How Arris, Khepri put deal together By Karen Bernstein

Despite the stated desire of nearly everyone in biotech to consolidate the industry, mergers don't grow on trees. Last week's announcement of a definitive agreement under which Arris Pharmaceutical Corp. will acquire Khepri Pharmaceuticals Inc. illustrates one solution to several of the key issues facing early to mid-stage biotech companies: both companies faced the problem of building critical mass in a fragmented industry, while Khepri in particular was caught in the limbo of mezzanine venture financing.

With the exception of genomics and screening companies, the financing choices for mid- to late-stage private companies are extremely constrained. For many of these companies, corporate partnering may not be an option until they have identified and begun testing lead compounds. And the fewer the options, the less leverage companies have with mezzanine funders, who have struck increasingly tough bargains as their exit vehicle - the IPO market - has been less and less generous.

Those funding realities place strong constraints on young companies, which can find themselves with technology that they don't have enough money to develop.

What Khepri needed

Both ARRS and Khepri are developing therapeutics based on proteases, catalytic proteins that alter the structure and function of other proteins and peptides by cutting the targeted molecule.

With $3 million in the bank at Oct. 31, 44 employees and an annual burn rate of $7.5 million, Khepri's choices were to do another funding round or look for a merger. The company has raised $23 million in three rounds of financing since its founding in 1992. At its last round in November 1994, it raised $11 million at $1.50 a share.