Chiron Corp. and Genelabs Technologies Inc. said Friday they areforming a worldwide diagnostics collaboration that will pay Genelabsup to $24 million, and eventually could lead to Chiron acquiringnearly all of Genelabs' diagnostics business.

One of the main attractions in the deal is the hepatitis G virus (HGV),recently discovered by Genelabs and government collaborators.Chiron paid Genelabs $5 million, and will pay another $10 millionupon completion of a definitive agreement. The $10 million equitypurchase can be converted, after five years, into Genelabs commonstock or applied to half the purchase price of Genelabs' diagnosticsbusiness.

Chiron, of Emeryville, Calif., also will pay Genelabs up to $9 millionrelated to research milestones in the development of HGVdiagnostics.

Genelabs hasn't released its financial statements for the quarter thatended Dec. 31, 1994, but said at the end of the third quarter that itexpected to have only enough money to get through this month. Sincethen, the Redwood City, Calif., company has received at least $1million, which came from Germany-based Boehringer MannheimGmbH for non-exclusive rights to screening tests for HGV.

Genelabs' stock (NASDAQ:GNLB) closed Friday up 31 cents, or 22percent, at $1.72 per share. Chiron (NASDAQ:CHIR) was up 75cents to close at $58.

A cross-licensing aspect of the deal gives Genelabs the right tocommercialize Western Blot and rapid diagnostic hepatitis C andHIV tests in Asia, excluding Japan. And the deal resolves anypotential conflict the companies may have had in the hepatitis C area.

"Based on our assessment, the hepatitis G virus is prevalent in theblood supply in the U.S., Europe and Japan, and is an importantcause of liver disease," Larry Kurtz, Chiron's vice president ofcorporate communications, told BioWorld. "Having rights for ourdiagnostics business is important."

Chiron and Ortho Diagnostic Systems Inc., a Raritan, N.J., subsidiaryof Johnson & Johnson, have a joint diagnostics business. Chiron stillmust get Ortho's OK to provide technologies to Genelabs. Chironplans to offer Ortho a position in the alliance with Genelabs.

Frank Kung, president and CEO of Genelabs, said the companyestimates 1994 diagnostics sales between $11 million and $12million.

"This is a good deal for all parties involved," Kung told BioWorld."It provides us with financial stability and a much higher probabilityof success for our product development."

HGV, like hepatitis B and C, is transmitted through bloodtransfusions or exchanges of bodily fluids. Genelabs and governmentresearchers started looking into the possibility of a new virus abouttwo years ago when hepatitis still was being detected aftertransfusions, even though the blood had been tested for hepatitis Band C.

Genelabs' non-exclusive deal with Boehringer Mannheim potentiallyis worth $14.5 million. Kung wouldn't say whether the Chironagreement precludes Genelabs from making other non-exclusivedeals, but said "right now we don't see the need to do any licensing."

The financing arrangement is rather complex, and involves an initial$15 million in licensing and equity payments. Chiron paid $5 millionas negotiations are being completed. Upon closing, Chiron will pay$10 million. Included in the payments is a $10 million investment innew Genelabs convertible preferred stock.

After five years, Chiron can convert that stock into Genelabscommon stock at a price up to $3 per share. Or, at its option, Chironcan apply the $10 million to half the purchase price of a company, tobe formed, that will include nearly all Genelabs diagnostic interests.

The value of the Genelabs diagnostics business would objectively bedetermined at that time. For example, if it was valued at $40 million,Chiron would pay $20 million for the remaining half, since it wouldapply the initial $10 million to half the business.

In the cross-licensing part of the deal, Chiron will get royalties fromany sales Genelabs makes from applicable products in Asia, andChiron would pay royalties on HGV-related sales. Kung said thepotential hepatitis C clash with Chiron was not made public.

Hepatitis E, also discovered by Genelabs and governmentresearchers, is included in the deal. But Kurtz said that virus ismostly in Third World countries, and Chiron's focus now is ondeveloped markets.

Kurtz said it could take one to two years to develop a HGV screeningtests and get commercial approvals. "A major motivation for Chironin this transaction is to acquire rights that would be put into theOrtho/Chiron business."

"This is a nice deal for Genelabs," Kurtz said. "It provides them witha substantial amount of cash, product rights to be used with this to-be-formed diagnostics company, and ensures that if hepatitis G, as webelieve, is a major marker for hepatitis, they will receive royaltypayments." n

-- Jim Shrine

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