Alan Williams Consolidation revisited is the founder of Managing Resources, a Date received *in revised form) 8th October, 2001 consultancy focused on the life science industries. The Alan Williams company undertakes strategic assignments and also assists public and private sector clients with regulatory affairs, investor Abstract In 1998, the author produced two papers that argued that consolidation was relations and human a necessary activity for biotechnology companies to pay greater attention to. Three resources development. years later a further consideration of the subject seems worthwhile. Examples of Alan has also been an investment manager in successful consolidators are reviewed. a venture capital company, and held Keywords: consolidation, mergers, acquisitions marketing and licensing positions in Fisons.

Introduction drink, vaccines and animal health but there is now greater focus on the highest In the early/mid-1970s, the pharmaceutical pro®tability sector, human pharmaceuticals. industry consisted of more than 100 At the time of writing, GSK is rumoured to research-based businesses of some be a possible purchaser of Bayer's signi®cant size, although none of them pharmaceutical business, the future of could convincingly claim a global presence. which has been questioned after the Typically, a leading company had a strong withdrawal of cerivastatin. position in its local market "examples Aventis, the eighth largest pharmaceutical included Merck and P®zer in the USA, company by sales in 2000,1 includes the Bayer in Germany, Beecham in the UK, operations of 1970s companies such as Roussel-Uclaf in France and Fujisawa in Rhone-Poulenc, Rorer, Fisons, Hoechst, Japan) and possibly some other Marion, Richardson Merrell, and some neighbouring countries "US companies in smaller companies. Moreover, Aventis is Canada, German companies in France and currently spinning out its agrochemical UK companies in the Commonwealth), interests, via a sale to Bayer, to focus on supported by a network of licensing pharmaceuticals, and vaccines "as an aside arrangements with peers in the other major we may note that Aventis's agrochemical markets. part, accounting for about 25 per cent of Since then, there has been a sustained revenue and 21 per cent of pro®t in 1999, agglomeration of the leading companies to encompasses the 1970 interests of at least create the behemoths that bestride the sector nine companies: Aagrunol, Boots, Fisons, at the beginning of the 21st century. Hoechst, May & Baker, Roussel-Uclaf, GlaxoSmithKline "GSK), which is the second Rhone-Poulenc, Schering and Union largest pharmaceutical company as ranked Carbide). by sales in 2000,1 includes the operations The consequence is that there are now Alan Williams and products of what were in 1970 at least only about 15 major pharmaceutical Managing Resources Ltd, 18Topcliffe Way, four separate companies "Glaxo, Wellcome/ companies and they would all claim to have Cambridge CB1 8SH, UK Burroughs Wellcome, Beecham, more-or-less global presences. Their number Tel: ‡44 *0) 1223 566158 SmithKline&French) and also some smaller may decrease further, as a result of the Fax: ‡44 *0) 1223 566159 ones. GSK's predecessor companies Bayer situation and some resolution of the E-mail: alan@managingresources. operated in ethical pharmaceuticals, over- Novartis minority holding "a 20 per cent com the-counter "OTC) medicines, food and stake) in its neighbour Roche. It is, however,

