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ZymoGenetics Reaches End of Road in Seattle, Faces Uncertain Future, Potential Job Cuts

Xconomy Seattle — 

[Updated: 5:12 pm Pacific, 9/7/10] ZymoGenetics, the company that once aspired to replace Immunex as the anchor company of Seattle’s biotech cluster, has reached the end of its road as an independent company. Many of its 320 employees could potentially lose their jobs as part of a takeover agreement reached with Bristol-Myers Squibb. The companies aren’t saying how deep the cuts may go.

[Update with ZymoGenetics CEO comment] While a ZymoGenetics spokeswoman told Xconomy initially that a lot of local ZymoGenetics employees are likely to lose their jobs through the acquisition, CEO Doug Williams stressed in a follow-up phone call that “no decisions have been made.”  A Bristol Myers spokeswoman, Jennifer Fron Mauer, also emphasized via e-mail that “no decisions have been made yet about people or the site.”

The two companies have set up a transition team that will sort through the hard decisions over the next couple months, Williams says. He cautioned against jumping to a conclusion that this takeover will end up costing hundreds of jobs, like Eli Lilly’s 2007 takeover of Bothell, WA-based Icos. “That was a different company, different circumstances,” Williams says.

While Bristol-Myers has said the key to its takeover is ZymoGenetics’ most valuable asset—pegylated interferon lambda—it has also said it plans to continue selling recombinant thrombin (Recothrom) and has shown interest in other drugs in the ZymoGenetics pipeline, Williams says. He refused to speculate on how many people might be retained by Bristol in the end. But ZymoGenetics’ finance chief, Jim Johnson, noted that Bristol’s recent pattern—based on acquisitions of Adnexus Therapeutics and Medarex—suggests it also may want to retain many people with expertise in biotech drug R&D like those employed by ZymoGenetics.

“I’m going to advocate on behalf of the many talented workers we have here, I think Bristol sees a lot of value in the people that are here,” Williams says.

Still, many ZymoGenetics employees were “surprised” by news of the sale and asked a lot of questions of senior management during an afternoon meeting to discuss the transaction, according to ZymoGenetics spokeswoman Susan Specht.

Officially, this deal isn’t yet done until shareholders who represent 56 percent of ZymoGenetics’ shares agree to hand over their stock to Bristol at its settled-on price of $9.75. But that is likely to happen without a serious fight, given that Bristol offered 84 percent more than Zymo’s $5.30-per-share closing price. Plus, the two biggest shareholders in ZymoGenetics—Denmark-based Novo Nordisk and the private equity firm Warburg Pincus—have agreed to hand over their shares to Bristol, which represents a combined 37 percent ownership stake in ZymoGenetics.

Bristol first approached ZymoGenetics’ board in May, and the board agreed to consider its overture, Specht says. The ZymoGenetics board was able to negotiate for a higher price, and—with the consultation of its finance and legal advisors—it chose to take the offer on the table, Specht says. In the end, it was really about getting some returns for shareholders, she says.

“They felt the share price was stalled, and it was really best to take the offer,” Specht says. “The share price hasn’t reflected our real value for some time.”

Fron Mauer, the Bristol-Myers spokeswoman, said no decisions have been made about what to do with ZymoGenetics’ people and facilities in Seattle, and those decisions won’t happen until after the deal is closed in the coming months. Specht noted that while many of ZymoGenetics’ business functions—finance, HR, legal, communications—could get cut as part of the deal, there is a chance for certain departments like biotech drug manufacturing to remain intact as part of Bristol. The Seattle facility is likely to remain open at least through 2011, Specht says.

Bristol’s desire for ZymoGenetics comes mainly from pegylated interferon lambda, an experimental drug designed to treat hepatitis C, a chronic liver infection. ZymoGenetics scientists developed this drug to have the anti-viral punch of one of the standard workhorse drugs for this disease, but without causing the nasty flu-like symptoms that many patients feel is worse than the disease itself. Hepatitis C is one of the booming fields of biotech research of the past couple years, as Cambridge, MA-based Vertex Pharmaceuticals and pharma giant Merck have blazed a trail with new compounds that greatly increase the effectiveness of older interferon regimens, which is triggering many of the estimated 6 million patients in the U.S. and Europe to seek treatment for this liver damaging disease.

The ZymoGenetics drug has only produced results from the first of three phases of clinical trials, but Bristol and Zymo have made some very aggressive bets that pegylated interferon lambda will someday replace pegylated interferon alpha drugs that have been on the market for years, like Roche’s Pegasys and Merck’s Pegintron.

Fron Mauer, the Bristol spokeswoman, said she couldn’t speculate when the new pegylated interferon lambda might reach the marketplace or how much it could generate for Bristol in sales. But the drug is clearly the main driver for the deal, particularly since Bristol has gotten to know it well since it agreed to pay as much as $1.1 billion to co-develop the drug with ZymoGenetics in January 2009. Bristol sees this drug as having potential to help fill some of the major gaps opening up in its pipeline, as it prepares to lose its patent protection for blockbusters like the anti-clotting agent clopidrogel (Plavix) and the anti-psychotic medication aripaprazole (Abilify). Those drugs are schedule to face competition from cheaper generics in 2012 and 2014, respectively, she says.

“Full ownership of pegylated interferon lambda is really the key for us,” Fron Mauer says. “It’s a novel interferon that has potential to be a backbone in a new standard of care for hepatitis C.”

As part of the takeover agreement, ZymoGenetics has agreed not to urge another suitor to come along with a higher bid. Still, that could technically happen if another pharma company sees a potential blockbuster drug in the making being offered at a bargain price today. Much will depend on the next few weeks, as shareholders mull over how much they like the Bristol offer, and whether they see any real alternative that might bring a higher return.

But right now, with 37 percent of the shares already tendered to Bristol and only 56 percent needed to clinch the deal, it looks like this deal is going to get done. And a lot of talented Seattle biotech pros could be hitting the unemployment line later this year.

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3 responses to “ZymoGenetics Reaches End of Road in Seattle, Faces Uncertain Future, Potential Job Cuts”

  1. I’m well aware most successful biotechs get purchased before they have a chance to grow, but this is a terrible deal. Bristol is paying a tiny 11% premium over Zymo’s 52-week high. RecoThrom is cash-flow positive at the end of this year. Assuming interferon-lambda is successful, which is a safe assumption otherwise partner Bristol wouldn’t be doing this deal, Zymo’s Board is accepting $200 million LESS in this buyout than they likely would have earned anyway in established milestone payments from the original deal. Not to mention 50% of NA profit and 15-28% ex-NA royalties or, for that matter, the rest of the pipeline and RecoThrom cash stream.

    I know, risk-adjusted NPV… blah, blah, blah.

    Fact of the matter is, Zymo’s Board sold shareholders and employees out. This is a terrible deal. With 66% of the needed shares already locked up, however, Bristol has it in the bag.

    A terrible ending for one of Seattle’s best biotechs.