Senior Staff Writer

It has been a year of downsizing and restructuring, and the long list of companies that have done so include Hyseq Pharmaceuticals Inc. and Variagenics Inc. Those two slimmed-down companies - one focused on drug discovery and one on diagnostics - said Monday they were merging in a stock deal valued at about $56 million.

"They were looking [for a merger] and we were looking also," said Ted Love, president and CEO of Hyseq. "We'd been looking for months, and they'd been looking for a number of months as well. We met, had some discussions and soon we thought there might be a good fit."

Love said the companies both are "interested in transitioning from tools companies to product companies," and said Variagenics' third-quarter reported cash and marketable securities of $60.8 million addresses Hyseq's needs for additional liquid resources.

The merger will be a reverse stock transaction through which Hyseq will form a wholly owned subsidiary that will merge into Variagenics. The entity born out of that maneuver will then merge into Hyseq. Each share of Variagenics' stock will be exchanged for Hyseq common stock at a ratio of 1-to-1.6451. Based on the closing price of Hyseq's shares Nov. 8, the ratio implies a purchase price of $2.22 per Variagenics share, or about $55.9 million.

Variagenics' stock (NASDAQ:VGNX) jumped 47 cents Monday, or 49 percent, to close at $1.43. Hyseq's stock (NASDAQ:HYSQ) fell 29 cents, or 21.5 percent, to close at $1.06. Both stocks were heavily traded.

Love will be the president and CEO of the new, to-be-named company, and current Hyseq Chairman George Rathmann will serve as the new chairman. The rest of the board of directors will be filled with three members of Hyseq's board and three from Variagenics'. The clinical operations and biotherapeutic research and discovery will take place at Hyseq's current space in Sunnyvale, Calif., while the molecular diagnostics development will be conducted at Variagenics' facilities in Cambridge, Mass.

In May, when Variagenics announced it was restructuring to save cash resources and to focus on oncology molecular diagnostics, the company said it would reduce its employees from 130 to about 90. Likewise, in May Hyseq said it would eliminate about 80 positions by 2003, a process that is ongoing. Love said Monday Hyseq has somewhere between 115 and 120 people. The combined company should have 110 to 120 people, indicating there will be further reductions. (See BioWorld Today, May 16, 2002, and May 20, 2002.)

"In these kinds of mergers, there are always redundancies," Love told BioWorld Today.

Early in the year, Hyseq in-licensed alfimeprase from Amgen Inc., of Thousand Oaks, Calif., giving Hyseq its lead product and moving it toward its goal of a products company. The product is a derivative of fibrolase enzyme and is being developed to treat peripheral arterial occlusions. It is designed to degrade fibrin, a protein involved in blood clots. After affecting a clot and circulating, alfimeprase is inactivated by a common protein in human blood, Love said. That suggests alfimeprase could be more effective and safer than other drugs in its class, he said.

Alfimeprase is in Phase I trials now, and Love said Hyseq would like to get most or all of the Phase II work done by the end of next year.

As the financial environment has made it harder and harder to raise funds in the biotechnology sector, it has been companies without products that have felt the pinch hardest. Some former tool companies and those facilitating drug discovery, rather than conducting it, have changed their tune. Although Love stressed that is not the case with Hyseq, he realizes why the merger is attractive to Variagenics.

"Hyseq didn't jump into biotherapeutics," he said, pointing to the addition of Rathmann in 1999 as the turning point for moving Hyseq into products. But Variagenics, he said, "has been very smart. They recognize that Hyseq is a company that could use them. They looked at us and said there is a [group] that is proven to be drug developers [and has] a great product and a collaboration with a world leader in Amgen."

Upon restructuring, Variagenics said it was moving its focus to applying pharmacogenomics to cancer. Part of that entailed the discontinuation of its NuCleave business, a mass spectrometry-based genotyping platform. The company uses a targeted drug pathway approach to identify therapeutically important genetic markers, including SNPs, haplotypes and, for cancer studies, loss of heterozygosity and other related indicators.

The combined cash of the new company is expected to last through the end of 2004. Together, the companies might form a whole greater than the sum of its parts.

"We're both very pleased," Love said. "The outlook is comparatively better for both companies. Hyseq was undercapitalized; the new company won't be undercapitalized."