Genzyme Inc. Monday agreed to acquire BioSurface Technology Inc.in what both companies said is an unprecedented financing deal for thebiotechnology industry.The acquisition, to be announced today, involves issuing "trackingstock" to shareholders of both companies to establish a separateGenzyme division for development and marketing of tissue repairproducts. The products, based on the technologies of both companies,are aimed at treating damages to skin (burns and ulcers), cartilage andnerve tissues. Genzyme and BioSurface both are located in Cambridge,Mass.The new division, Genzyme Tissue Repair (GTR), will be part ofGenzyme, but will have its own common stock and will be traded onthe NASDAQ market when the agreement is finalized in November. Itinitially will be funded with $26 million from both Genzyme andBioSurface."This is a consolidation, but it's driven by opportunity, rather thandesperation," Genzyme's Greg Phelps told BioWorld. "Consideringwhat BioSurface brings to what Genzyme has, this is an opportunity tojump to the front of the pack in this field."Phelps, Genzyme's senior vice president of corporate development,will be president of GTR. BioSurface President and CEO DavidCastaldi will act as a consultant.Castaldi, who was a co-founder of BioSurface in 1986, told BioWorld,"Our vision or dream over the years has been to create the leadingcompany in the field of tissue engineering or tissue repair. Given thecircumstances at BioSurface, we were not in a position to realize thatdream ourselves. We have repositioned ourselves to get greaterfinancial resources and technological resources."Robert Dahl, investment banking director of CF First Boston Corp. inNew York, advised Genzyme on the agreement. Dahl said it's the firsttime this unique stock ownership structure has been used bybiotechnology companies and that other firms may find it attractive asa means of consolidation.GTR will absorb BioSurface, all its 100 employees and an estimated$16 million in cash the company is expected to have on hand inNovember. BioSurface currently has $20.5 million in the bank and aburn rate of $8 million annually.Genzyme initially will commit $10 million and 100 employees to thenew division plus $30 million over three and a half years. During thefirst year of operation, GTR will use $20 million of its $26 million incash to fund research and development.Trading in BioSurface's stock (NASDAQ: BSRF) was halted Mondayat $4.37 a share. The stock has risen almost 100 percent since May 9,when it was $2.25 a share, based on speculation of a takeover.Genzyme's stock closed Monday at $26.37, down 37 cents.In issuing the tracking (or letter) stock, BioSurface investors will get atax-free exchange of one GTR share for about 1.7 BioSurface shares.Genzyme shareholders will receive a tax-free dividend of one GTRshare for about 7.4 Genzyme shares. BioSurface and Genzymeshareholders will have a 50-50 ownership in GTR.GTR will have 8.3 million shares outstanding, 5 million held byBioSurface shareholders and 3.3 million owned by Genzyme'sinvestors. Another 1.7 million GTR shares will be reserved byGenzyme for issuance on convertible debentures and outstandingwarrants. Genzyme said its financial commitment to the new divisionequals a $10-per-share purchase of GTR stock.The company listed several advantages to issuing tracking stock asopposed to more conventional take-over strategies.As a division of Genzyme, rather than a spin-off, GTR's anticipatedearly losses will be included in Genzyme's overall tax statement. GTRalso will have access to all Genzyme's resources, such as clinical,regulatory affairs and production. By making GTR a separate stockentity, rather than absorbing it internally, Genzyme said GTR hasgreater visibility for investors, can make acquisitions and can raisemoney.In its first year, GTR is expected to generate $6 million in sales fromBioSurface's one marketable product, Epicel, which is sold to burncenters. GTR will have seven other tissue repair products in variousclinical and pre-clinical trial stages, two from BioSurface and five fromGenzyme. The product portfolio, according to Genzyme, will be thelargest in the tissue repair field.According to both companies, GTR will combine the three coretechnologies involved in tissue repair: Genzyme's biomaterials, alongwith its recombinant proteins and enzymes, and BioSurface's cell andtissue cultures.BioSurface has two other products, in addition to Epicel, both of whichare in clinical trials. Chondrograft is a cultured cartilage in the initialhuman study stage. Acticel, classified by the FDA as a device, is anepithelial cell product grown from human donor skin cells as atemporary wound dressing. The company refers to it as a "livingbandage." Acticel is in pivotal clinical trials for burns. Clinical trialsfor ulcers are expected to begin by the end of this year.Genzyme's BetaKine, developed in association with CeltrixPharmaceuticals, of Santa Clara, Calif., is in Phase II trials for woundsand Phase I trials for multiple sclerosis. BetaKine is a recombinantgrowth factor (TGF-beta-2).Genzyme's Vianain, an enzyme used to remove necrotic tissue, is inPhase II trials for burns. Phase I/II trials of the drug for ulcers areexpected to begin this fall. Another product is a tissue plasminogenactivator, a recombinant enzyme designed to treat ulcers. The drug is inclinical trials under a physician investigational new drug exemption.Two other Genzyme products are in the pre-clinical stage. Leukocyte-derived growth factor is a protein targeted for wound repair and dermalreplacement product is a biomaterial matrix aimed at treating burns. n

-- Charles Craig

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