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Biotech firm



is engaged in a fight with its largest shareholder over its planned $160 million acquisition of privately held Eos Biotechnology.

OrbiMed Advisors, a $4 billion asset management firm that owns 10% of Pharmacopeia, is strongly opposing the acquisition on the grounds that the deal is too expensive and doesn't make strategic sense. OrbiMed has hired a proxy solicitation firm to help it garner additional shareholder support for its cause.

Pharmacopeia executives have countered by hiring consultants to press their case with investors. The company believes that it's paying a fair price for Eos and that the deal will yield long-term benefits for the company and its market value.

Pharmacopeia has scheduled a shareholder vote on the merger for Jan. 18.

Rare Biotech Brouhaha

While lacking the drama of the






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merger fight, the tiff between Pharmacopeia and OrbiMed is unusual because proxy fights are fairly rare among biotech firms.

"In more than 25 years in this business, I've never been involved in something like this," says OrbiMed Managing Partner Sam Isaly. "But we feel very strongly about this -- strong enough to get involved in a campaign to convince other shareholders to join us."

Pharmacopeia is a service-oriented biotech firm that uses its science and technology to help other drug firms accelerate their drug research and development. Pharmacopeia has been profitable since 1999, but company executives say earnings growth is slipping, forcing them to change course.

"The best thing for us to do is to harness our internal technology and apply it to the development of our own drugs," says Pharmacopeia spokeswoman Sue Rodney. But in order to become a drugmaker, the company needs drug targets. That's where Eos fits in, she says, because the privately held company owns technology that mines the human genome for promising disease targets, then develops antibodies, or drugs, against those targets.

Pharmacopeia announced its plan to acquire Eos on Aug. 22, in a stock swap valued at $197 million at that time, based on Pharmacopeia's share price of $18.51. Investor reaction has been anything but sanguine -- shares of Pharmacopeia have fallen more than 26% since the merger was announced, compared with a 17% rise in the broader American Stock Exchange Biotech Index. Pharmacopeia shares closed Thursday at $13.76.

Don't Do It

OrbiMed, which owns 2.4 million of the 23.9 million Pharmacopeia shares outstanding, believes the Eos deal is a mistake. In a letter sent to shareholders, the asset management firm argues that Pharmacopeia is significantly undervalued compared with its peers, so now is the wrong time to use its shares as currency for a major acquisition. It believes that the price offered to Eos is too high, especially because valuations of private, early-stage biotech firms have dropped considerably in the past year. Lastly, the deal would plunge Pharmacopeia into the red for 2002, and at best would be neutral to earnings in 2003.

"We believe that this is an ill-advised transaction for Pharmacopeia and have determined to vote all of the shares we control against the Eos acquisition," the OrbiMed letter states. "We urge our fellow Pharmacopeia shareholders to vote against the transaction as well."

Pharmacopeia's Rodney says the company respects OrbiMed's views, but says buying Eos is its best strategic move.

"We understand that our shares are undervalued, but we can't get the stock price higher unless we do this deal," she says. She also defends the price being paid for Eos -- about $160 million today, which includes $40 million in cash on Eos' books.

"There are not that many companies out there left that can provide us with the

genomics technology that we need," says Rodney. "We did an exhaustive search of quality companies before we decided to acquire Eos," she adds.

Yes, Do It

Pharmacopeia's board of directors has approved the Eos merger. In its own letter to shareholders, Pharmacopeia executives say, "You may be aware that one of our stockholders, OrbiMed Advisors, has publicly objected to our proposed merger with Eos. We strongly disagree with their position. Your Board and management remain convinced that the Pharmacopeia-Eos marriage of genomics, biology and chemistry presents our company with the best opportunity to achieve increased revenues over the long term, and to maximize value for all stockholders."

So far, analysts have tended to side with OrbiMed. In a research note following the announcement of the Eos deal, Legg Mason biotech analyst Stefan Loren wrote, "We are impressed with Eos' technology, expertise and management depth; however, we believe that Pharmacopeia may have overpaid." Loren rated Pharmacopeia a buy then, but he's since downgraded the company to market perform because of softening revenue in its software business and uncertainty over the Eos merger. Loren's firm has no banking relationship with Pharmacopeia.

SG Cowen biotech analyst Bill Tanner also has concerns with the deal, believing that Pharmacopeia shares might actually rebound if shareholders reject the merger. Tanner rates Pharmacopeia buy, and his firm doesn't have a banking relationship with the company.