West Coast Editor

Precision Therapeutics Inc.'s move to go public by way of a reverse merger with a special-purpose acquisition firm gives a boost to marketing of its ChemoFx test, which uses a patient's live tumor cells to measure the likelihood of response to cancer drugs.

The deal with Oracle Healthcare Acquisition Corp. represents the "blank check" firm's second try at Pittsburgh-based PTI, which will keep its name, as Oracle's name changes to Precision Therapeutics Corp., leaving Oracle - which is expected to apply for trading on Nasdaq - with about $120 million in cash (less merger expenses) that will stay in the merged firm.

Formed in the fall of 2005, Oracle said last September that it signed a letter of intent with a then-undisclosed firm for a business combination, and would liquidate if such a deal could not be completed by March 8, 2008. The letter of intent was terminated the following month.

Neither company could be reached, but Oracle's SEC paperwork filed on the PTI deal discloses that the fizzled arrangement in October - with PTI - came as a result of PTI's decision to pursue its pending initial public offering, rather than merge with Oracle. PTI had filed in August for an IPO that would raise as much as $80.5 million, so the firm could continue pushing ChemoFx. (See BioWorld Today, Aug. 27, 2007.)

The SEC filing chronicles meetings and phone calls between the two companies. After the IPO market went bad in early November, PTI contacted Oracle to ask if the firm was still interested. In the middle of that month, PTI and its underwriters decided to delay the IPO, and talks began in earnest with Oracle again.

Oracle's board of directors "took note that the consideration being issued in the merger, based on the current market price for Oracle's common stock, is substantially in excess of 80 percent of Oracle's net assets," which was a goal in making a deal, according to the filing.

Under the "risks" section of the document, Oracle acknowledges the chance that some of its current public shareholders would vote against the PTI deal and demand to redeem shares for cash when the merger is done, thus dropping the amount of cash available to the combined firm, but the board "deemed this risk to be no worse with regard to PTI than it would be for other target companies."

Under the terms, Sean McDonald, PTI's president and CEO, will hold the same posts in the combined company, headquartered in Pittsburgh, and several Oracle board members would stay on the merged firm's board, along with Kevin Johnson, a member of PTI's board as well as Greenwich, Conn.-based Oracle's.

Assuming an exchange ratio of about 0.4 of a share of Oracle common stock per PTI share (based on Oracle's closing price Nov. 30 and the number of outstanding PTI capital stock, plus options and warrants), Oracle would issue about 19 million shares at the closing of the deal, including 2.5 million shares to be deposited in an escrow account.

Oracle's stock (OTC BB:OHAQ) closed Friday at $7.80, down 2 cents.

The ChemoFx test, which uses biopsy tissue, allows testers to classify the tumor as "responsive," "intermediate" or "non-responsive" to each drug or combination requested by a physician, who provides a list of as many as a dozen drugs or drug combinations to be tested against the sample.

ChemoFx reached the market in 1997, though the company curtailed sales efforts in 2003 because of reimbursement issues. In April 2006, Medicare started paying for the test in gynecologic cancers, and Precision that summer established a direct sales force.

PTI in 2006 cited a study showing that ovarian cancer patients treated only with a drug or combination to which their tumor cells were classified as "responsive" by ChemoFx gained a median tumor progression-free interval about three times the median progression-free interval for patients treated only with drugs classified as "non-responsive." PTI is targeting about 700 gynecologic oncologists in the U.S., and Oracle said the ChemoFx test could become part of the standard of care in cancer.

Oracle made initial proposals for business combinations to four other potential targets before starting talks with PTI. All of those, including one with a company that was being divested from a large medical-device parent, fell through. The firm went public last year, selling 15 million units at $8 each, along with a private placement of more than 800,000 warrants to some of the firm's founding stockholders at $1.20 each. The gross proceeds totaled $121 million, of which $113.5 million was placed in trust, including $2.4 million in deferred underwriting fees.