Biotechs Merging to Pool Resources

Traditionally, big drug companies have gobbled up smaller biotechnology firms to smooth out the long and bumpy road to drug development.

Now, biotech companies are increasingly buying one another. The reasons for the consolidations are many.

This is according to a panel of biotechnology

"Biotech firms are no longer mere fodder for the pharmaceutical giants," said panel leader Stephen Ferruolo, citing a headline that appeared in The Economist magazine.

According to The Economist's survey, biotech consolidations nearly quadrupled from six in 1999 to 23 in 2001, said Ferruolo, a partner with the San Diego-based law firm Heller Ehrman White & McAuliffe LLP.

The consolidated pharmaceutical industry leaves biotechs with fewer customers to provide with services. Drug giants are expected to lose their patent protection on best-selling drugs such as Cipro and Claritin, and with no new blockbuster drugs in sight, spending is likely to decline.

This will spell less funding for early-stage biotechnology and fewer significant deals, one biotech industry veteran said.

Still, many biotechs remain better funded than they have been in years. Examples of firms pooling their own resources with the goal of becoming fully integrated biopharmaceutical companies are rampant.

The experts agreed biotech mergers can work. But the stakes are high.

"There are and have been a significant number of biotech-tobiotech collaborations, but very few would appear to have been successful," said Michael Grey, chief business officer at Structural Genomix, Inc., a wellfunded proteomics firm in San Diego.

Common-place 50/50 mergers between a chemistry-rich biotech and another biologyrich biotech tend to work well together until they reach a point where resources from a big drug company are needed.

Then, he said, the question arises, "Do I continue with this 5050 collaboration with no near-term revenues or do I use the resources in a partnership with pharma?"

Most run with the cash and that's when the collaboration begins to falter, he said.

But it doesn't have to be that way.

Katherine Bowdish, president of Alexion Antibody Technologies in San Diego, can still recall "anticlimax" after closing a merger in September 2000.

Prolifaron Inc. of Sorrento Valley was bought by publicly traded Alexion Pharmaceuticals Inc. of New Haven, Conn., in a stock deal valued at $41 million to $45 million for all outstanding shares of Prolifaron.

Bowdish said the marriage between her scientifically-rich West Coast biotech and the East-Coast expert in drug development continucs to work - in spite of the occasional competitive bickering.

Bowdish advises firms seeking to consolidate to keep on top of developments and listen to employees' concerns.

Grey, who resigned as CEO and president of the San Diegobased platform technology firm Trega Biosciences Inc. following their acquisition of Germany-based Lion Bioscience AG, said biotech collaborations warrant a "carefully structured agreement."

His advice: Develop a detailed plan - no longer than 12 months - with clearly defined responsibilities that allows for flexibility and an exit strategy.

"Early stage companies change very rapidly and the agreement needs to be set up so to accommodate the evolution of the company," Grey said.

He proposes three models:

* The "barter model" calls for two biotechs to trade technologies to achieve the next, higher value.

* Under the "baton exchange model," each biotech agrees to complete one task, hands it off, then decides on the next move.

* The "draft model" has the objective to pool resources to create multiple opportunities.

Biotech partnerships offer a means to leverage technologies and create higher value by retaining products rights through early drug development.

Wall Street tends to look unfavorably at biotechs that give away too much of their value too soon, Grey said.