Genetics Institute Inc. and shareholders of its spin-offcompany, SciGenics Inc., appear to be headed to aconfrontation over the $29.3 million buy-back offer madeby Genetics Institute.

SciGenics stock (NASDAQ:SCGN) closed Thursday at$14.13, higher than the $14-per-share offer price madelast week by Genetics Institute. The offer will be openthrough Oct. 11, 1995. To become effective a majority ofshares must be offered.

SciGenics shareholders have expressed skepticism overGenetics Institute's assertion that two SciGenicsprograms both turned out to be flops, and have littleresidual value. Genetics Institute said its $14-per-shareoffer was made in good faith and as a goodwill gesture. Afuture offer, if made, likely would be substantially less,Genetics Institute said.

Mark Simon is a managing director of Robertson,Stephens & Co., which was the lead underwriter forSciGenics' public offering in 1991. He said GeneticsInstitute's offer sends the wrong message: that GeneticsInstitute is turning its back on those who invested inSciGenics.

It went public at $22 per unit to develop two programs:recombinant macrophage colony stimulating factor (M-CSF) and embryonic growth and regulatory proteins(EGRP). Development of the M-CSF program essentiallywas stopped when efficacy was not demonstrated in leadindications. And no EGRP factors have been discovered,Genetics Institute said.

"The question," Simon said, "is can we truly believe thereare no factors, or valuable technology that could beapplied to other areas. Genetics Institute has had anumber of top scientists working in the area, and I'm sureit has value.

"And M-CSF has value, too," Simon told BioWorldToday. "Because Genetics Institute has been unable tofind indications for it doesn't mean it's a dead product.This is a company many people respect for its strongtechnology in the area of proteins, but its execution ofclinical trials leaves a lot to be desired."

Three of SciGenics' five directors were deemedindependent. They voted to accept the $14-per-shareoffer. Genetics Institute's initial offer of $12 per sharewas made in June when the stock was trading at $13.

Dennis Harp, Genetics Institute's director, corporatecommunications, said his company will not exercise itscall option or program-purchase options by their May 31,1996, expiration dates. He said the $14-per-share offerwill allow Genetics Institute to recoup the cash left inSciGenics (about $9 million), gain some tax advantagesand generate goodwill among investors.

Genetics Institute on Wednesday began mailing its tenderdocument, which spells out the status of the programs andits reasons for making the tender offer at this time. One isthat stopping the relationship now would allow GeneticsInstitute flexibility in its related discovery programs;another is the resources could be allocated for programsmore likely to pan out.

"It's really unfortunate," Harp said of the shareholderbacklash. "We decided we're not going to exercise theoptions, and yet we're still willing to pay something. Itwould be sad if our good intention of giving somethingback would be misconstrued and misinterpreted and inthe end our efforts to do rights would have beenrejected."

Major shareholders of SciGenics told BioWorld Today onMonday that they were disappointed with the offer,particularly in that it was well below stipulated prices andwell before the May 1996 option dates. They said it wasimpossible to assign a value to a program in such an earlystage as EGRP. Those investors were either unavailableThursday or said they could not comment because theyhadn't received a copy of the tender document. (SeeBioWorld Today, June 26, Sept. 8 and Sept. 12, 1995, p.1.)

Shareholders Have Very Long Memories

Simon warned, "There are a number of sophisticatedshareholders who hold this security. Those shareholdersmay have a very long memory."

West Highland Capital Inc., of Greenbrae, Calif., holds44 percent of SciGenics' 2.1 million outstanding shares.San Francisco-based Biotechnology Fund L.P. holds 10percent. And recently disclosed transactions show thatMentor Partners L.P., of New York, raised its stake to12.8 percent.

Harp called unfounded the charges that the SciGenicsdirectors were too beholden to Genetics Institute tonegotiate strongly, or that the information GeneticsInstitute presented to the directors did not tell the wholestory about the research. He said, however, that "herehave been some consulting arrangements" involving thedirectors and Genetics Institute, but that none of thedirectors stands to profit from the SciGenics buy-back.

Simon speculated that a major motivation in GeneticsInstitute buying back SciGenics is that it "wants to avoidprotracted litigation. It would not be in Genetic Institute'sinterest to have its scientists appear in court and describetheir daily activities in terms of SciGenics or non-SciGenics activities."

The implication is that researchers assigned to SciGenicscould have made other discoveries or gained informationvaluable to Genetics Institute. SciGenics then couldattempt to stake some sort of claim to those discoveries.

"Maybe one option," Simon said, "is for [SciGenicsshareholders] to pull up to the loading dock with the truckand take the technology. Maybe they could build morevalue than Genetics Institute is willing to pay. Peoplethink they [Genetics Institute] are trying to steal thistechnology cheaply." n

-- Jim Shrine

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

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