130 Journal of Commercial Biotechnology & Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Consolidation revisited

noteworthy that few of them have a biotechnology companies without any dominant position in the large Japanese notable scienti®c input by the leading market and that no Japanese company is pharmaceutical companies. Nevertheless, represented among this `elite'. the latter have recognised the power of During the same period, say 1975±2000, these new technologies, most of which there has been an extraordinary creation of appeared only in the last decade, and have new companies with considerable scienti®c bought into them "by acquisition or by capability. Biotechnology, essentially a new licensing deals) and are in the process of set of enabling tools discovered in the past reducing the platform technologies, 30 years, has been the source of some 4,000 especially CC and HTS, to commodity status companies2 which are carrying out research that are obligatory requirements for all the in the life sciences and predominantly, but major players. Speci®c platform acquisitions not exclusively, with the aim of developing included Affymax "bought by Glaxo)4 and drugs for human healthcare. Sphinx bought by Lilly. Examples of other To date "mid-2001), few of these biotechnology purchases by majors include biotechnology companies have attained Agouron by Warner-Lambert, Sugen by suf®cient size and product density to be able Pharmacia, Chiron by Ciba-Geigy "now to challenge the pharmaceutical majors in Novartis) and Genentech by Roche, though their sales and distribution activities in some of these cases the acquiring although, arguably, many challenge them in company has contented itself with a research creativity and capability. Even the majority stake rather than 100 per cent largest of the `new' companies, Amgen, ownership. which has a market capitalisation in the The rapid consolidation of the order of US$70bn does not maintain a sales/ pharmaceutical sector "which is always distribution network which would enable it explained by the management to be justi®ed to reach the full GP market. In contrast, GSK by signi®cant cost savings) has not been boasts a US salesforce in the order of 8,000 observed to make a signi®cant difference to and a worldwide sales operation of some the R&D capability of the larger 40,000; no biotechnology company comes pharmaceutical companies; indeed, it is even remotely close to this scale of possible that the increasing size and the operation. With a total revenue of some regular "seemingly once every two or three US$3.6b,3 Amgen is dependent partly on years) uncertainty of incumbent employees fees/royalties from partners supplementing about their job prospects have even reduced the efforts of its own relatively small sales the productivity of the majors. Indeed, the and marketing operation of about 1,500 motivation of the staff of American Home which is focused mostly on specialist units Products was unlikely to have increased as in major centres. the management engaged in three successive attempted, but ultimately Partnering abortive, deals. Nevertheless, there can be no doubt that pharmaceutical consolidation There is no doubt that biotechnology has increased the marketing, sales and companies, individually and as a set, have distribution power of the survivors, by force developed an astonishingly creative R&D of numbers if for no other reason. capability. Protein engineering, The dichotomy between relatively combinatorial chemistry, high-throughput sclerotic R&D organisations in large screening, chip diagnostics, antibody pharmaceutical companies and the creative humanisation, genomics and proteomics energy of small biotechnology companies "examples of companies in each area being has led to a perception of a natural Genentech, Affymax, Pharmacopeia, symbiosis between the two groups with one Affymetrix, Cambridge Antibody side having money "large pharmaceutical Technology, Millenium and OGS companies are usually highly cash respectively) have all been developed by generative) but needing products to feed

& Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Journal of Commercial Biotechnology 131 Williams

