By Jennifer Van Brunt


As the early days of 1998 have already shown, the urge to merge is still a predominant theme across all industries — from telecommunications to banks, from the defense industry to computer software companies.

In the latest of a series of startling announcements, the American Stock Exchange confirmed late last week it is in merger talks with the National Association of Securities Dealers — the parent of the Nasdaq stock market. This particular combination, if it ever comes to pass, would create a formidable opponent to the New York Stock Exchange. It would also combine two very different styles of trading: The American Stock Exchange is a "floor exchange," with brokers physically present at the exchange, where they shout out bids and offers while specialists match the buy and sell orders. Nasdaq, on the other hand, is an electronic, computer screen-based dealer system.

If opposites truly do attract, then perhaps this seemingly odd coupling of two widely disparate "cultures" will come to pass. That's far from certain at this point, but it's already become abundantly clear that even when two corporate cultures appear to be totally compatible, basic discrepancies may arise that will stop a pending merger dead in its tracks. That was certainly the case with the very high-profile breakdown in talks between British pharmaceutical giants SmithKline Beecham plc and Glaxo Wellcome plc late last month. According to London-based SmithKline, the farther into talks the two companies got, the more apparent it became that there were some real cultural differences. Later news reports and analyses boiled the whole problem down to a power struggle between the heads of the two huge drug firms as to who would hold the reins of the merged entity, which by all measures would have become the largest pharmaceutical company in the world.

As it is, the number of pharmaceutical houses around the globe continues to shrink every year. And 1997 was no exception, as big pharma continued its urge to streamline operations by way of merger and acquisition. Moreover, the same forces are at work in the biotechnology sector. Intra-biotech mergers and acquisitions maintained a brisk pace in 1997 — a trend that has been accelerating since 1994. There were 66 biotech-biotech mergers and acquisitions announced in 1997, up from 51 in 1996 (excluding those that occurred in the arena of agricultural biotech). And as the first months of 1998 have already demonstrated, that urge to merge could become even stronger this year. By March 10, there had been 12 biotech-biotech deals announced and one proposed acquisition by a big pharma company — Deerfield, Ill.-based Baxter International Inc.'s $189 million bid for Boulder, Colo.-based Somatogen Inc.

But that's one area where there's been little change in strategy over the last four years — big pharmaceutical houses have not stepped up their acquisitions of biotech firms. The actual number of such deals always has been low compared to the biotech-biotech mergers and acquisitions — and there is no indication that it will change. Big pharma's major strategy for accessing the technologies of new drug development has been through collaboration, not acquisition. Certainly, the number of collaborations between biotech and big pharma companies has skyrocketed year after year, but the number of acquisitions has remained low.

In 1997, for instance, there were only seven such deals. These included — among others — Novartis AG's $75.6 million buyout of SyStemix Inc., of Palo Alto, Calif., in which the Swiss pharmaceutical giant (through its former incarnation as Sandoz Ltd.) already held a 73 percent interest, and Rochester, N.Y.-based Bausch & Lomb Inc.'s $300 million purchase of Chiron Corp.'s Chiron Vision business unit, located in Irvine, Calif.

But it was instrumentation giant The Perkin-Elmer Corp. (NYSE:PKN) that really went on a biotech buying spree in 1997. Its biggest acquisition was the $360 million buyout of Framingham, Mass.-based PerSeptive Biosystems Inc., completed in January 1998. That merger was anticompetitive enough that the Department of Justice required PerSeptive Biosystems to sell its DNA synthesis patent rights to NeXstar Pharmaceuticals Inc. (NASDAQ:NXTR), of Boulder, Colo. Those rights expand NeXstar's existing patent portfolio and allow it to make instruments and chemicals used in the synthesis of DNA molecules.

Perkin-Elmer, of Norwalk, Conn., was already a world leader in scientific instrumentation as well as systems for life sciences applications. And through its PE Applied Biosystems division, it also dominates the market for automated DNA analysis systems. With the acquisition of PerSeptive Biosystems, Perkin-Elmer added systems for purifying, analyzing and synthesizing biomolecules.

PE Applied Biosystems, which is based in Foster City, Calif., made its own purchase in July 1997 through the acquisition of privately held Linkage Genetics Inc. The company was joined with PE Applied Biosystems' PE Zoogen and Applied Agricultural units to form PE AgGen, which will provide genetic analysis services in plant and animal breeding.

Perkin-Elmer also acquired rights to amplified fragment length polymorphisms in human and animal health care applications from Keygene NV, of Wageningen, the Netherlands, by acquiring its spin-off, GenScope Inc., in February. This technology allows the analysis of all the genes expressed in a cell in a matter of only two hours.

In 1997, Perkin-Elmer also acquired privately held Molecular Informatics Inc., of Santa Fe, N.M. This firm brought to the mix its expertise in bioinformatics software. According to Perkin-Elmer's president and CEO, Tony White, "The rapid growth in life sciences, with its increasing need to manage, integrate and interrogate vast amounts of information, is redefining pharmaceutical drug discovery and development. With the acquisition of Molecular Informatics, Perkin-Elmer has the technologies in place to link the systems that pharmaceutical research companies need to compress the time and reduce the cost of discovering new drugs and bringing them to market."

That same philosophy — to join together the systems that big pharmaceutical houses require for new drug discovery — is what prompted so many of the intra-biotech mergers in 1997. Combinatorial chemistry, genomics and bioinformatics make perfect bedfellows, apparently, and the merger of Sequana Therapeutics Inc., of La Jolla, Calif., with Arris Pharmaceutical Corp., of South San Francisco, is a prime example. The new company, named AxyS Pharmaceuticals Inc. (NASDAQ:AXPH), incorporates Sequana's genomics capabilities with Arris' drug discovery focus. Other deals fall into this arena, too, including Millennium Pharmaceuticals Inc.'s (NASDAQ:MLNM) $103 million acquisition of ChemGenics Pharmaceuticals Inc. (both of Cambridge, Mass.) in February; Columbus, Ohio-based Progenitor Inc.'s (NASDAQ:PGEN) $30 million buyout of Mercator Genetics Inc., of Menlo Park, Calif., in August; and Palo Alto-based Incyte Pharmaceuticals Inc.'s (NASDAQ:INCY) $95.7 million acquisition of privately held Synteni Inc., of Fremont, Calif., which was finalized in January 1998. Added to that is the recent announcement that Pharmacopeia Inc. (NASDAQ:PCOP), of Princeton, N.J. — a relative old-timer in the world of dedicated combinatorial chemistry companies — intends to shell out $133 million for the bioinformatics capabilities of San Diego-based Molecular Simulations Inc. It's easy to see that an increasing number of biotech mergers are following a trend toward consolidating in one company the diverse drug discovery technologies and capabilities that are in such high demand by big pharma — capabilities for which big pharma is willing to pay top dollar.