Genzyme Corp. helped clear up an uncertainty about its HAL lineWednesday when it offered $93 million in stock for the rights held bya partnership that funded early development of the anti-adhesionproducts.
The partnership was established in 1989 when 770 investors togetherpurchased 738 units at $50,000 apiece, raising $36.8 million.Genzyme over the past few months has filed premarket approvalapplications for Seprafilm and Sepracoat, the lead products from thehyaluronic acid-based line.
The products are designed to reduce the incidence and extent ofpostoperative adhesions, which can cause complications and lead toadditional surgeries.
Investors in the financing vehicle were called the Surgical AidPartnership, or Genzyme Development Partnership L.P. Rather thanoffering the lump-sum payment, Genzyme could have exercised apurchase-option agreement that would have entailed a cash paymentand significant royalties.
Under that option, Genzyme and the partnership would have formeda joint venture upon product approval. They would share profits fortwo years, after which Genzyme would pay $26 million to thepartners plus royalties of 10 percent on North American sales for 10years and 6 percent on royalties on European sales for 10 years, aGenzyme spokeswoman said.
Cowen & Co. analysts liked the move by Cambridge, Mass.-basedGenzyme.
"It's completely in line with our expectations that the company wouldbuy back the partnership," said Cowen biotech analyst JoyceLonergan. She said Genzyme's quantifying the buyback with the $93million stock offer cleared up uncertainty surrounding thepartnership, and took care of concerns that the royalty and milestoneobligations would cut into profits.
Two independent directors of the general partner must approve theoffer, then send it to vote, where two-thirds of the limited partnerswould have to affirm the offer. Another stipulation is that Genzymemust be sure it can write the acquisition off as in-process researchand development.
The independent directors could not be reached for comment. Butgiven that Genzyme has said it expects huge sales from the products,the offer could be seen as low to the original investors.(The partnersalso got warrants when they invested which, given the extraordinaryrise of Genzyme's stock the past year, offered another profitopportunity. The partnership's money ran out early in 1994, andGenzyme contributed about $12.5 million since then, a spokeswomansaid.)
Lonergan said another benefit of the offer is that it was made forstock. That helps two ways. One is that the company can use its largecash balance to aggressively invest in sales and marketing, she said.And the increase in the stock means fewer shares would be issued,she said.
Lonergan said the $93 million and warrants make it a profitable dealfor those in the partnership. She wouldn't expect the offer to be seenas lowball because Genzyme doesn't want to continue negotiations,and that every company wants to keep doors to the capital marketsopen.
Genzyme's stock (NASDAQ:GENZ) gained $3.38 Wednesday toclose at $75.88. By contrast the company in October sold 2.5 millionshares at $51.25 each. The stock was trading at less than $30 a yearago before the first HAL results were disclosed.
"Genzyme now has quantified something for me that I didn't knowhow to quantify," Lonergan said of the offer. "If Genzyme is willingto fork over $93 million it tells you they have confidence in the HALproducts. It's a sign Genzyme believes in the potential of the productand is willing to pay for it." n
-- Jim Shrine
(c) 1997 American Health Consultants. All rights reserved.