Investors reacted negatively to Monday's news that ChironCorp. and Cetus Corp. will merge, sending prices of bothcompanies' stock tumbling.
Chiron (NASDAQ:CHIR) closed down $6 at $54.75 and Cetus(NASDAQ:CTUS) closed down $2.25 at $15.63.
The merger, in an exchange of stock, will follow thecompletion of the sale by Cetus of its GeneAmp polymerasechain reaction technology to Hoffmann-La Roche Inc. and F.Hoffmann-La Roche Ltd. for $300 million plus royalties.
Based on Friday's closing price for Chiron stock of $60.75, thedeal is worth $660 million. Analysts said the final price couldbe in the mid-$50s, which would bring the closing value below$600 million.
A Chiron spokesman said the company will record charges "inthe nine-figure range" associated with the merger whencompleted. The company expects to report a loss in 1992 andto return to profitability in 1993.
Chiron initiated discussions about nine months ago, whenCetus announced it would look for a corporate alliance after aFood and Drug Administration advisory committee failed torecommend approval of its interleukin-2 for kidney cancer.
"We believe the crown jewel of Cetus is oncology," saidWilliam Rutter, Chiron's chairman. He said the alliance wouldallow Chiron to enter the oncology business and would giveChiron access to Cetus' manufacturing facility.
"In addition, we are enthusiastic at the prospect of combiningour drug design and discovery programs," Rutter said. "BothChiron and Cetus are leaders in the creation of peptides andpeptide analogs as drug candidates. Cetus has an excellentprogram in oncogenes and intracellular signalling mechanisms.Chiron's focus is on growth factors and growth factorreceptors," he said.
For Ronald Cape, founder and chairman of Cetus, it was abittersweet day. "If I were to tell you I stood here exhilarated,you'd know I wasn't telling the truth," he said. "For people fromthe Cetus side, this marks the end of a chapter, and I have tonote that with a certain amount of sadness."
Analysts' mixed reactions to the proposed merger hinged on theperceived value of Cetus' oncology assets. Cetus has sevencancer products on the market, six in clinical trials and four inearlier-stage development.
Cetus sold $45 million worth of cancer products last year,including $33 million on the sale of six genericchemotherapeutic products through its joint venture with BenVenue Laboratories Inc.
"It's a steal for Chiron," said Stuart Weisbrod, an analyst atMerrill Lynch in New York. Excluding cash from the PCR deal,Weisbrod estimated that Chiron will pay about $9 a share forCetus. Weisbrod said Cetus is worth more.
Margaret McGeorge, an analyst at Sutro & Co. in San Francisco,also liked the deal. "Investors' knee-jerk reaction is, 'Why isChiron buying a company that's burning cash?' " she said. "Andover the next 12 to 18 months, the acquisition will stifleChiron's earnings." But McGeorge said Cetus' oncology businessis worth the $330 million Chiron is paying, excluding the PCRproceeds.
Cetus' Proleukin IL-2 is being marketed in nine Europeancountries for advanced kidney cancer and has currentannualized sales of $15 million. Cetus hopes the drug will getanother FDA review this fall, said Hollings Renton, Cetus'president and chief operating officer. IL-2 is also in clinicaltrials for other indications. The company is beginning Phase IItrials of its Macrolin macrophage colony stimulating factor(M-CSF) for cancer and infectious diseases.
Cetus has four other cancer-related products in clinical trials:PEG-Proleukin for various cancers, TNF retroviral gene vector,OncoScint CR103 for diagnosis of colorectal cancer, andCardioxane for mitigation of cardiotoxicity in chemotherapypatients.
The company has four cancer products in preclinical trials orresearch: ADCC 2B-1 Bispecific antibody, erb cancer B2antibody, TNF convertase inhibitor and antibody to IL-6.
Joseph Edelman and Peter Drake, analysts at Prudential Bacheand Vector Securities, respectively, said Chiron paid more thanCetus is worth.
"I see it as a bold but risky move," said Edelman, whodowngraded his rating on Chiron from "buy" to "hold." "Theyhave to make IL-2 a substantial product for this thing to payoff for them."
The analysts agreed that the deal was a good one for Cetus,which "was in no position to demand great things," accordingto Edelman. Cetus also "commanded a very handsome premium"in the sale of its PCR business, said McGeorge.
-- Karen Bernstein BioWorld Staff
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