THIS year, British biotechnology companies have been merging and acquiring with enthusiasm. The company British Biotech has made consolidation its mission. The Oxford-based company has put its money where its mouth is with two bold moves. In April, it took over cancer drug specialist RiboTargets of Cambridge. And in August, it acquired the neuroscience drug company Vernalis, based in Winnersh, Berkshire, for 拢48 million.
Elsewhere there was a spectacular bidding war over Oxford GlycoSciences in January, which eventually ended when Celltech, the UK鈥檚 largest biotech operation, acquired it for 拢1.1 million. Then in May, Runcorn-based Protherics, famous for a rattlesnake antivenom, bought the cancer treatment group Enact in an 拢8 million deal. And last month cancer drug specialist Xenova offered up to 拢15 million in shares for its smaller rival KS Biomedix.
It鈥檚 not only British firms that are feeling hungry. With biotechs across Europe valued so low, it鈥檚 no surprise that US companies, too, are snapping them up. In July, the California-based blood testing and vaccines giant Chiron bought the Oxford-based vaccine company PowderJect for 拢542 million. And in the same month it was announced that BioReliance, based in Maryland, would purchase the pharmaceuticals manufacturer Q-One of Glasgow.
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Industry insiders think there is plenty more to come. 鈥淭here are huge amounts of discussions going on and I鈥檓 sure we鈥檒l see more consolidation in the next few months,鈥� says biotech entrepreneur Andy Richards from Cambridge. Keith Redpath, head of life sciences research at European investment bank WestLB Panmure agrees. 鈥淓veryone is talking to everyone,鈥� he says.
It鈥檚 easy to see the benefits of a merger (快猫短视频, 15 March, p 65). Protherics, for instance, raised 拢3 million and added two new products to its clinical development portfolio when it took over Enact.
鈥淧rotherics doubled the size of its portfolio by buying Enact,鈥� says Redpath. Increasing the number of drugs in a company鈥檚 development pipeline is one of the most compelling reasons for consolidation. 鈥淵ou need ten products in phase-one clinical trials to bring one to the market,鈥� says Redpath. 鈥淭his is a very simplistic model but it is the way that people are beginning to look at the biotech industry.鈥� In the heady days of 2000, investors threw money at companies with only one or two products in their pipeline. Now they are more cautious, looking to reduce their financial risk by investing in companies that have a range of products in development.
Consolidation also forces companies to rationalise their research programmes, discarding less promising ones and concentrating on those with the best chance of success. 鈥淵ou end up with a better portfolio to spend your money on,鈥� argues Redpath. And this is good for companies trying to attract investors. 鈥淔und managers have seen people telling them a story which hasn鈥檛 changed in three years,鈥� says Richards. 鈥淐onsolidation allows them to hear a new story.鈥�
But the factors driving the current mergers and takeovers are not altogether positive. The vast majority of British biotechs are many years away from profitability, and joining forces with another company is sometimes the only option before the money runs out. 鈥淐ompanies that disappoint and continue to be loss-making will have to merge or they will be in the hands of the receivers,鈥� forecasts Andy Smith of the London-based 3i Bioscience Investment Trust. 鈥淭he crescendo of pressures on UK biotech has built up so that management can鈥檛 ignore it any longer.鈥�
There is, in theory, the option of raising money on the stock market. But the market is practically closed to biotechs in the present economic downturn. It is sceptical about the industry鈥檚 ability to deliver financial returns in the short term. And there is simply not enough money from private investors to go round.
鈥淔rom a cash perspective we need consolidation,鈥� says Sue Foden, a venture partner at London-based Merlin Biosciences and former head of two technology transfer companies. 鈥淭here鈥檚 not enough money to develop every biotech that aspires to raise money in the next few years. If six little companies merge to make one, then it has got a chance,鈥� she says.
In the past decade the biotech industry has proliferated wildly. In 1993 there were just 200 drug-discovery biotech companies in Europe and the US, but a decade later there are over 4000 (see Graphic). In contrast, the number of major global pharmaceutical companies has shrunk from 40 to 15 in the same period. Inevitably the biotech industry will follow the lead of its big brother, with a Darwinian selection of the fittest companies. 鈥淭he big boys have consolidated, it鈥檚 the little boys鈥� turn now,鈥� says Redpath.
