Pharmos revises merger deal [p. 18]

Israeli biopharmaceutical company Pharmos Corp. may have just about managed to get back on track in its transformation from a failed "one drug wonder" to a company with a diversified and more advanced drug pipeline after backing down from shareholder pressure and revising the terms of the merger deal with Vela Pharmaceuticals Inc. "We believe that the revised terms are in the best interests of Pharmos shareholders, as a significant portion of the consideration is linked to specific milestones related to Vela's drug candidate, dextofisopam," said Haim Aviv, chairman and CEO of Pharmos. Following the announcement in March of the agreement to acquire US company Vela Pharmaceuticals, a privately owned company specializing in the development of medicines related to diseases of the nervous system, Lloyd Miller, a major company shareholder, urged Pharmos shareholders not to approve the acquisition and informed them of his intention to block the share issue needed to acquire Vela. "We were not sure what Miller was after; whether he thought the deal too expensive, aimed to replace management, as he had no confidence in us, or whether he was aiming for a hostile takeover attracted by the cash pile of the company," said Aviv. Following personal negotiations during which Aviv managed to convince Miller about the strategic appropriateness of the Vela acquisition but only after revising the terms of the merger, the completion of the acquisition is thought to be a done deal. "We were lucky that Vela agreed to the modified conditions of the merger," said Aviv. "Mr. Miller has been instrumental in restructuring the deal terms, and I thank him and his group, Drs. Soula and McKee, for the amicable resolution of the proxy dispute. We welcome Mr. Miller to the Pharmos board, along with the three new directors joining us from the Vela board." According to the revised terms, the cash payable by Pharmos at the closing of the deal has been increased to $6 million from $5m in the original deal. Further, the number of shares of Pharmos common stock to be issued to Vela shareholders at closing has been reduced to 6.5m shares from 11.5m shares. In addition, the revised agreement also included performance-based milestone payments of a total of $6m and issuance of 13.5m shares in stock in connection with the development of Vela's lead drug, dextofisopam, for the treatment of irritable bowel syndrome (IBS). "If a shareholder saw the need to hammer out a better deal for shareholders, this begs the question of why the management could not act in the shareholder's best interest in the first place", said an industry expert. "The addition of performance-related milestone payments sheds some light on the skepticism of Pharmos shareholders toward Vela's drug portfolio." Pharmos not so long ago had failed to become a major player in the traumatic brain injury market worth as much as $1 billion a year worldwide. At the end of 2004, Pharmos pivotal Phase III trial for its flagship drug dexanabinol for the treatment of TBI flopped, leading to a 66% drop in the company's share price. Furthermore, Pharmos's management also came under fire for dumping portions of their shares at various intervals before the clinical results came out.