BioWorld International Correspondent

PARIS - The cash offer for Genset SA of €107 million (US$105 million) that Serono SA filed with the French stock market authorities last week raises two questions: Does the price being offered put a fair value on Genset, and will its shareholders accept it?

The offer is conditional on the Swiss biotechnology company's receiving acceptances corresponding to at least two-thirds of the voting rights of Genset. Given that the board of the Paris-based genomics company unanimously recommended the offer and that Genset shareholders gave Serono satisfaction on its first precondition by voting at the extraordinary meeting held last week to abolish the provision in the company's statutes limiting the voting rights of any shareholder to a maximum of 20 percent, there is a good chance that a majority of shareholders will accept the offer from the Geneva-based company.

That said, the meeting last Wednesday did not go off without some expressions of dissent, with some small shareholders complaining that Paris-based Genset was being sold cheaply on the basis of the performance of its stock over the past year rather than the period since its IPO in 1996. In effect, the share price averaged €48 during those six years, but only €6 over the past 12 months.

Financial analysts consider the price a fair one, however. Serono is offering shareholders premiums of about 195 percent and 188 percent, respectively, for Genset ordinary shares and American depositary shares, relative to the prices at which they were trading on the Nouveau Marché of Euronext in Paris and Nasdaq in New York before their suspension on June 18. At the same time, it proposes to redeem immediately the 522,223 outstanding convertible bonds issued by Genset in June 2000 that are due to mature on Jan. 1, 2004. The offer price is €102.64, the redemption price on June 26, which corresponds to the par value plus accumulated interest of €8.64. It represents a premium of 389 percent relative to the closing price on the last day of trading (May 23), and 953 percent compared to the conversion value. That operation will cost some €49 million, implying that Serono's offer effectively values Genset at about €60 million.

Explaining the scientific and commercial rationale behind its bid, Serono said the acquisition would create a vertically integrated, genomics-based drug discovery and development company combining Genset's gene-based approach to target identification and validation with Serono's expertise in functional genomics and its proven track record in drug discovery and development. Being part of Serono would thus enable Genset to capitalize on its upstream strengths.

Serono also put forward a strong financial case for the takeover, pointing out that Genset remains an increasingly loss-making company 13 years after its creation, has a cash burn rate of €12 million per quarter and possessed net cash and liquid reserves of €27.7 million as of June 30. In addition to financing its ongoing research programs, it would face a bill of €57.3 million for the redemption of its outstanding bonds when they fall due on Jan. 1, 2004.

Investors have taken note of Genset's deteriorating situation and the delay in the development of the company's anti-obesity drug candidate, Famoxin, since its share price has fallen 48 percent since the beginning of this year, and at under €4 in mid-June, it was only a fraction of the €238 speculative peak reached in early 2000. For Serono, the takeover would dilute net earnings by an estimated $15 million this year (or about 5 percent of earnings per share) and by a further $20 million in 2003, and its share price fell a little after the bid was announced.

Financial analysts in Paris see the Serono offer as Genset's best bet in its desperate circumstances. Delphine Le Louet, biotechnology analyst with KBC Securities, maintained that €60 million was a "good price" for the company. At Bryan Garnier and Forecast, Rodolphe Besserves, a pharmaceutical industry analyst, took a similar view. "We were negative on Genset. This is not a bad way out for it," he told BioWorld International. But he described the offer price as "the scrap value" of the company, adding that he was not sure Serono was making the best use of its cash. As for Genset's shareholders, "they have no choice but to accept it. If they don't, they'll find themselves with shares worth €0.50. It's double or quits for them."

The bid was officially filed by Serono France Holding SA, a wholly owned subsidiary of Geneva-based Serono SA. If it is successful, Genset will become a subsidiary of Serono in France. The acquisition would swell Serono's total work force to 4,700, and the enlarged group would boast three research centers, two preclinical testing units, 11 manufacturing plants and an international sales and marketing organization.

Genset would be responsible for discovering and validating new genes, secreted proteins and potential targets in support of Serono's global drug discovery and development activities. Genset's research center at Evry, south of Paris, would become the center of genetics expertise within Serono's overall research and development structure, complementing its centers in Geneva (specialized in CNS, metabolism, genomics and chemical screening), Boston (reproductive endocrinology) and Ivrea, Italy (toxicology).

On the other hand, Genset's metabolism research center in San Diego, which employs some 50 people, is to be closed, as well as its Paris head office, whose operations will be transferred to Evry. Serono expects Genset's French work force of around 200 to be cut by 20 percent. But its top two corporate officers, CEO Marc Vasseur and Chief Scientific Officer Daniel Cohen, would remain on the Genset board in their present capacities.

In addition to Genset's expertise, intellectual property and research facilities, Serono would inherit a substantial library of secreted proteins as well as Famoxin. Although it looks promising, proof of principle remains to be established for Famoxin, and Serono does not appear in a hurry to take it into clinical development. Whereas a few months ago Genset announced the firm intention of starting a Phase I clinical trial before the end of this year, Serono is talking in terms of preclinical development continuing through 2003 and clinical trials being initiated in 2004-05.