By Lisa Seachrist

Washington Editor

WASHINGTON — With an eye toward strengthening its position in the potentially lucrative field of blood substitutes, Baxter International Inc. will acquire Somatogen Inc. in a stock-merger transaction worth at least $189 million.

Baxter, of Deerfield, Ill., will pay the Somatogen shareholders $9 per share in Baxter common stock (NYSE:BAX). With approximately 21 million shares outstanding, the purchase will cost Baxter $189 million. In addition, Baxter will make deferred cash payments of up to $2 per share contingent upon 5 percent of sales of certain future products through Dec. 31, 2007.

The transaction is expected to be completed in the second quarter of 1998. Whether in the process Boulder, Colo.-based Somatogen will remain a distinct, but wholly owned, subsidiary of Baxter remains to be determined. Baxter will account for the transaction as a purchase, allocating the price based on the fair value of Somatogen's assets and liabilities. A substantial portion of the purchase price will be allocated to Somatogen's in-process research and development.

Somatogen's stock (NASDAQ:SMTG) soared 31 percent on the news, closing Tuesday at $8.69, up $2.06. Baxter's stock ended the day at $55.75, down $0.69. Based on Baxter's share price, the takeover would cost the company about 3.36 million shares.

"We obviously are excited by the deal," said Andre de Bruin, Somatogen's president and CEO. "We consider the terms of the deal to be quite fair to our stockholders. We are excited about the prospect of combining the two [blood substitute] programs."

While an emerging field, blood substitutes could become a gold mine for Baxter because, unlike stored human blood, a blood substitute is unlikely to transmit viral diseases such as hepatitis and AIDS, doesn't require typing and crossmatching, and can be stored for long periods of time. Both Baxter's and Somatogen's blood substitute efforts focus on hemoglobin — the iron-containing protein in red blood cells that enables blood to transport oxygen to tissues throughout the body.

Baxter currently has its human hemoglobin-derived product, HemAssist, in Phase III trials. Somatogen has a first-generation recombinant human hemoglobin product in Phase II trials and several second-generation versions of hemoglobin-based oxygen therapeutics in the preclinical stage.

"This deal will allow us to pool our knowledge and data to more effectively bring these products to market," de Bruin said. "It was never the strategy of Somatogen's management team to go it alone. We are very pleased with this deal with Baxter because they have a strong commitment to this field."

Baxter intends to get HemAssist to market first while developing second-generation products based on Somatogen's technology.

"We are convinced that Somatogen's technology is most able to help us develop the second-generation therapies," said Mary Thomas, media spokeswoman for Baxter. "We are going to be looking for every way to integrate both companies' capabilities." *