Associate

Not to compare the biotechnology industry - with its blockbuster drugs and groundbreaking science - with a flea market, but there are good deals in this depressed environment if you look around.

GenVec Inc. and Diacrin Inc. think so. The companies agreed to merge in a $40 million stock exchange that would leave GenVec shareholders with 45.5 percent of the combined entity and Diacrin holders with 54.5 percent.

"We think it's a good deal for both sides," said Paul Fischer, GenVec CEO. "We think it's a very good deal and they are getting a nice premium to their stock price."

On the other side, Thomas Fraser, president and CEO of Diacrin, said in a conference call that the deal was "an excellent way to unlock shareholder value for both Diacrin and GenVec" and said he "truly looks forward to working with Paul and his team as we continue to work to develop GenVec."

To complete the merger, each share of Diacrin will be exchanged for 1.5292 shares of GenVec in a tax-free deal. Using GenVec's Monday closing price of $1.46, the deal has a total price tag of $40.4 million and values Diacrin at $2.23 per diluted share.

Gaithersburg, Md.-based GenVec's stock (NASDAQ:GNVC) fell 29 cents Tuesday, or 19.9 percent, to close at $1.17. Diacrin's stock (NASDAQ:DCRN) shot up 40 cents, or 34.8 percent, to close at $1.55. After the merger, the combined company - still named GenVec - would have about 50 million shares outstanding.

Looking at the deal, some benefits are obvious - Diacrin's $40 million in cash, for instance. But beneath that, the deal does three things for GenVec, Fischer told BioWorld Today.

"We have TNFerade," he said. "It has shown a lot of promise in the clinic and we want, in this environment, the ability to move the product through to commercialization without depending on the market.

"Two, we can leverage some important facilities and capabilities they have in the manufacturing area. We can control the manufacturing of our clinical products and also grow our vaccine business.

"And there is a very important third angle: We will still be partnering products."

Basically, then, the deal gives GenVec much-needed cash in a financial environment that is less than facilitative, will help GenVec with manufacturing - not only with its own drugs but with collaborators - and gives GenVec more clout as it seeks partners for its products.

After merging, the new company will trim from about 120 employees to 90 and work its burn rate down to less than $20 million per year. Both facilities will be kept up and running. GenVec should finish 2003 with about $50 million in cash, taking it "well into 2006," Fischer said, adding that suitors should look favorably on that bit of news.

"Potential partners won't be concerned with our operating horizon," he said. "And we won't need to have a partner responsible for manufacturing."

The companies are approaching therapies in different directions - GenVec focuses on gene transfer and vaccines, while Charlestown, Mass.-based Diacrin concentrates on cell transplantation. But the companies have synergy through their cardiac programs that could be stronger when combined and perhaps could work well in tandem.

"We're paying about $40 million, and they have about $40 million in cash, but keep in mind that we both have cardiac programs," Fischer said.

At the top of the combined pipeline, though, would be TNFerade. The product, which uses adenovector technology to deliver the tumor necrosis factor-alpha gene into a tumor and there interacts with radiation therapy or chemotherapy, is in two Phase II trials for pancreatic and esophageal cancer. GenVec would hope to move into Phase III trials at the end of the year or in 2004 if "certain data in esophageal cancer are positive," Fischer said, and the company is seeking a European and Asian partner, although it would prefer to keep U.S. rights. If things progress well, GenVec could file for approval in esophageal cancer in early 2006, Fischer said.

Next in the pipeline would be BioBypass, a product being tested in coronary artery disease (CAD) that uses vascular endothelial growth factor to stimulate growth of blood vessels. GenVec reported a failed Phase II trial in peripheral arterial disease early this year, and stopped development of the drug in that indication. However, the Phase II in CAD was "quite positive," and Fischer said GenVec would like to form a partnership around the product and take it into a Phase II trial, delivering the drug via catheter as opposed to surgery, as was the route in the Phase II reported last fall. (See BioWorld Today, Jan. 8, 2003.)

GenVec also has AdPEDF, for macular degeneration. It is working on an AIDS vaccine with the Vaccine Research Center at the National Institute of Allergy and Infectious Diseases, a division of the National Institutes of Health in Bethesda, Md., and is collaborating with the U.S. Navy Medical Research Center to create malaria and dengue virus vaccines.

Both boards have approved the merger, which is expected to close in the third quarter. Fraser will move to the chairman position of the combined GenVec, with Fischer serving as CEO. The board will consist of five GenVec representatives and four from Diacrin. So while Fischer noted that the deal "is an acquisition," he said it is also a merger striving to successfully bring two companies together.

"We felt strongly that we had to get representatives from both sides," he said. "The key message is that it's pretty much equal and we want to work together to make a stronger company."