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Three Sirna Shareholders Sue to Block Merck Acquisition; Sirna Posts Higher Q3 Losses

When Merck announced its $1.1 billion cash bid for Sirna Therapeutics late last month (see RNAi News, 11/2/2006), most of Wall Street interpreted the move as a major validation of RNAi’s therapeutic potential: Sirna’s stock nearly doubled the day the deal was reported to trade just shy of the $13 per share Merck agreed to pay, while shares of rival Alnylam Pharmaceuticals’ were lifted to an all-time high.
Not all investors, however, are pleased with the proposed acquisition. Three Sirna shareholders have filed separate lawsuits attempting to block the sale and accuse Sirna’s management of negotiating the deal for their own financial benefit.
Sirna disclosed the lawsuits this week in a filing with the US Securities and Exchange Commission detailing its third-quarter financial results, which included a sharp jump in losses on doubled operating costs.
“The proposed sale is wrongful, unfair, and harmful to Sirna’s public stockholders, and represents an effort by [the] defendants to aggrandize their own financial position and interests” at the expense of ordinary shareholders, the suits allege.
The Suits
“Recently, Sirna has made great strides towards [its] goal” of developing RNAi into a therapeutic modality, according to the lawsuits, which cite the company’s clinical development of its age-related macular degeneration drug Sirna-027 (see RNAi News, 8/10/2006) and the advancement of its hepatitis C drug Sirna-034 toward human studies.
Additionally, Sirna has signed potentially lucrative deals with a number of pharmaceutical firms, including a respiratory drug-development deal with GlaxoSmithKline that could be worth up to $700 million (see RNAi News, 4/6/2006), the lawsuits state.
“This recent chain of successes indicates that Sirna is on the verge of financial success, [which is] especially relevant to Sirna shareholders because [the company], as of yet, is not … profitable,” the suits state. “Thus, the company’s shareholders eagerly await the promise of a stratospheric return on their investment on the day that Sirna successfully markets its first RNA interference product. Unfortunately, due to the proposed acquisition, that day may never come.”

The lawsuits allege that Sirna President and CEO Howard Robin, along with seven of the firm’s board members, “are unwilling to share the lion’s share of [Sirna’s potential success] with the company’s shareholders, choosing instead to sell the company to Merck … and cash out Sirna shareholders for inadequate consideration.”
The lawsuits charge Robin and the board members with violating their fiduciary duties “insofar as they stood on both sides of the transaction and engaged in self-dealing and obtained for themselves personal benefits, including personal financial benefits.”
For example, Robin owns 27,494 shares of Sirna, which would entitle him to $357,422 from the Merck buyout. Director James Niedel, meanwhile, owns 381,336 shares of Sirna and controls more than 14 million shares for his investment firm Sprout Group, which in total translates to a $188.5 million payout under the terms of the Merck acquisition.
“By reason of their positions with Sirna, the [defendants] are in possession of non-public information concerning the financial condition and prospects of Sirna, and especially the true value and expected increased future value of Sirna and its assets,” the lawsuits claim. “Despite their duty to maximize shareholder value, the defendants have clear and material conflicts of interests and are acting to better their own interests at the expense of Sirna’s public shareholders.

“The company’s shareholders eagerly await the promise of a stratospheric return on their investment on the day that Sirna successfully markets its first RNA interference product. Unfortunately, due to the proposed acquisition, that day may never come.”

The lawsuits seek, among other things, class-action status, a ruling that the proposed acquisition of Sirna by Merck is “unlawful and unenforceable,” and an enjoinder from that the Superior Court of the State of California, County of San Francisco, preventing Sirna from consummating the deal “unless the company adopts and implements a procedure or process to obtain the highest possible price for shareholders.”
Officials from Sirna did not return a request for comment. In the company’s 10-Q, however, Sirna said the lawsuits are “without merit” and that it intends to “defend them vigorously.” It also notes that should it terminate the acquisition agreement, it could be required to pay Merck a $42.1 million termination fee.
The Quarter
Sirna reported a jump in its third-quarter net loss to $9.6 million, or $0.13 per share, from a year-ago loss of $4.2 million, or $0.08 per share.
Driving the loss increase was an increase in quarterly expenses to $12.7 million from $6.3 million, in part due to a $3.1 million increase in research and development spending to $7.7 million as Sirna invested in Sirna-034 and the continued relocation of the firm’s core scientific teams from Colorado to San Francisco.
Third-quarter revenues, meanwhile, edged up slightly, to $2 million from $1.9 million a year earlier.
As of Sept. 30, Sirna had cash, cash equivalents, and securities available for sale totaling $82.8 million. The firm said it continues to expect its total 2006 burn rate to be in the $30 million to $33 million range.

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