Genetics Institute Inc. is proposing the acquisition of SciGenics Inc.for about $25.2 million in cash, or $12 per share, less than SciGenics'current share value.

Genetics Institute (GI) spun off SciGenics in 1991 to research anddevelop recombinant human macrophage colony stimulating factor(M-CSF) and embryonic growth and regulatory proteins.Development of M-CSF has been discontinued in cancer andinfectious disease indications, but is continuing in a cholesterol-lowering area.

SciGenics went public in May 1991 at $22 per unit in an offering thatraised about $42 million. The Cambridge, Mass. company has about2.1 million closely held and lightly traded shares outstanding, about$11 million in cash and equivalents as of March 31, and reported anet loss of $2.5 million in 1994.

David Crossen, director of health care services at New York-basedUBS Securities, said GI's offer may indicate that it is interested in theproducts, not the hard assets. "One might infer Genetics Institute seessome opportunity for [M-CSF]," he said. "Genetics Institute clearlyneeds to build up a pipeline, especially with IL-12 on the ropes."

Gina Brazier, manager, corporate communications for GI, said thecompany is in negotiations with the SciGenics board. "We can't, as amatter of policy, comment on the strategy of why we're doing it andhow we arrived at that figure."

The price for exercising GI's stock purchase option agreement now is$69.83; originally it was $33.48. Genetics Institute holds noSciGenics stock, Brazier said. Six institutional investors hold 70percent of the outstanding stock, the largest being West HighlandPartners Ltd., of Green Bray, Calif., which holds 30.4 percent, shesaid.

SciGenics stock (NASDAQ:SCGN) closed Friday at $13.50 pershare, down 25 cents, after reaching a high of $14.25 in trading of32,000 shares. GI (NASDAQ:GENIZ) was unchanged Friday at$35.50 per share. SciGenics shareholders got a warrant to purchaseone share of GI at $35.92 _ in addition to one SciGenics share _when they bought units in the initial public offering.

"We've made a proposal to the [SciGenics] board, and we'll wait tohear their response," Brazier said. "There's no deadline for them toreply." She said the three independent directors on SciGenics' five-person board will evaluate GI's proposal.

Joyce Lonergan, an analyst in Cowen & Co.'s Boston office, said thelower-than-value bid by GI could be the first round in a negotiatedbid price. That the stock didn't drop closer to the offer price couldindicate that shareholders think the offer will come up and/or that theshareholders would only hurt themselves since the stock is closelyheld.

Edmund Debler, an analyst with New York-based Mehta and Isaly,said M-CSF fundamentally is a limited molecule, one in whichSciGenics wouldn't expect many offers. "The reason I think itbombed out is it has a nasty side-effect profile," he said. "That's notnecessarily going to go away in a different indication.

"If a molecule doesn't show promise, the limited partner is stuck withit," Debler said. "Who better to take it back than the partner, at alower price. That's the bad side to these spin-outs, these off-balancesheet financings."

Brazier said patient accrual in a Phase I/II trials of M-CSF in acholesterol-lowering indication _ familial hypercholesterolemia, agenetic disorder with a small patient population _ recently wascompleted, and results should be available by the end of the year. Theembryonic growth program still is in the research stage.

Crossen said GI now essentially is a royalty-earning company thatdoesn't come close to breaking even. "The critical area for them isnew products," which he said GI can do with access to about $250million in cash (as of March 31). n

-- Jim Shrine

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