into its sales operations and the other side available' to devote its scarce clinical having product candidates and, usually, not development resources to, possibly in a the wherewithal to develop them "a cash different therapeutic area but not always. shortage and sometimes a clinical and Indeed, the current style of partnering regulatory skills shortage) or the marketing renders this a signi®cant risk to most deals. power to sell them. The large company always has the right to Most biotechnology companies respond proceed but not the obligation and the logical to questions about strategy by stating thing for it to do is to take lots of relatively something like `we aim to partner our cheap options but to keep expenditure low products as soon as possible with a leading until all the candidates have been pharmaceutical company'. There is an thoroughly evaluated and have progressed irresistible analogy with the answer given satisfactorily for a year or two. by a bank robber as to why he kept robbing It is noteworthy that even a company as banks `that's where the money is'. The large as Alza felt exposed in its dealings validation by a scienti®cally knowledgeable with large pharmaceutical companies. In unit can of course also support a further commenting on the deal under which approach to the public markets. Johnson & Johnson "J&J) acquired Alza for Partnering arrangements "involving some an announced price of US$12.2bn, Ernest or all of equity investment, up-front fees Mario, Alza's CEO, said `Alza was at the and potential royalty payments) have whim of its clients. If they developed generally been characterised by large another product which did not use Alza's pharmaceutical companies offering to technology, they could just stop marketing biotechnology companies what are to our technology. Alza was not the master of themselves small amounts of money "but, to its own destiny'.5 the other side, large sums) to obtain rights to Of course, pharmaceutical mergers are a the latter's output. Deals of this type have classic reason for re-evaluating portfolios to certain characteristics: avoid con¯icts between internal and external product candidates "it is an easy · The initial payment is generally guess which will be favoured) and between comparatively small, as a percentage of two or more external candidates. The on/ the potential payments "and it may off dance between GlaxoWellcome and include an equity investment which can SmithKlineBeecham was the background to deter other possible partners); the closure of the partnership arrangement · milestone payments require demanding between the latter and Vanguard Medica performance; "now Vernalis) concerning that company's · They include some elements of an option, development of frovatriptan, because ie the pharmaceutical company has the GlaxoWellcome's stable contained the right to progress but does not really have competing, and more advanced, the obligation to do so "effectively, this sumatriptan. In the end Vernalis managed reserves the right of the pharmaceutical to ®nd another partner, Elan, for company to consider other offers in the frovatriptan but not without experiencing a same therapeutic area including from its nasty hiccough in its share price. Given own R&D effort, when a greater share of Bayer's present instability, the management the value chain will be retained in-house). of CuraGen, which entered a key But there is a serious risk to a biotechnology partnership "with a headline value of company in adopting this partnering model, US$1.3bn) with that company only in however super®cially attractive the injection January 2001, must be acutely aware of the of funds is. The larger company can always risk it faces. CuraGen's share price discontinue a deal `because the product did dropped rather more than the NASDAQ not perform to expectation' which can index in the month around Bayer's perhaps sometimes be interpreted as withdrawal of cerivastatin which might `because a more satisfactory candidate is precipitate an acquisition of Bayer's

132 Journal of Commercial Biotechnology & Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Consolidation revisited

pharmaceutical business, though the fall partners with care'; their article includes the was not heavy. story of J&J dropping Amylin's product Since most big pharmaceutical companies pramlintide, despite having reputedly spent have large product pipelines with 20 or US$175m on its development "it is hard to more products in the clinic "eg at the end of know how Amylin could have found a more 1999, AstraZeneca, not the largest committed partner). pharmaceutical company, had a pipeline of However, in a few isolated cases, more than 30 drugs in clinical development) biotechnology companies, which usually and given that pro®t performance is based still need some help in marketing, sales and largely on the sales/pro®tability of extant distribution, have been able to strike better products, the impact of dropping an deals or make alternative arrangements. external candidate is usually small. On the They could be said to have managed their other hand such an action, given that the risk better; how they have done this is original agreement validated the through consolidation. biotechnology company's work, can have a devastating impact on its share price; indeed, partnership discontinuance can lead Consolidation as a strategic to share price falls in excess of 50 per cent in response a single day. Just as a validation may justify a funding operation, a partnership break-up In 1998, the author argued8,9 that can signal a funding famine and even no consolidation by biotechnology companies, effective independent future "and any with the aim of achieving a critical mass "to remaining equity held by the departed be de®ned later), would give them greater partner may be even more of an security and greater control over the outputs embarrassment). Many acquisitions of of their research creativity. Those papers biotechnology companies are preceded by a also explored the factors that appeared to breakdown of a partnership with a leading place limits on the adoption of merger and pharmaceutical company.6 Sometimes, even acquisition between biotechnology being acquired is not possible; arguably, companies. Boehringer Ingelheim's decision in If two companies are `sub-critical' and November 1998 to drop the cancer product both are likely to stagger along "at best) but Foscan was the starting point of Scotia's together they are above the `critical' level journey into receivership. there may be bene®ts for all parties in Thus, there is an asymmetry of risk in encouraging them to join together "the point most biotechnology/pharmaceutical behind the article by Parker10). The relationships. This is greater when the deal important riders to this are that both is on an early stage development rather than companies must have something of on a late one and when the biotechnology signi®cant value and potential to bring to company has a narrow portfolio, as most of the party "as one major investor memorably them do. In general, this risk asymmetry has said `a dog, ie a failing company, buying a tended to get worse between 1998 and 2001 dog merely creates a bigger dog') and there as the ratio of biotechnology companies to has to be a coherent business case for the leading pharmaceutical companies has joint operation. moved from about 3,000 : 25 to 4,000 : 15. In practice, most acquisitions in the Despite this, partnering remains the biotechnology sector seem to result from predominant strategy because it is still one investors, especially venture capitalists, of the quickest ways of getting some funds seeking to rescue some funds from the into biotechnology companies. Considerable assets of a company which clearly could not effort is expended in ®nding better sustain itself following one or more partnering models. Moscho and Leiter7 have important setbacks:11 in other words, when written an article called `Perfect partnering' the management had thoroughly which includes a section entitled `Choose demonstrated that the company was sub-

& Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Journal of Commercial Biotechnology 133 Williams

critical. Yet, there have been examples US$1.3bn with a pro®t of nearly US$500m where acquisition has led to much stronger and a market capitalisation in excess of companies with enhanced core capabilities US$16bn. Thus, over some eight years, Elan and potentially very good positions in had turned in a compound growth rate in its speci®c market sectors. market capitalisation in the order of 48 per By examining selected examples of cent per annum. purposeful consolidation among Of course, Elan has now developed very biotechnology companies the present paper considerable ®nancial power and the ability is aimed at demonstrating that to make choices that it did not have some consolidation can be a viable strategy that years ago; nevertheless, Elan is still not in delivers notable bene®ts; but this is not so in the same league as the biggest every case and some cautionary notes are pharmaceutical companies and is compelled also sounded. Three main examples of to focus its energies on a series of market consolidator companies are considered in sectors where it can obtain a reasonably some depth; these are Elan, Celltech and strong franchise without committing to the Shire. Reference is also made to other costs of a monster salesforce. Importantly, examples of apparent success, including its strength in selected sectors means that some from the USA, though failures are not Elan is now in a position to act in chronicled or even listed, partly because it partnership mode towards smaller and would be invidious to make speci®c more fragile companies offering them an judgments and partly because, frankly, alternative potential route to funds, clinical there are too many. expertise and marketing. Arguably, Elan may be a more sympathetic partner "and one with fewer potential product con¯icts) Elan Corporation because of its own comparatively recent Elan was founded in Ireland in 1969. In its history of being a small company, an early years it developed technology, experience that has been forgotten in the particularly for drug delivery, and corporate mind-sets of the major drug manufactured and marketed selected active companies. ingredients in improved formulations such as sustained release capsules. By 1992 it was Celltech a pro®table public company with sales of Ir£62m "approximately US$100m) growing This was the UK's ®rst biotechnology at a reasonable rate and a market company. Founded in 1980 to commercialise capitalisation in the order of US$700m some technology arising from UK public "stock splits and warrants complicate the sector research, it seems to have had many calculation). different faces over the years being, for a In 1996, Elan acquired Athena period, a specialist in the manufacture of Neurosciences, the ®rst big step in a major monoclonal antibodies but has still not yet vitalisation of the company. The earned a pro®t.12 Latterly, the company's consideration of US$537m was settled focus has moved to drug development and entirely by the issue of 19.5 million shares. marketing. ATS was also acquired in that year for about It was in 1999/2000 that Celltech made US$141m. Things started to hot-up in 1998 two very signi®cant strategic moves. Firstly, when Elan acquired, in rapid succession, it merged with Chiroscience and secondly, it Sano, Carnrick, Neurex and Nanosystems as purchased Medeva. The former had a well as picking up two smaller companies. portfolio of products, some in the clinic, In 1999, Axogen was acquired and then in complementary to those of Celltech; rather 2000 four more companies "Neuralab, differently, Medeva had some minor but Liposome, Dura and Quadrant) joined the established products and a sales/ group. marketing/distribution capability, albeit on By the end of 2000, sales had increased to a narrow territorial base. Later, Celltech also

