Does one and one make three?
Biotech observers are starting to think not. For years, the accepted wisdom in the industry held that combining companies could accelerate growth and spark investor interest, particularly at a time when biotech was
persona non grata
in many portfolios.
But an expected wave of mergers never materialized, at least not to the extent that it has in the quickly consolidating drug industry. Now, with share prices well above year-ago levels and investors sensing that a new age of biotech discovery has arrived, executives at the world's biggest biotech gathering, the
Biotechnology Industry Organization
conference in Boston, say widespread consolidation among biotech players probably isn't in the offing. What changed?
For one thing, investors have renewed their love of biotech. Though a recent wave of
selloffs knocked most biotech stocks well off their highs, a six-month-long rally has given cash-hungry companies ample opportunity to raise money. That took the pressure off companies that otherwise might have sought to merge with rivals to appeal to investors at cash-raising time.
Biotech companies, after years of finding investor doors closed, raised a record $10 billion in the first quarter to finance growth, according to
Warburg Dillon Read
. "The first quarter was the best ever for biotech fund-raisings," says Eric W. Roberts, managing director of corporate finance.
But even when money isn't an issue, some executives now say finding the right partners in a diverse industry often presents insurmountable obstacles. Now that money is more freely available, it's unlikely companies will pursue mergers as a survival tool, although they say acquisitions to boost product portfolios is probable.
"We looked at one plus one equals three, but largely found that one plus one equals one," says William T. Comer, who headed
, a California biotech company that sold out to
in November after failing to find a suitable merger partner. "That's why we haven't seen a lot of biotech-to-biotech mergers."
The Outer Limits
With nearly 1,300 U.S. biotech companies, it seemed inevitable in recent years that companies would begin joining forces. After all, the reasoning went, there are a limited number of investors willing to fund the long lead times needed to bring a drug to market, and limited room for "me-too" companies working in the same therapeutic fields.
"Everyone was saying there are 1,300 biotech companies out there and why don't we put bunches of them together," says Glen T. Giovannetti, a partner in
Ernst & Young's
life sciences group in San Francisco. "But it takes a lot to get them to throw in the towel. It's directly proportional to how much money they have in the bank."
Compounding the pressure was a spate of mergers in big drug companies, giving biotech companies fewer potential partners to develop their products. According to BIO, the last decade has seen the ranks of the big drug companies most active in forming biotech partnerships shrink to seven from more than 20. Large drug companies such as Britain's
, which are slated to merge, can have up to three dozen biotech partnerships. Those inevitably get pared back in a merger.
To be sure, there was a certain amount of merger-and-acquisition activity in the biotech business in the first half of last year, but it all slowed down in the second half, particularly since share prices began rising last October as fund managers shifted money out of some high-priced Internet stocks.
Nonetheless, the number of biotech companies that aim to develop new drugs and medical products has grown, reflecting a continuing vast opportunity for product development at a time when many diseases remain poorly treated. And venture capital funds, which typically finance biotech start-ups, are awash with cash from the technology bull market, with many looking to invest in the exponential growth in knowledge about the human genetic makeup.
"Company creation has continued to exceed company destruction, either through merger or business failure," said David Stone, a consultant with
Liberty Tree Advisors
who led a panel discussion on consolidation.
According to BIO, the U.S. biotech industry, far from consolidating, grew to 1,283 companies last year from 1,274 in 1998, with the number of publicly traded firms rising to 327 from 317. Industry employment rose to 155,000 from 141,000 over that period. That growth was hailed by luminaries like
Peter Lynch, who contrasted the anemic growth in new company creation in Europe to growth in the U.S. Fidelity manages one of the largest biotech funds in the world.
"Some 4,000 companies went public in the last 10 years in the U.S.," Lynch told the 9,500 or so conference delegates at Boston's Hynes Center. "That's an amazing number. In Europe, there haven't been 4,000 companies to go public since Charlemagne."
Still, even with the more favorable industry conditions, no one is betting that biotech-to-biotech consolidation will cease altogether. And some even predict it could re-emerge as companies look to grow, using more valuable stock as acquisition currency.
"Higher market capitalizations could lead to greater consolidation," said John C. Martin, CEO of
, which last year spent $550 million in stock to buy
, a fellow biotechnology company in one of the biggest biotech-to-biotech mergers to date. He said the purchase "accelerated our strategic vision and made us more productive."