BioWorld International Correspondent

LONDON - After two years of searching, British Biotech plc finally landed a merger partner, privately held RiboTargets Holdings plc, a structure-based drug discovery specialist that brings £19 million to add to British Biotech's £32 million cash pile.

Based on British Biotech's closing price of 3.875 pence per share on March 19, the unnamed merged entity will have a market capitalization of £52 million (US$81.3 million), a far cry from British Biotech's peak valuation of £2 billion.

RiboTargets' investors, who have put £45 million in since its formation in July 1997, have had to swallow hard to accept the £26 million valuation that the deal puts on the company.

Simon Sturge, CEO of Cambridge, UK-based RiboTargets, will become CEO of the merged company. He told BioWorld International, "The shareholders have faced up to the realization that the public markets are substantially down, and whether it was an [initial public offering] or a merger, they would have to accept a low valuation."

But with £19 million in cash, RiboTargets did not necessarily need to make a move now. "I think that is why this is a very positive thing," Sturge said. "We could have tried to sit it out, but we have merged to create a stronger company."

Following completion, British Biotech shareholders will own 50.01 percent, and RiboTargets shareholders 49.99 percent of the merged company. Over 99 percent of RiboTargets' shareholders have committed to accept the offer, while British Biotech's largest shareholder, Amvescap plc, which owns 25.5 percent of the shares, has said it will vote in favor of the deal.

The architect of the deal is Peter Fellner, outgoing CEO of London-based Celltech Group plc. Fellner will be executive chairman of the merged company and has further acquisition plans. When he accepted the position of chairman of Oxford-based British Biotech in November 2002, he vowed to use it as a springboard to force restructuring of the UK biotechnology sector. He said that the merger with RiboTargets "signals the first step in repositioning British Biotech as a competitive commercial biotech company."

Sturge said RiboTargets and British Biotech have looked at acquiring a number of companies.

"Our advantage now is that we have a very, very strong cash position in a market where few have cash," he said. The aim is to build on RiboTargets' discovery skills and British Biotech's development experience and create a broad oncology and anti-infectives pipeline.

Annual cost savings of £6.4 million annually are promised, with savings of £3.1 million in the first 12 months. As a first step, British Biotech said it is transferring 17 researchers involved in metalloenzyme inhibitors to Evotec OAI AG's facilities in Oxford, and then would contract back chemistry services from the Hamburg, Germany-based company. Over time, the work force will be cut from 177 down to 110. The combined cash is expected to fund the merged company for three years.

Sturge said there also would be a portfolio review.

"We have done a huge amount of due diligence on [British Biotech's] product portfolio," he said. "In our view, there will be substantial rationalization and then we will focus on the best products."

Initially, the merged pipeline will have four products in clinical development, all from British Biotech. Sturge said data is expected on all four in the next three to six months, putting the company in a good position to decide which to take forward. British Biotech's collaborations with Geneva-based Serono SA in anti-inflammatory drugs and with Genasoft Inc. in anti-infectives will continue.

RiboTargets' lead product is R140, an oral Gaba_A agonist for pain relief in cancer, was in-licensed last year and due to enter clinical development in the second half of 2003. RiboTargets' lead in-house program, a search for small-molecule inhibitors of the cancer target Hsp90, is scheduled to enter preclinical development this year. In addition, the company has five early stage programs based on antibacterial and anticancer targets.

The research and development of the merged company will be based in Cambridge. British Biotech owns the freehold of buildings in Oxford, which Sturge said would be disposed of and replaced with a serviced office. Sturge himself will be based in Cambridge.

Tony Weir, finance director of British Biotech, will retain that position in the merged company. British Biotech has had an acting CEO since November 2002, Elliot Goldstein resigned following the scrapping of several products in clinical development and his failure to enlarge the pipeline through merger or acquisition. That coup de grace was the breakdown of merger negotiations with the antibody specialist Morphosis AG of Munich, Germany, in October 2002.

British Biotech's stock (NASDAQ:BBIOY) fell 25 cents Friday, or 9.3 percent, to close at $2.45.