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As Lion Shareholders Vote in Favor of Changes, One Investor Declares Impending Buy-Out Offer

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A Lion Bioscience investor took company management by surprise during a shareholder meeting last week by announcing that two venture capital firms may offer to purchase some or all of the company’s assets.

During the company’s extraordinary shareholder’s meeting in Heidelberg, Germany, on March 24, in which investors voted in favor of a new set of bylaws that could enable management to buy out the firm, Ian Humphrey-Smith, a former head of the Human Proteomics Organization and current Lion shareholder, stood up and declared that FM Fund Management and Zapis Capital Group may soon make a buy-out offer of their own.

Speaking by telephone to BioInform from the all-day meeting, Gunter Dielmann, vice president of investor relations at Lion, said that the company “knew nothing” about the proposed purchase offer beforehand, and that company officials had not yet had a chance to speak with Humphery-Smith or the two VC firms.

The “offer has no specific numbers,” he said, adding that Lion was told that the offer “should or will take place anytime in the future.” The purchase offer could extend to either “part of the assets or the total company,” Dielmann said.

In a written statement Lion issued after Humphery-Smith’s announcement, the company stressed that the purchase offer was “non-binding and non-specific,” adding that “in case of a binding and specific … purchase offer, Lion Bioscience AG would review such an offer seriously.”

Dielmann said that discussions regarding the potential buy-out have essentially been put on hold due to the Easter holidays, and are expected to begin March 29.

Bidding War on the Horizon?

As BioInform reported last week [BioInform 03-21-05], Lion investors were scheduled to gather Thursday to vote on several resolutions that would enable management to buy out its Cambridge, UK-based SRS bioinformatics business, currently known as Lion Bioscience Ltd.

Lion’s board had recommended a new structure that would establish the Heidelberg-based parent firm, Lion Bioscience AG, as a “holding company” that would have only a “minority interest” in the bioinformatics business, which would remain in Cambridge. The holding company’s primary function would be to manage Lion’s remaining €25 million ($33.3 million) in cash holdings and to “invest in promising companies with excellent growth prospects as well as in intellectual property and industrial property rights, particularly in the area of the life sciences/IT sector.”

According to Dielmann, shareholders voted in favor of the proposals, giving management the operating freedom to restructure the company in this way. Humphery-Smith’s announcement during the meeting “had nothing to do with the vote,” Dielmann said.

Humphery-Smith, who holds only 45 of the company’s outstanding 19.8 million shares, told BioInform after his announcement at the meeting that he attended “on a proxy” on behalf of the VC firms. “It was a matter of being present so that we could represent the alternative bid for the company, be it either the assets or the whole company,” he said.

The fact that the shareholders voted in favor of the board’s recommendations will not pose any barriers to the potential take-over bid, according to Humphery-Smith. “We told the shareholders very clearly that if the motions were carried, the financial backers were still prepared to maintain an interest in the company, of either the company as a whole or in part, depending on what happens and what legal advice we get,” he said.

According to Humphery-Smith, Lion’s board had set the price for the management buyout at €680,000, and the VC firms he represents are “definitely in a position to better that.”

However, he noted, due diligence may turn up further information that could diminish the appeal of what appears to be a low asking price for a company that projects revenues of €8-€10 million in 2005 based on sales of SRS. It’s unclear what contractual obligations the company may still hold with its customers.

“We’ve still not been able to get within the company to see detailed figures of how its business has been conducted,” he said. “There’s been some misunderstanding about the level of liabilities left within the company, so those sorts of things would have to be cleared up.”

The proposed takeover would “better what’s being offered by management,” Humphery-Smith said, noting that the decision to create a private equity firm to manage Lion’s cash, as management has suggested, would cripple the bioinformatics business.

“I tried to convince them [the shareholders] that there’s real value in the company based around the cash assets, which are necessary in today’s bioinformatics environment,” he said. “Unless you have an appropriate cash buffer, you will not succeed in this space.”

Humphery-Smith called the board’s proposed structure a “terrible management decision” that would “take the cash away from Lion, who are going to be asked to work with €2 million, by way of a loan from the management equity fund.”

Despite the shareholders’ vote in favor of these changes, the company’s smaller investors have not been supportive of the proposed new structure. In early March, Germany’s Association for the Protection of Shareholders (Schutzgemeinschaft der Kapitalanleger, or SdK) issued a statement that sharply criticized Lion’s management and urged shareholders to vote against the board’s proposals. According to Humphery-Smith, there was “a lot of dissention” at last week’s meeting, which was attended by around 200 people.

“At one stage the company was worth $1.2 billion, and was hailed as the greatest thing ever to come out of Germany, and management has continued to prove that it’s not capable of turning the company around,” he said.

Details on the proposed take-over offer are expected to be made available over the coming weeks. “We’re seeking legal counsel on what the next actions are,” Humphery-Smith said.

One of the financial backers involved in the proposed buy-out already has ties with a Lion alumnus. Zapis Capital Group has invested an undisclosed amount in Lucidyx, which was founded last year by Manuel Glynias, the former CEO of NetGenics.

Lion purchased NetGenics for $17 million in 2002.

— BT

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