Arris Pharmaceutical Corp. strengthened its position inproteases with Wednesday's agreement to purchaseKhepri Pharmaceuticals Inc. for stock currently valued at$21 million.
Mike King, an analyst with New York-based Dillon,Read & Co. Inc., said this is one of the few biotechnologymergers that makes much sense.
"The fact that both are involved in protease inhibitors andhave little, if any, overlap, gives this company atremendous portfolio," King said. "Combining the abilityof both companies to generate targets and do medicinalchemistry, layered on top of Arris' phenomenal ability todo corporate partnerships, makes it an ideal merger."
Arris' stock gained 50 cents Wednesday to close at$10.38. The merger calls for the issuance of 1.5 millionshares when the deal closes, which is expected in mid-December, and another 525,000 shares or their cashequivalent on Dec. 30, 1996. Of the initial shares, 1million will be locked up until January 1997.
Arris reported 8.7 million shares outstanding on Sept. 30,1995. Khepri shareholders would own about 19 percentof the combined company. Arris expects to write off alarge part of the purchase as in-process research anddevelopment in the fourth quarter.
Both Arris and privately held Khepri are in South SanFrancisco. Khepri, founded about two and a half yearsago, has 44 employees, 36 of whom are in the researchand development component. Its burn rate for the yearwill be about $7.5 million.
John Walker, president and CEO of Arris, said themerged company would have had more than $30 millionat the end of the third quarter, enough to last up to threeyears, assuming no new money comes in from corporatecollaborators.
But new partnerships are planned, with a Khepri programin inflammation expected to be the subject of acollaboration in the first half of 1996, Walker said.
The main attraction for Arris was Khepri's cysteineprotease targets, which are implicated in a number ofdiseases. Last summer Khepri presented at a scientificmeeting its work in rat models of rheumatoid arthritis,and elaborated on that with the publication of a paper in ascientific journal. (See BioWorld Today, Aug. 22, 1995,p. 1.)
Another program at Khepri is neural endopeptidase,potentially being developed for chronic obstructivepulmonary disease and asthma. The protein is in latestages of preclinical development, after which thedecision will be made on whether to continuedevelopment (likely with a partner), said Ron Henriksen,president and CEO of Khepri.
The status of a Khepri subsidiary, called Khepri Canadain Montreal, is to be determined. Two investors affiliatedwith the Quebec government are partners in that venture.
Henriksen said Khepri tried to keep a flexible set ofstrategies and goals in mind as it tried to grow thecompany, particularly in light of the blurring of varioustimelines in the biotechnology industry, such as the timeto initial public offerings. Early in 1995, he said, Khepriofficials began to talk about the possibility of a merger,but only if there were fits in technology, people andphilosophies. They found Arris, about two miles downthe road.
David Stone, a managing director of New York-basedCowen & Co., which advised Arris on the deal and hasbeen familiar with both companies for a long time, said"it looks like an acquisition destined to be smoothlyaccomplished and mutually beneficial.
"It's the kind of consolidation investors have been askingfor and I'm gratified the initial response of the marketwas positive," Stone said.
Arris has corporate collaborations with Stockholm,Sweden-based Pharmacia AB (now Pharmacia & UpjohnInc.) to develop inhibitors of serine proteases involved inblood clotting, and with Leverkeson, Germany-basedBayer AG, for inhibitors of tryptase and chymase, forasthma and other inflammatory diseases. Other dealsinvolve development of mimetics.
"The Khepri acquisition adds to our already robustpipeline and results in a portfolio of new targets moreextensive than that of any other company pursuingprotease drug discovery today," Walker said. "Once thetransaction is completed, we will immediately begin toapply our Delta technology _ initially developed forinhibition of serine proteases _ to Khepri's cysteineprotease targets. n
-- Jim Shrine
(c) 1997 American Health Consultants. All rights reserved.