Envisage

Blending with Biotech

by Heidi Moore

April 2007

Since the 1983 blockbuster initial public offering of Amgen, investors have kept a close watch on emerging biotechnology companies touting the latest and greatest drug discovery. Some are lured by the promise—or perhaps the myth—of huge windfalls for early investors in successful biotech startups.

Often founded by academics and scientists with a stake in the research at hand, biotechs typically are small, entrepreneurial companies, and usually lack the financial backing and expertise necessary for long-term success. Furthermore, most biotechs don’t have the resources or experience to take a drug beyond research and development, through several phases of clinical trials and on to end-stage marketing and sales.

Couple those factors with the difficulty of securing venture capital—particularly in markets where biotechs are prevalent, such as the U.K.—and it becomes evident that few of today’s emerging biotech companies are likely to emulate Amgen and make it to an initial public offering. Since slow growth is not an attractive option in a rapidly changing industry such as bioscience, many U.K. biotech firms end up turning to big pharma for synergistic deals, either by seeking out partnerships with larger, well-funded corporations that possess established drug development pipelines, or by undergoing a merger or acquisition.

For large pharmaceutical companies, biotechs serve as fertile ground for potential mergers and acquisitions. Looking to fill a gap in a particular drug category, pharmaceutical corporations often enlist an innovative partner that already has undergone the risky initial stages of drug research and discovery.

The resulting relationships between big pharma and biotech typically end in one of two scenarios—mutually beneficial partnerships, or culture clashes and conflicting goals. Which scenario emerges after a merger or acquisition primarily depends on whether a meeting of minds exists at the executive level, as well as whether that meeting is supported by a clear vision for the emerging company and buy-in from key players at the biotech company.

Capital Quest

The U.K. currently has more public biotech companies than any other country in Europe, according to Dr. Simon Best, chairman of the London, U.K.-based BioIndustry Association (BIA), and chairman of Ardana plc, an emerging reproductive pharmaceutical company in Edinburgh, Scotland. The BIA is a trade organization representing approximately 265 companies in England and 60 companies in Scotland, about a third of which are biotech companies dedicated to drug discovery and development with the rest being associated companies providing support or services to the biotech industry.

“We have a fairly good cohort of companies who are public,” Best says. “Of those, some have managed to get all the way through and sell their own products, but those products are relatively small [in value]. We also have quite a few whose strategy is to go all the way to market with niche products but license bigger products or partner with big pharmaceutical companies. We also have a number of old-style, pure-play R&D companies whose aim is to take the product and partner with big pharma.”

The pool of biotech startups in the U.K. is shrinking, however, due to the lack of available funds in what Best characterizes as a risk-averse climate for venture capitalists. The companies most likely to be considered by large pharma for a merger or acquisition are the more established biotechs—those that secured financing several years ago and now have a drug or technology beyond the initial stage of development. Some of these will end up going public, most likely in the London Stock Exchange’s Alternative Investment Market (AIM), but many will end up being acquired by large pharmaceutical companies.

The past 18 months in particular have seen “a fair number of acquisitions,” Best says. As an example of just a few of the higher-profile takeovers that have occurred, he cites Celldex Therapeutics’ acquisition of Lorantis in October 2005, Cephalon’s acquisition of Zeneus Pharma in December 2005, AstraZeneca’s acquisition of KuDOS Pharmaceuticals Ltd. in December 2005, Pfizer’s acquisition of PowderMed in October 2006 and GlaxoSmithKline’s acquisition of Domantis in December 2006.

Cultural Divide

The success of these mergers or acquisitions depends very much on what the acquiring company is hoping to gain from the deal, Best says. If the goal of the acquiring company is to integrate the biotech and retain a majority of its top talent, that company must be mindful of the culture of the biotech and aware of cultural differences that are likely to arise. “There is a fairly egalitarian tradition in the U.K. among smaller companies,” he says. “Typically, U.K. [biotech] companies are relatively small and at the stage where it remains possible to have relatively frequent and informal communication.” By virtue of their size, Best says, “big pharmaceuticals have a much more formal structure and less communication across functions” than smaller biotech companies.

When it was announced in December 2005, Cephalon’s acquisition of Zeneus Pharma represented exactly the sort of synergistic deal desired by many large pharmaceutical companies and biotechs. The US$390 million deal provided Cephalon with Zeneus’ portfolio of oncology and critical-care products, in addition to its 245 employees.

According to Jacqui Cookson, then European human resources director at Oxford, U.K.-based Zeneus, the Zeneus executive team originally had a different goal for the company. “Our intention at the outset—about which there was great deal of excitement—is that we would [go to] IPO eventually,” Cookson says. “However, when an attractive offer came through for the company, there was no hesitation. It was a fantastically quick turnaround.”

Despite the change in financial plans, the managing team at Zeneus still felt the acquisition was a positive move for the business, Cookson says. She has been involved in a number of acquisitions in the past, and in her experience, cultural differences between two companies can add complexity to the integration process, she says.

There can be challenges if the two companies have differing communication and decision-making cultures, Cookson says. Acquired biotech companies often are small and therefore have a flexible, entrepreneurial environment with a swift decision-making process and an open, informal structure that enables frequent communication with employees. The acquiring companies generally are larger and more established, which makes their decision-making processes slower and more bureaucratic, and their communication processes less spontaneous. Such fundamental differences can create challenges during the integration process, Cookson says. When there are two corporate cultures that communicate and make decisions using different styles, it can lead to generally short-term, but nevertheless significant, anxiety among staff, with a predictable impact on performance and employee turnover, she says.

In order to curtail these anxieties, the acquiring company must have transition teams in place to identify the acquired company’s key people and earn their commitment early in the integration process, Cookson says. She also advocates a kind of cultural due diligence on the part of the larger, acquiring company. That diligence should go beyond an examination of the biotech’s mission, vision and values, she says. “Dig a bit deeper and talk to people who really understand the culture and how the company works. Don’t just rely on the mission statement.” Companies that undertake this diligence will be able to identify significant differences in culture, acknowledge them and plan strategies to manage them.

Often in acquisition situations, the acquiring company relies on financially based incentives to retain key staff, but these alone are not always sufficient, Cookson says. Even when communication and decision-making strategies are in place, large pharmaceutical companies may find it difficult to retain a certain segment of the staff that relishes the open, entrepreneurial culture of a biotech. In such cases, the acquiring company must create a lively and dynamic environment, to the extent possible. The key is to engage these individuals—or face the prospect of talented and valued employees cashing in their stock options and heading across the street to the next biotech start-up.

Given the current strength of the U.K.’s biotech sector, large pharmaceutical companies willing to risk the culture clash of a merger or acquisition will find fertile ground. “The U.K. still has a number of very strong companies that have unique platforms,” Best says. He predicts significant activity over the next five years in leading-edge areas such as X-ray crystallography–mediated drug discovery, regenerative medicine and stem-cell biology.

Many biotechs will find it difficult to raise enough capital locally to reach critical mass in the U.K. To meet that challenge, Best says, many biotech companies will need to enlist the help of large pharma.

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