Arris Pharmaceutical Corp. this week completed itsacquisition of Khepri Pharmaceuticals Inc. and while theterms of the deal didn't change since the early Novemberagreement, the value to Khepri shareholders increasedsignificantly.

Shareholders of privately held Khepri will get 1.4 millionshares of Arris stock initially and another 530,000 sharesor their cash equivalent, subject to adjustment, in oneyear. Another 350,000 shares are reserved for issuanceupon exercise of options, warrants and exchange rights.

The 2 million shares of Arris (NASDAQ:ARRS) areworth about $30 million based on the $15.13 closingprice of Arris on Wednesday. When the proposed dealwas announced last month, Arris' stock started the day atless than $10 per share, meaning the acquisition wasvalued close to $20 million. (See BioWorld Today, Nov.9, 1995, p. 1.)

Of the initial 1.4 million shares, about 1 million will belocked up until January 1997. The remaining shares willbe subject to shorter lock-up provisions. Arris will haveabout 10.1 million shares outstanding once the new stockfrom the acquisition is accounted for.

Both companies are located in South San Francisco, bothare working on protease inhibitors and there is very littleoverlap in the companies' programs, giving the combinedcompany a strong product portfolio. Analysts hailed thedeal as a biotechnology merger that made a lot of sense.

The acquisition will be accounted for as a purchase, andArris is expected to write off about $20.5 million in thefourth quarter as in-process research and developmentcosts.

"Everybody is excited about the synergies between thecompanies and the opportunities we can pursue," saidShari Annes, vice president, investor relations, for Arris."We're more convinced than ever it was the right thing todo."

The companies are within a few miles of each other. Bothwill remain in operation. Arris, or the "North Campus,"will house the protease program. Khepri, or the "SouthCampus," will be home to the receptor program, thefinance group and certain core technologies.

Annes said about 15 positions, or about 10 percent of thecombined company, will be eliminated due to integration.Khepri had 46 employees, Arris had 102.

She said Arris will end the year with about $28.5 millionin cash and equivalents, which should last two and a halfto three years. That's assuming no money comes in fromnew corporate partnerships or other means.

Khepri has four preclinical programs involving cysteineprotease targets that are candidates for partnershipdiscussions in the first half of 1996, Annes said. The leadopportunity is in rheumatoid arthritis and the othersinvolve other inflammatory indications.

Another program at Khepri (and another partnershippossibility) is neural endopeptidase, a protein in latepreclinical studies being developed for chronicobstructive pulmonary disease and asthma.

Arris has ongoing collaborations with Stockholm,Sweden-based Pharmacia and Upjohn Inc. to developinhibitors of serine proteases involved in blood clotting,and with Bayer AG, of Leverkusen, Germany, forinhibitors of tryptase and chymase for asthma and otherinflammatory conditions. Arris also is working withothers on development of mimetics. n

-- Jim Shrine

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