By Mary Welch

In terms of mergers and acquisitions, 1998 may very well be the year the proverbial dam broke.

¿It may be the year we saw the first trickle opening of the flood gates in terms of activity,¿ said Paul Boni, a vice president at Punk, Ziegel & Co., in New York.

David Steinberg, an analyst with Volpe, Brown, Whelan & Co., in San Francisco, concurred that last year was ¿as active a year as there was in the entire decade. There were a number of acquisitions. Elan Corp. for instance was an aggressive consolidator.¿

Elan, of Dublin, Ireland, went on a $1.4 billion shopping spree, with more than half that figure going to shareholders of Neurex Corp., for which Elan agreed to pay $740 million in April to serve as the centerpiece of its new Elan Pharmaceuticals division. The division has been largely built through acquisitions, including the 1998 buyout for $150 million of GWC Health Inc., the parent company of Carnrick Laboratories Inc., of Cedar Knolls, N.J. Elan has for most of its history specialized in drug-delivery technologies, and the company snapped up two firms in that field: Sano Corp., of Miramar, Fla., acquired for $392.8 million; and Nano Systems LLC, of King of Prussia, Pa., for $150 million.

Chiron Corp., of Emeryville, Calif., continued to play both sides of the mergers and acquisitions market as part of a restructuring designed to bolster core businesses in therapeutics, vaccines and blood testing, while shedding non-core businesses. The company paid $115.5 million to buy out Hoechst AG¿s 49 percent stake in Chiron Behring GmbH & Co., a Marburg, Germany-based vaccine company in which Chiron held the other 51 percent. In November, Chiron sold its in vitro diagnostics subsidiary to Bayer AG, of Leverkusen, Germany, which paid $1.1 billion.

Like Bayer, Abbott Laboratories, of Abbott Park, Ill., used an acquisition to add to its diagnostics lineup, paying $234 million to acquire International Murex Technologies Corp., of Toronto, which brought DNA probes and microtiter technology.

In some of the other large pharma-biotech buyout deals, Perkin-Elmer Corp., of Norwalk, Conn., paid $360 million for PerSeptive Biosystems Inc., of Framingham, Mass.; Watson Pharmaceuticals Inc., of Corona, Calif., signed a check for $300 million to acquire TheraTech Inc., of Salt Lake City, Utah; and Baxter International Inc., of Deerfield, Ill., paid $189 million for Somatogen Inc., of Boulder, Colo.

Boni noted that pharmaceutical companies gobbling biotech is ¿nothing new. The pharmaceutical is buying the company in its late-stage of developing. It¿s a financial play, with the pharmaceutical company swooping down to acquire a company that has a drug on the market or close to it. Think Neurex or Agouron.¿ (Warner-Lambert Co., of Morris Plains, N.J., paid $2.1 billion in January 1999 for Agouron Pharmaceuticals Inc., of La Jolla, Calif.)

Major players in pharma, agbiotech joining forces

The biggest merger news in pharma came in December, when Hoechst AG, of Frankfurt, Germany, announced that it would combine its life-sciences work with Paris-based Rhone-Poulenc SA to form a new company, Aventis, which will be headquartered in Strasboug, France. The combined research and development budget for Aventis will reach almost $3 billion.

Agrobiotechnology mergers made headlines as well in 1998, with Monsanto Co., of St. Louis, paying $3.7 billion for DeKalb Genetics Corp., of DeKalb, Ill., in December. Dow AgroSciences LLC, of Indianapolis, a subsidiary of the Dow Chemical Co., of Midland, Mich., paid $411.6 million in November to acquire Mycogen Corp of San Diego.

Market forces making some buyouts more attractive than collaborations

Analyst Caroline Copithorne said merger and acquisition activity was more focused with more companies being bought in the early stages, partly because of the growing disparity of evaluations between large and small companies.

¿Typically you could buy the whole company, including its intellectual property, for what you can do licensing deals these days,¿ said Copithorne, who is senior biotechnology analyst at Prudential Securities Inc., in New York. ¿Plus, these small companies have not been able to access financing like they could in the past, which makes them more willing to be acquired than previously.¿

The acquisitions often ¿make sense¿ for the absorbed firm, agreed Rachel Leheny, executive director at Warburg, Dillon, Read LLC, in New York. ¿Companies are realizing that merging or being acquired makes a lot of sense  it¿s a viable alternative, particularly with the cap market squeeze we saw in 1998 and will probably see in 1999. We counted 24 deals in 1998, 15 in 1997 and 11 in 1996  and there already have been five this year. Merger activity is starting to pick up.¿

¿What drives M&As is either a strategic move or one party is looking at it as an exit strategy,¿ said Elise Wang, first vice president at PaineWebber Inc., in New York. ¿The buyer must feel pretty strong about the company¿s prospects; otherwise you¿re just adding to your burn rate. I think later-stage companies are willing to look at the opportunity to be acquired but you have to deal with the perception of valuation and willingness to sell.¿

A common trend in 1998 acquisitions was that ¿acquired companies were all fairly close to or at profitability,¿ Steinberg noted. ¿They either had late-stage products or were on the cusp of profitability. The mergers were to help the acquirer expand their product pipeline and enhance their prospects for success.¿

Biotechs are also seizing M&A opportunites

Biotech-biotech makes for ¿a more interesting merger,¿ according to Boni. ¿They try to accelerate a drug to the market or bring a service or tool into the market and we¿ve seen good and bad.¿

He put the deal that created South San Francisco-based AxyS Pharmaceuticals Inc. in the latter category. The company emerged in early 1998, when Arris Pharmaceutical Corp., of South San Francisco, Calif., completed a $118.5 million acquisition of Sequana Therapeutics Inc., of La Jolla, Calif.

¿It¿s already been partly shut down  not because it didn¿t fit  but because it didn¿t accelerate that goal,¿ said Boni, who is skeptical also of Gene Logic Inc.¿s September purchase of Oncormed Inc. for $39 million. Both of those companies are based in Gaithersburg, Md.

¿How did it accelerate Gene Logic¿s business? It bought them some infrastructure quickly, and clients and some cross-selling opportunities, expertise and patents,¿ he said. ¿What Wall Street is looking to see is if that transcends into deals, deals, deals.¿

Many of the biotech mergers came in for under $20 million, but there were also a number of $100 million-plus transactions. Amersham Pharmacia Biotech, of Uppsala, Sweden, paid $256 million for Molecular Dynamics Inc., of Sunnyvale, Calif. The bioinformatics companies had been collaborating since 1994. And in August, T Cell Sciences Inc., of Needham, Mass., acquired Virus Research Institute Inc., of Cambridge, Mass., for $150 million.

Boni said the last two years have been wake-up calls to a lot of companies and their leaders. ¿How long can we do this without doing something tangibly?¿ he asks. ¿Not very long. If you think back to the beginning of biotechnology until 1996-97, think how many companies fizzled and went bankrupt. Very few shut their doors. It¿s like a decaying half-life  they keep on going, they cut their staff, go another year, cut staff They never reach zero. There¿s a lot of companies that go that way and it¿s a credit of management that they believe they can pull it together. But already this year you have three or four companies that have disappeared. That¿s new. I¿ve never heard more CEOs amenable to merger before.¿

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