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Merger Hyseq, Variagenics Unite With Acrobatic Accounting

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The Hyseq/Variagenics merger may have been a surprise to the rest of the industry, but the way Hyseq CEO Ted Love tells it, the match was virtually destiny. “We brought them our upside, they manage our downside,” he quips.

But in this case, destiny was far from straightforward. The merger, in which Hyseq essentially bought Variagenics by issuing enough stock to cover the cash Variagenics had on hand — about $60 million — will result in a new company owned 64 percent by Variagenics and 36 percent by Hyseq.

The path to the new company, which has yet to undergo its naming and logo-ing process, began a year ago. “Variagenics started to look at possible M&A opportunities as long as 14 to 18 months ago,” Love said in late November, at the time of the merger announcement. Hyseq began looking at the beginning of 2002, and Love happened to have a “chance interaction with one of their board members” at a February meeting in New York. “They talked to other companies, and so did we,” Love says. Finally, both companies settled on this merger.

Love says Variagenics’ emphasis on products, primarily through its molecular diagnostics unit, was appealing to Hyseq, which is trying mightily to get its first biotherapeutic through clinical trials. “They fit the sweet spot for what we thought would make sense for us,” he says. Hyseq’s main problem was its lack of cash, and Variagenics’ $60 million coffers looked awfully good, Love acknowledges. Layoffs are inevitable, and approximately 90 staffers are expected to be let go. Relocations for the rest, though, are unlikely — Love anticipates that each unit will remain where it was, one in Sunnyvale, Calif., and the other in Cambridge, Mass.

The future of the merger is as non-linear as its beginnings. To avoid a taxable transaction, Hyseq will spin out a shell company, which will team up with Variagenics, and then Hyseq will spin the shell back in. Hyseq’s stock was chosen as the survivor, but its ticker symbol will change as soon as the merger is approved (target: February) and the new company is named.

Love hopes Hyseq’s first drug will be through trials and submitted to the FDA by 2005. Meantime, Variagenics has a diagnostic in the works that could get to market as early as 2004. Throughout, Love views as a model the biotech giant Amgen, with revenues “north of $60 billion to $70 billion” based almost entirely on just two products, he says.

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