By Jennifer Van Brunt

Editor

With the capital markets as tough as they have been this year for biotechnology companies, many firms are being forced to look elsewhere for financial backing. One of those alternatives that some biotech firms are choosing — perhaps the last to be considered — is to be acquired by another company.

Indeed, although much of the activity in biotech mergers and acquisitions this year has been focused on marriages between two young companies that wish to create a critical mass by joining their technologies, an increasing number of these deals are buyouts of the weak by the strong.

Predictions of a major consolidation within the biotechnology sector have surfaced every single time that the biotech financing well has run dry. And although there is still money available to enterprising biotech firms from traditional sources — in fact, overall the sector has actually raised more money in 1998 than it did last year for the same time period — the alternatives for companies that are already struggling seem to be disappearing. Such businesses might have less than a year's worth of cash in the bank to keep operations running.

As the stock prices fall, the market capitalizations of these firms start shrinking until they get to critically low levels. And, adding to the downward spiral, biotech companies with relatively low market capitalizations get little if any analyst coverage. To all intents and purposes, companies in this predicament just vanish from investors' radar screens.

Pace Picks Up

The pace of merger and acquisition activity between biotech firms has continued to accelerate over the last four years. In 1994, for instance, there were 41 inter-biotech mergers and acquisitions; by the end of 1997, that number had jumped to 66. And for the first half of 1998, there have already been 35 unions — either proposed or consummated — between biotech firms. (See the graphs on p. 2 for comparisons of the number and value of mergers and acquisitions between 1994 and the first half of 1998.)

As well, there are indications that the major pharmaceutical houses are stepping up the pace of acquisition this year. In years past, the number of outright acquisitions of biotech companies by big pharma have remained fairly low. But in the first half of 1998, there have already been as many deals announced and/or completed as there were in all of 1995 or 1996. Two of the 11 big pharma mergers and acquisitions of 1998 are actually the "reverse" situation: In one, Chiron Corp. (NASDAQ:CHIR), of Emeryville, Calif., has bought out the remaining stake in Chiron Behring GmbH & Co., its human vaccines joint venture with Germany's Hoechst AG. In the other, SangStat Medical Corp. (NASDAQ:SANG), of Menlo Park, Calif., has offered $33 million to buy Imtix, the organ transplant business of Pasteur Merieux Connaught, a member of France's Rhone-Poulenc Group.

Biotech-Biotech Deals

The deals between biotech companies, however, run the gamut. In some, there is an obvious marriage of strength, as the young firms seek to achieve a sum that is more than the parts. In others, though, an acquisition is a rescue operation.

Hopkinton, Mass.-based Seragen Inc. (OTC Bulletin Board:SRGN) has had its share of financial setbacks over the years — even as its lead oncology product has progressed steadily through the clinic. Seragen's long-time partner on that drug, Eli Lilly and Co., of Indianapolis, made several moves in the spring of 1997 to support Seragen's restructuring efforts. Lilly altered the terms of the 1994 collaboration so that Seragen could seek other corporate partners for non-cancer uses of the product; Lilly also offered its assistance to Seragen in meeting certain third-party payments.

In July 1997, Seragen signed an option agreement on another of its drug candidates — a growth factor fusion protein for treating restenosis — with U.S. Surgical Corp., of Norwalk, Conn. But despite the potential income of $32 million from that deal, Seragen's finances were tenuous enough that the company's stock was delisted from Nasdaq in the fall of 1997.

But in May of this year, Ligand Pharmaceuticals Inc., of San Diego offered to buy the company — along with its late-stage drug for treating refractory cutaneous T cell lymphoma. Ligand (NASDAQ:LGND) will pay as much as $67 million for Seragen. And the drug, an interleukin-2 fusion protein called Ontak, has been recommended for approval by an FDA advisory committee. Ligand is also buying Marathon Biopharmaceuticals Inc., a former facility of Seragen's, which still manufactures Seragen's potential therapeutics. Plus, Ligand struck a deal with Lilly under which Lilly will assign Ligand the rights to Ontak.

Ligand's not being entirely altruistic, however, for the acquisition of Seragen's product Ontak complements its own product portfolio for cutaneous T cell lymphoma. Ligand is developing Targretin (a synthetic retinoid analogue) for treating the same disease — but at earlier stages.

On the other hand, the philosophy of joining together the systems that big pharmaceutical houses require for new drug discovery — combinatorial chemistry, genomics and bioinformatics — has prompted many biotech-biotech mergers of late. In 1997, for instance, it accounted for the merger of Sequana Therapeutics Inc., of La Jolla, Calif., with Arris Pharmaceutical Corp., of South San Francisco, to form Axys Pharmaceuticals Inc. (NASDAQ:AXPH). Other 1997 deals that fall into this category include Millennium Pharmaceuticals Inc.'s (NASDAQ: MLNM) acquisition of Cambridge, Mass., neighbor ChemGenics Pharmaceuticals Inc. in February, and Progenitor Inc.'s (NASDAQ:PGEN) acquisition of Mercator Genetics Inc., of Menlo Park, Calif., in August. Progenitor, which had been located in Columbus, Ohio, relocated to California shortly thereafter.

This type of merger has continued into 1998. One of the earliest announcements concerned Pharmacopeia Inc.'s (NASDAQ:PCOP) acquisition of Molecular Simulations Inc. Princeton, N.J.-based Pharmacopeia, one of the original combinatorial chemistry companies, closed its $130 million buyout of the San Diego-based bioinformatics company in June.

In what is claimed to be the first merger between two companies focused on genomics, Gene Logic Inc. (NASDAQ:GLGC) made a $38 million bid for Gaithersburg, Md., neighbor OncorMed Inc. (AMEX:ONM) in early July. The marriage helps create a critical mass of technologies and services to offer to big pharmaceutical partners. Gene Logic will acquire not only OncorMed's tissue repository (used to characterize genes) and its clinical experience, but also the firm's portfolio of pharmacogenomics alliances with large pharmaceutical houses. When mixed with Gene Logic's own genomics and bioinformatics platforms, the result is intended to be the stepping stone to a franchise in pharmacogenomics.

Some biotech companies have pooled their respective resources to form new companies entirely. This is the case for Matrigen Inc. and Prizm Pharmaceuticals Inc., for instance, which announced in May that they had merged to form Selective Genetics Inc., which will be based in San Diego. The new company will focus on gene therapy approaches to tissue repair and regeneration.

And T Cell Sciences Inc. (NASDAQ:TCEL), which is located in Needham, Mass., announced in May that it is going to merge with Virus Research Institute Inc. (NASDAQ:VRII), of Cambridge, Mass., in a $150 million stock swap to form Avant Immunotherapeutics Inc. Both companies have been developing products that harness the immune response to prevent and treat disease. Together, they will have 12 products near or in clinical trials and five strategic alliances with pharmaceutical partners.