National Editor

NEW YORK - One effect of the tightened market is that deals are taking place as alternatives to financings, and "pharma companies are, for the first time, looking at acquisitions as alternatives to collaborations," said Stephen Sands, managing director of Lazard Freres & Co. LLC's banking group.

"I don't think they're going to gobble up biotech," Sands told a crowded meeting room in the Waldorf-Astoria Hotel here during a roundtable discussion that was part of the Biotechnology Industry Organization's CEO & Investor Conference.

But transactions such as Johnson & Johnson's recent buyouts of Scios Inc. and 3-Dimensional Pharmaceutical Inc. may become more common, Sands said. J&J, of New Brunswick, N.J., intends to acquire Sunnyvale, Calif.-based Scios for $2.4 billion and 3-Dimensional Pharmaceutical, of Exton, Pa., for about $129 million. (See BioWorld Today, Feb. 11, 2003, and Jan. 17, 2003.)

In a session titled "The Changing Relationship Between Pharma and Biotech," Sands noted "there are still all the issues everybody's always had: How much unencumbered technology is in these companies; what is the risk-reward [ratio]?"

Also, he cited a "higher bar" in merger deals.

"If you're a pharmaceutical guy and you put yourself on the line to spend $500 million or $1 billion on a biotech company, or even $200 million on a biotech company, and it fails, the personal price in the company politically is always higher [than it would be in a collaboration], and deals are always about people," Sands said.

Gail Maderis, president of Genzyme Molecular Oncology, a division of Genzyme General in Cambridge, Mass., said the distinction between biotechnology companies and pharmaceutical firms is starting to blur.

"We're seeing pharma companies doing a lot of deals in the biologics arena, and large biotechs doing small-molecule deals," she said, adding that "it's more an issue of looking at the acquirers and the acquirees," or the "haves" and "have-nots."

While would-be buyers and collaborators are looking for later-stage products, "it's becoming a more competitive arena [where] fewer late-stage products that are unpartnered are worthy products. As companies back up and look for earlier-stage deals, the risk equation shifts, and that creates interesting issues in terms of how to structure the deal and perhaps also tips the balance between acquisitions and alliances."

On hand from Amphora Discovery Corp., of Research Triangle Park, N.C., was Martin Haslanger, president and CEO. Amphora, with what it calls a multidimensional lead-generation approach, was formed to create and commercialize a database of chemical genomics information for use in faster preclinical drug discovery to accelerate target validation and lead identification.

"Clearly, people are very much interested in later-stage molecules, although they [also] are interested in more efficient ways to get to early stage molecules, and platforms that are connected to products are very interesting to companies," he said. Amphora raised $23 million in a round of Series B financing late last year. (See BioWorld Today, Dec. 31, 2002.)

An important lesson of the past decade, Haslanger said, involves what might be called the "histocompability factor." The term, which in a medical context has to do with a state of mutual tolerance that allows some tissues to be grafted effectively to others, is useful in understanding buyouts, he said.

"How do you maintain the human capital, the creativity of the biotech [firm] once you acquire it?" he asked, pointing to the two-thirds-ownership deal between South San Francisco-based Genentech Inc. and Roche Holdings Ltd., of Basel, Switzerland, which may be "done more and more to try to address these issues."

The bottom line regarding buyouts, Haslanger said: "Valuations make it very tempting. Ongoing expenses are a real problem."

Finding somewhat more conservatism among would-be buyers was Wolfgang Stoiber, principal and co-founder of JSB Partners LP, of Concord, Mass.

"From what we see, it takes clinical proof of concept for pharmaceutical companies to make a purchase decision," he said. "Before then, we find it hard to convince someone that a strategic alliance is inferior to the acquisition, for all sorts of reasons, risk being one."

Apart from the potential profit-and-loss impact of a merger, "people want to keep their options open," Stoiber said. "They want to do a number of partnerships."

Buyers also want "ideally, more than just a product," he said; they want a research and development platform that feeds new projects into the system.

"At that point, pharmaceutical companies consider buying," Stoiber said. "That is also a point where, given the current market conditions, it makes an awful lot of sense for founders and early investors to sell."

Having a product in a later-stage trial does not mean a reduction in risk that is very significant for biotechnology firms considering keeping the whole show to themselves, he said.

"Even in Phase III, you do fail," Stoiber noted. "We ran these analyses for shareholders in some of the assignments we did, and found that, even in the best-case [scenario], it does not necessarily make sense to stay in the game even beyond early Phase II, because the dilution you have to accept and the risk you have to take as an owner of a small biotech company that has one or two products in development is enormous."

The BIO CEO & Investor Conference continues through today.