The agreement reached last week for Genetics InstituteInc. to buy SciGenics Inc. is not as clear-cut as thoughtsince SciGenics' two largest shareholders oppose thedeal. Together, they could block it.

Genetics Institute last week offered $14 per share, orabout $29 million, to repurchase SciGenics, a company itspun off in 1991 to research and develop recombinantmacrophage colony stimulating factor (M-CSF) andembryonic growth and regulatory proteins (EGRP).

SciGenics went public in a 2.1-million-unit offering at$22 per unit. The units later separated into one commonshare and one warrant to purchase Genetics Institute(NASDAQ:GENIZ) stock. Six institutions hold 70percent of the outstanding shares.

Genetics Institute, of Cambridge, Mass., has program-purchase and call options that expire in May 1996. Underthe call option, Genetics Institute can buy back SciGenicsfor $69.83 per share; the current program-purchase pricefor M-CSF is $131.1 million and $46 million for EGRP.

"I am surprised and disappointed with the way GeneticsInstitute has handled the whole thing so far," said LangGerhard, president of SciGenics' largest shareholder,West Highland Capital Inc., of Greenbrae, Calif., whichowns 44 percent of the company. "These kinds ofunderwritings are done within the context of goodwill.We did not sign up for a deal that said, `Let's have acommittee decision internally nine months before May1996 and see if we can vote on what it's worth.'

"In the prospectus there are certain prices described thatthey would pay at certain dates if for some reason theydecided internally they wanted to have rights to theprogram," Gerhard told BioWorld Today. "If they wantthe programs, they should refer to what they wrote downthat they were willing to pay for it."

The M-CSF program has failed to show efficacy in thefirst two intended indications. The EGRP program hasremained early stage since 1991. Harp said no factorshave been found to date.

Mark Lampert is a general partner at San Francisco-basedBiotechnology Value Fund L.P., which owns 10 percentof SciGenics. He said nowhere in the SciGenicsprospectus was there a provision for changing the optionprices.

Both Lampert and Gerhard said there was never anexpectation that the EGRP program would be anythingbut still early stage at this point. Gerhard said, "Wecannot determine a `value' on a mature biotech programhalf the time before it goes into an FDA panel discussion.The concept of value when you're dealing in this ilk ofassets is absurd."

Dennis Harp, director, corporate communications forGenetics Institute, said the $14-per-share tender offer stillis scheduled to be launched, probably by Wednesday, andwill remain open for 20 business days. The offer iscontingent upon a majority of shares being tendered.

"Some of the points Mr. Gerhard has raised," Harp said,"will be answered in the tender document and willprovide more information about why Genetics Institute ismaking the tender offer at this time."

Harp said he could not elaborate pending the issuance ofthe tender document. But he said the document wouldaddress the issue of goodwill.

The inference is that the document will state that neitherprogram is panning out, and that Genetics Institute isbeing generous in its offer.

"We're offering $14 per share for the common and thewarrant is still trading at $7.50," Harp said. "Thosepeople who bought in at the initial public offering maynot see a significant reduction of their investment; in fact,to the extent that they continue to own the warrant, theymay see considerable appreciation."

SciGenics stock (NASDAQ:SCGN) closed Monday at$13.88, up 13 cents. Genetics Institute was up 75 cents to$39.50. n

-- Jim Shrine

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