Genomics Deals Help Companies Work Faster, Smarter

By Randall Osborne

Consolidation in the biotechnology andpharmaceutical industries maintained a brisk pace during 1997, a trend that analystspredicted would continue as streamlining became more and more a demand of doing business.

“We call it the ‘deconvolution’of the pharmaceutical industry,“ said Peter Drake, an analyst with VectorSecurities International Inc., of Deerfield, Ill.

Companies sought more and more to simplifytheir strategies, outsourcing clinical development while “insourcing“ speedierways to identify and develop new products, and that approach carried over into merger andacquisition choices, Drake said.

“Genomics — which includes genesequencing as well as software companies such as Incyte [Pharmaceuticals Inc.,of Palo Alto, Calif.] — is very important,“ he said.

Joe Dougherty, an analyst with UBSSecurities, of New York, said genomics is “one of the few areas in the industrywhere you can see synergy between whole companies.“

Combinatorial chemistry, for example, is aperfect match with genomics, Dougherty said. In other areas, companies are “much moreinclined to cherry pick,“ forming collaborations for specific features rather thanconducting buyouts.

A strong genomics element was evident in theyear’s biggest merger: the $360 million agreement between Perkin-Elmer Corp.,of Norwalk, Conn., to acquire PerSeptive BioSystems Inc., of Framingham, Mass., for$13 per share in a stock exchange.

Perkin-Elmer focuses on DNA; PerSeptive hasdeveloped technologies by which researchers are studying protein sequences in proteomics,seen as an important complement to genomics work.

Later in the year, Arris PharmaceuticalsCorp., of South San Francisco, began its takeover of Sequana Therapeutics Inc.,of La Jolla, Calif., for $166 million. The deal, briefly held up by an Arris shareholder,created a new entity called AxyS Pharmaceuticals Inc., incorporatingSequana’s genomics capabilities with Arris’ drug discovery focus.

Millennium Pharmaceuticals Inc., ofCambridge, Mass., acquired privately held ChemGenics Pharmaceuticals Inc., also ofCambridge, in a stock swap valued at $90 million. The buyout combined Millennium’sdisease-gene discovery focus with ChemGenics’ microbial genomics technologies.

Progenitor Inc., of Columbus, Ohio, afunctional genomics company, took over Mercator Genetics Inc., of Menlo Park,Calif., which focuses on discovering disease-related genes, for about $30 million.

Eric Schmidt, also with UBS, saidpharmaceutical companies are “not good at getting innovative scientists into researchorganizations and retaining them. There are certain things that biotech companies just dobetter.“

Joining forces helps them do it better still— and not just in genomics for development of human drugs, as agriculturalbiotechnology company Calgene Inc., of Davis, Calif., found out when its majorityowner, St. Louis-based Monsanto Inc., acquired it for $240 million.

That acquisition was characterized as a swapof Calgene’s technological expertise for much-needed cash from Monsanto, althoughCalgene shareholders who disagreed with the January offer took until April to settle.

Lack Of Capital Forced Mergers

In terms of money, the biotech sector“was not as red hot or ice cold as it has been in the past,“ Schmidt said.“One of the big trends was that we never saw the financing window either 100 percentopen or 100 closed. That sounds like an obvious thing, but that’s not how it has beenin biotech before.“

A difficult market for initial publicofferings (IPOs) forces consolidations, said Elizabeth Silverman, who analyzes platformbiotechnology companies for BancAmerica Robertson Stephens, of San Francisco.

“There will be more acquisitions and moremergers,“ Silverman said. “Some of the smaller private companies, rather thandoing an IPO in 1998, may end up merging into a larger entity.“

She cited as a prime example thelate-in-the-year deal between Incyte and privately held Synteni Inc., of Fremont,Calif. Incyte acquired gene chip technology from Synteni, which “was on track for a1998 IPO as of October,“ Silverman said.

“I think it just looked like a muchbetter investment to merge with Incyte rather than go it alone in the market whenit’s so tough to get money,“ she added.

Schmidt forecasted that progressively moredemands will be made of biotech firms by investors. Even genomics may lose its automaticmagic, he said.

“If it’s a hot industry for another12 months, investors will become more savvy [about genomics] as well,“ he said.“I don’t think companies will have an opportunity to go public with moderatelydifferentiated technology. You’ll need something more to pin your hopes on.“

Genomics, bioinformatics and combinatorialchemistry gave biotech a needed boost, and the industry will need them to get the resultsfor which investors clamor.

“In another industry, that’s the wayany company is evaluated,“ Schmidt said. “It has to be that way. Now, biotechcompanies are being judged on their individual merits, and that’s a sign wewelcome.“

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