But there are crucial differences between the pharmaceutical and biotech sectors: unlike those in Big Pharma, biotech mergers do not always add up financially. 鈥淚n the pharmaceutical industry, when companies merge you get two revenue streams with one cost base,鈥� says David Chiswell, chairman of the BioIndustry Association, the trade association for the UK鈥檚 bioscience sector. The cost savings can be enormous, he says: on the same scale as income from a blockbuster drug. But in the less-developed biotech sector, it鈥檚 a different story. 鈥淵ou get twice the cost base without a revenue stream.鈥�
Consolidation doesn鈥檛 always deliver more robust, sustainable companies. Already some of the takeovers are being seen by some industry insiders as little more than an attempt to mop up competition. 鈥淐onsolidation doesn鈥檛 guarantee to make stronger companies,鈥� says Chiswell.
But recently some of these black clouds hanging over the process of biotech consolidation seem to be lifting. 鈥淭he atmosphere is more positive than it has been for the past three years,鈥� says Richards. There is renewed faith that this year鈥檚 deals will build on the positive aspects of the industry, not just protect against the negative, he says.
The truth, of course, is that it will be many years before the outcome of these mergers and acquisitions becomes clear. 鈥淐onsolidation doesn鈥檛 produce something bigger, better, newer overnight,鈥� says Redpath. 鈥淭he proof of the pudding will come in a while. PowderJect bought Evans Vaccines three years ago and at the time I can remember people saying: 鈥榃hat a terrible idea,鈥� slamming the deal and saying it was the wrong thing to do. But when PowderJect shares reached 拢5.50 as the deal with Chiron went through, people didn鈥檛 say: 鈥業 told you that was a bad idea.鈥� It will be two to three years before we see if the British Biotech deal with Vernalis has been a success.鈥�
The name British Biotech will disappear in the merger 鈥� Vernalis will be the trading name for the new entity 鈥� and it will mean the closure of British Biotech鈥檚 Oxford headquarters. But many in the industry will be relieved that at least it bucks the trend of European companies being snapped up by their US counterparts. Others regret that companies nurtured in the UK end up controlled from abroad but acknowledge that US ownership has advantages.
鈥淎s an investor, it is great,鈥� says Richards. 鈥淏ut with my UK plc hat on, I would like a good chunk of the UK鈥檚 biotech sector to be independent.鈥� He recognises, however, that this may not be an option. 鈥淚f it came to a choice between companies failing and companies being US-owned, then I鈥檇 choose US ownership any day.鈥�
Besides, both pharmaceutical and biotech companies operate on a global scale 鈥� 70 per cent of sales from UK biopharmaceutical companies are in the US, for example. 鈥淲e have to avoid taking too parochial a view. It鈥檚 a global industry,鈥� says Chiswell. 鈥淚鈥檓 more concerned about the reasons behind the takeovers 鈥� our companies are cheap.鈥�
Which is bizarre. Many European biotechs are valued at less than the money they have in the bank, which puts them in the bargain basement for cash-rich US companies looking to get bigger quickly (快猫短视频, 12 April, p 54). The recent takeover of PowderJect by Chiron, completed last month, is a case in point. 鈥淧owderJect shares went up from 拢2.50 to 拢5.50 at the point of sale. This just shows that Chiron saw twice the value in PowderJect that the market did,鈥� says Redpath.
Attention from the US could bring renewed confidence to Europe鈥檚 struggling biotech industry. 鈥淭he US interest could refresh the whole sector,鈥� says Richards. There is greater confidence to invest if there is an exit route via takeover: investors then know they can get a return on their money.
Others, however, envisage a gloomier outcome from the US shopping spree in Europe. The risk is that the best companies will be snapped up and the rest left on the shelf. 鈥淭he whole UK biotech industry will never be owned by the US. But there is an even worse scenario: the good biotechs are acquired by US companies and we are left with the rest just ticking over or failing,鈥� says Smith.
No doubt in the year ahead we will see more companies jumping into bed together, others dying alone, and still others being born in a flurry of optimism. The only certain outcome is that the British biotech family will look very different in a few years鈥� time.