134 Journal of Commercial Biotechnology & Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Consolidation revisited

purchased Cistron but this was a much granted the latter marketing rights to a few smaller deal. of Pharmacia's products in selected The impact of the two main deals, which territories. It was reported13 that Pharmacia followed each other closely, can be seen in was compelled to compete for this deal, the market capitalisations of the relevant structured around a product only in Phase companies. Before the merger "with II, against three other major pharmaceutical Chiroscience) and the acquisition "Medeva) companies "Aventis, GlaxoSmithKline and became public knowledge, ie in early 1999, P®zer). In other words, Celltech's strong the market value of each of the three position gave it a chance to take control of companies lay in the range £250±500m with the process. This is not the norm for less a total value a little in excess of £1.0bn. After secure biotechnology companies and would completing the two deals Celltech's share have been almost unthinkable until quite price peaked at around £18, which recently. corresponded with a market capitalisation in excess of £4.5bn. Subsequently, it traded Shire for several months in the range of £12±14, indicating a market value of some £3.5bn. In Shire Pharmaceuticals is a very different other words, the ®nancial consequence of company from either Elan or Celltech. Both the mergers was an increase in the total of those companies have deliberately value of some 250 per cent; this is a clear maintained a research base; in contrast, vindication by investors of the `synergy' Shire has, at least until recently, generally achieved by the deals with, presumably, seen its primary activity as being late stage some bene®t coming from lower risk and development and marketing/sales. some from greater potential. The company was founded in 1986 and In addition there were operational was ¯oated "had its initial public offering, consequences. By mid-2000, Celltech's IPO) on the London Stock Exchange in 1996. status could be summarised as follows: At the end of that year total revenue amounted to £21m with a pro®t after tax of · It was pro®table at the operating level "see £2.7m. Neither ®gure would have been so note 12). impressive had there not been a licensing · It had several products on the market and fee "from Janssen for galantamine) in the its own sales operations in selected order of £11m. Shareholders' equity at the countries, including USA and UK. end of that year amounted to £25m with a · The pipeline included 12 products in market capitalisation of £114m. clinical development and one just about to By the end of the year 2000, Shire had be launched in the USA. acquired or merged with Pharmavene · A strong ®nancial position. "1997), Richwood "1997), Fuisz "1999) and All of this meant that Celltech had greater Roberts "1999) and had announced its ¯exibility in the timing and structure of the intention to merge with Biochem Pharma. deals that it could do with other companies Revenues in the year had increased to and would not be driven to seek a partner US$517m with earnings, under UK GAAP simply because it represented the best "generally accepted accounting principles), chance of a cash injection. This was of US$108m and shareholders' equity was demonstrated in March 2001 when Celltech stated as US$1.2bn. The market made arrangements with Pharmacia in capitalisation at the year-end amounted to relation to the development and about £2.7bn having peaked a few weeks commercialisation of CDP 870. Not only is before at £3.8b. Pharmacia committed to up-front fees, The deal with Biochem Pharma, a milestone payments, royalties "in due company that tended to focus on preclinical course) and certain development and clinical development, surprised some expenditure but it has left some parties because of Shire's previous strategy commercialisation rights with Celltech and of staying at arm's length from research.

& Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Journal of Commercial Biotechnology 135 Williams

