Biotech Pioneer Cetus, Neighbor Firm to Merge

By SUSAN MOFFAT

July 23, 1991 12 AM PT

TIMES STAFF WRITER

In a move demonstrating the vulnerability of biotechnology firms with high research costs, industry pioneer Cetus Corp. announced Monday that it was selling off a key technology to a European pharmaceutical giant and merging its operations with Chiron Corp. in a stock swap deal valued at $660 million.

The merger follows the pattern of consolidation in the biotech arena, where leading-edge technology does not guarantee profits and medium-size entrepreneurial firms are often forced to find stable partners with deep pockets.

Cetus’ merger makes it the last of the four stars of the early days of the biotechnology industry in the 1970s to undergo a major restructuring, according to G. Steven Burrill, national director of Ernst & Young’s high-technology consulting practice. The proposed Cetus-Chiron merger follows the purchase last year of Genentech, another biotech star, by the Swiss firm Hoffmann-La Roche. Biogen and Genex, the other two firms, also underwent major restructurings in recent years.

Under the terms of the merger, Cetus shareholders would end up owning one-third of the merged company, while Chiron stockholders would own the rest. The Cetus name would disappear, and the merged company would be known as Chiron Corp.

Chiron executives will dominate the merged company, with Chiron Vice Chairman and Chief Executive Edward Penhoet continuing as CEO of the new firm. Cetus President Hollings Renton will be a member of the board and will have principal responsibilities for the merged company’s activities in cancer drugs.

The merger is subject to approval by stockholders of each company and other conditions.

Cetus also said it would sell its polymerase chain reaction technology research section to Hoffmann-La Roche for $300 million plus royalties of up to $30 million. PCR, as the technology is known, allows scientists to reproduce tiny amounts of DNA in tissue until there is enough to determine whether the tissue is cancerous or if a virus is present.

Cetus and Roche have been working together since 1989 to use the technology to develop diagnostic tests for AIDS, Lyme disease and tuberculosis. Analysts said the $300-million price Roche said it was paying for the technology indicates that it expects a potential billion-dollar market in PCR products. They also noted that the cash infusion made Cetus a more attractive partner for Chiron. Perkin Elmer, which also has been working with Cetus on selling research applications of PCR, will acquire rights to the technology through Roche.

Cetus is known as a company boasting leading-edge technology in cancer drugs that gambled and lost--at least in the short run--by investing aggressively in one cancer drug that has taken longer than expected to be approved. Analysts said that by joining its research expertise with Chiron’s solid financial position, Cetus’ technology will probably be able to reach market more successfully.

Because the two firms are across the street from each other in Emeryville, their managers and researchers were already familiar with one another when negotiations on the merger began nine months ago.

“We think we have one of the strongest biotech-based health companies in the world,” said Renton of the upcoming merged firm. He acknowledged that at Cetus, “probably we’ve been overaggressive in the number of diseases we’ve been pursuing.”

Cetus spent $125 million over eight years developing Proleukin, its version of interleukin-2, a cancer drug. The company ran into trouble when the FDA last July declined to approve the drug, citing side effects. The absence of expected revenues put a heavy burden on the company’s expanded research infrastructure.

Proleukin is enjoying moderate sales in Europe, and Renton said he expected that it will be approved by the FDA later this year, but analysts say the delay in approval cost the company dearly.

Losses at Cetus widened from $50 million in 1989 to $61.5 million in 1990 on sales of $38.9 million. By contrast, Chiron, buoyed by demand for its hepatitis C diagnostic tests, saw revenues double last year and recovered from a succession of losses to a $6.8 million profit on revenues of $78.5 million.

Cetus’ problems mirror those of Genentech, the highly successful firm that was bought out last year.

“This is what happens when an emerging company is exposed to one or two products that don’t come through on time or at the scale you expected,” said David Stone, a biotechnology analyst at Cowen & Co.

Chiron and Cetus at a Glance

Chiron Corp.

Headquarters: Emeryville, Calif.

Employees: 775 worldwide, 575 in Emeryville

1990 revenue: $78.5 million

1990 net income: $6.8 million

Cetus Corp.:

Headquarters: Emeryville

Employees: 980, to be reduced to 650

1990 revenue: $38.9 million

1990 net income: $61.5-million loss