the agency's antitrust concerns," FTCofficials said in a prepared statement.

Rorer's gene therapy programs are combined in its RPR Gencelldivision, which includes collaborations with 14 companies andinstitutions. Rorer's stock (NYSE:RPR) gained $0.25 Tuesday toclose at $74.375.

The FTC agreement also forces Novartis to grant licenses "at lowroyalties" for Genetic Therapy's ex vivo gene therapy patent and forpatents using cytokines in connection with ex vivo gene therapy forcell expansion. The licensing deal with Rorer also may include thosepatents.

In the area of chemoresistance gene therapy, the consent decree barsNovartis and Chiron from gaining exclusive rights to products forthat market.

Novartis gained patent rights for the Factor VIII gene through alicense negotiated by Genetic Therapy Inc. from Genetics InstituteInc., of Cambridge Mass. Novartis' patent position in use ofcytokines for cell expansion is derived from Ciba and Sandozcollaborations with Chiron and Genetic Therapy, respectively,involving certain interleukins.

Novartis' most advanced gene therapy program was started byGenetic Therapy prior to Sandoz's takeover. It involves use of theHSV-tk gene in treating brain cancer. The gene therapy is beingevaluated in a Phase III trial. The HSV-tk gene is delivered to braintumors to make them more susceptible to ganciclovir, which kills thecancer cells.

The FTC agreement was the final hurdle in the merger of Ciba andSandoz, both of Basel, Switzerland. The consolidation creates theworld's second largest drug company behind Glaxo Wellcome plc, ofLondon.

Combined 1995 sales of Ciba and Sandoz in the core businesses ofhealth care, nutrition and agribusiness would have totaled $27 billion.

In addition to licensing the gene therapy technologies, the FTCconsent decree requires Novartis to divest itself of Sandoz's cornherbicide business and its pet flea control products.

With clearance of the Ciba-Sandoz merger by the FTC, the twocompanies officially will begin operating as Novartis Friday. Theconsolidation previously was approved by European regulatoryauthorities and shareholders of Ciba and Sandoz. n

-- Charles Craig

(c) 1997 American Health Consultants. All rights reserved.

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