But, Biochem Pharma had high pro®tability technology. This is a clear attempt to build owing to its previous successful core capabilities by M&A. development of 3TC, as a result of which it Genzyme is one of the longer established derived substantial royalties from biotechnology companies. It has been GlaxoSmithKline, the licensee, a pipeline distinctive in the ®nancial mechanisms it and no substantive sales operations itself. has used to fund a wide range of technology Shire presented the merger as the developments and it has brought products combination of two complementary to market. In addition, Genzyme has not companies. By mid-2001, the merger was hesitated to make acquisitions that complete although the senior management strengthen its position; in 1997 it purchased team was derived mainly from Shire; the Pharmagenics and in 2000 it bought Geltex. market capitalisation of the combined As this paper was going to press, Genzyme company was in the order of £5.5bn. also acquired Novazyme. Shire is now in a strong position. It does J&J is a large diversi®ed company with not have the ®nancial ®repower of a healthcare and other interests which has the pharmaceutical major, or even of Elan, but ®nancial strength to buy into new its revenues appear to be growing rapidly technologies. It has always had a signi®cant and it is pro®table on a pre-exceptionals14 position in OTC products and also an basis. The company now has a signi®cant interest in ethical pharmaceuticals through late stage "Phases II and III) clinical its ownership of Janssen. More recently, it development portfolio and also Biochem's has purchased Centocor and Alza. earlier stage capabilities; so, Shire is now in It should be noted that there has been a position to choose additional projects that considerable cross-border acquisition match the market sectors that it focuses activity with US ®rms buying UK ®rms upon. "Sequenom/Gemini, Incyte/Hexagen and Geron/Roslin Biomed for example) but this is not by any means a one-way traf®c "viz. Other examples of consolidation Chiroscience buying Darwin, CeNes with Cambridge Neuroscience and Celltech The three examples reviewed above are all buying Cistron) and other countries are companies that have, it appears, carried out involved "eg Germany's Lion buying USA's successful corporate development through Trega). In the CRO sector, Quintiles has aggressive mergers and acquisitions "M&A) been a busy acquiror, picking up at least 11 activity and have achieved good returns for companies between mid-1997 and mid-2000. their shareholders. All three have their But, there is no doubt that many headquarters on the eastern side of the companies have stepped into M&A activity Atlantic Ocean but this is not to suggest that and suffered problems as a result. Some successful M&A activity does not occur in entered into the activity for the wrong the USA. reasons and others made the wrong choices. Three examples of US companies that Perhaps they were companies and have been pro-active and, at least to date, managements that were doomed to fail successful in carrying out some anyway. consolidation are Valentis, Genzyme and J&J. These three examples "from many The general strategic context potential candidates) have been chosen because they are different types of company. In the early days of biotechnology "mid-/ Valentis is still an early stage company late 1980s) the aim of many managements without products, though its pipeline is was to develop a fully independent strong. It was formed by two companies pharmaceutical company "FIPCO), "Megabios and GeneMedicine) joining something no company had really achieved together and then purchasing Polymasc, a since Syntex, which was founded in the late UK-listed company with complementary 1940s. Amgen can reasonably be assumed to

136 Journal of Commercial Biotechnology & Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Consolidation revisited

have reached that status but even Genentech UK) and major charities such as the and Chiron did not make it "both had to Wellcome Foundation, predicates that many concede an effectively controlling equity new companies will be formed "though it is stake to Roche and Ciba-Geigy "now interesting to note that Ernst & Young's Novartis) respectively. It was in the early regular reports suggest that the number of 1990s that managers and analysts conceded US biotechnology companies has remained that FIPCO status was not a realistic constant at around 1,300 for several years; prospect for biotechnology companies there, at least, the rate of new company growing organically and so increasing formation is comparable to the combined attention was paid to the partnering model. rate of acquisition and various forms of But, as the number of pharmaceutical demise). majors has decreased, through cost-saving Clearly, as the examples in this paper mergers, and the number of biotechnology have shown "and it is recognised that the companies has increased the ratio has activities of three companies, plus some become even more unfavourable and the brief summaries, do not represent a risks associated with partnering have statistically valid sample and can only be become larger. Despite the view that considered as exemplars), the ®nancial pharmaceutical majors have potential markets are willing to recognise product famines, the logjam they face is managements that deliver feasible more in development and registration than development strategies making appropriate in the number of available product use of mergers and acquisitions and to mark candidates. They will continue to take up their share prices accordingly. But, on options to new products but the chances are the other hand, the markets are quick to that they will also drop more of them when punish managements that promise more they have to focus on a small number of than they deliver or that cannot achieve products for late stage development. viable strategies, whether by acquisition or Fortunately for many smaller otherwise. biotechnology companies, a second tier of candidate partners has been constructed through growth promoting and value The future adding mergers. "It is interesting to note that Looking forward, it is impossible to pharmaceutical/pharmaceutical mergers conceive that some 4,000 biotechnology are always justi®ed as cost saving while companies can all have successful biotechnology/biotechnology mergers are independent futures. Some degree of stated to be growth oriented.) Elan, Celltech, consolidation is inevitable. There are Shire and Genzyme are clearly examples of effectively two ways in which it can happen. companies that have stepped above the 15 Either, companies will enter distress critical mass threshold. Over the past few situations, their managements will be years, they have moved from relatively dismissed and their investors will get what impoverished status, probably sub-critical they can in a ®re-sale of the assets, or, and sometimes also suitors of the majors, to investors and managements will work being natural ports-of-call for the smaller together to secure companies with a realistic companies seeking both funds and chance of long-term survival. development and marketing expertise. For the latter to happen rather than the Indeed, there are now several companies former, the factors that may impede M&A that can perhaps be considered as nearly- activity have to be addressed. Two factors FIPCOs. They have achieved this by M&A that appear to be particularly important are: as much as, if not more than, by organic growth. · venture capital investors always invest for Rapid technology development, usually capital gain; agreeing that an investee initially in universities, public sector company should be taken over before that research bodies "NIH in USA and MRC in capital gain has emerged in the desired

& Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Journal of Commercial Biotechnology 137 Williams

amount is not necessarily an attractive the company to the state at which it is option "and even less so if a book loss is attractive to others; crystallised); moreover, they are often in · there are managers who are ®tted to run illiquid situations and do not have the larger stronger companies and others who option of running down their holdings in are better at the dif®cult task of starting a the way that investors in the public small company and energising it until it is markets can; an attractive prospect. · managements usually believe "understandably, but not necessarily Consolidation activities would happen realistically) that they are better than more frequently if investors, particularly others and in a merger "or acquisition) one venture capital ®rms but also major management team is likely to come out on investors through the public markets, top; moreover, sometimes the full range of rewarded some managements by converting share options may not be available. them into serial entrepreneurs able to earn their wealth from several short assignments There have been many reports that rather than one long one. While there are management is the single most obstructive some examples of this type they are factor to coherent M&A activity. It is relatively infrequent. accepted wisdom that the ®rst GlaxoWellcome and SmithKlineBeecham References and notes deal failed because neither CEO was prepared to give way; two years later, one 1. Pilling, D. and Hall, W. "2001), Financial Times, 8th had retired and the other was willing to May. 2. The precise number is dif®cult to quantify, partly accept the post of non-executive Chairman because it changes almost daily, but standard "and also a prestigious university industry sources "eg Ernst & Young) suggest some rectorship) leaving the top management 1,300 companies in the USA and approximately post to an agreed candidate. Ben McGraw, 1,600 companies in Europe. Allowing a mere 400 for the CEO of Valentis, was reported to have Canada, 100 for Australia and 500 for the rest of the world leads to a conservative worldwide estimate said at a conference of CEOs discussing in the order of 4,000. But, it should be noted that M&A activity `the problem is us' and the that the author has heard speakers at conferences Celltech and Chiroscience merger is reputed suggest that the USA alone accounts for as many as to have become possible because the CEO of 3,000 companies. the latter wished to move to another 3. Amgen Annual Report 2000. 4. Interestingly, as this paper was being prepared, company and a second director had GSK announced the sale of Affymax to venture expressed his intention to retire. "The author capital investors; Affymax's combinatorial was present in an academic forum when a chemistry techniques are now embedded former director of Chiroscience explained throughout the larger company. the sequences of events in considerable 5. Abrahams, P. "2001), Financial Times, 21st June. 6. Xenova's merger with Cantab Pharmaceutical detail, including con®rmation of the followed a major setback in the latter's relationship summary indicated here.) with GSK following a failure in a clinical trial of its For consolidation to become more lead product, a vaccine for genital warts. Ironically, common, there has to be a general just a few months earlier, Cantab had been recognition that: attempting the acquisition of Peptide Therapeutics "now Acambis) which managed, at seemingly the eleventh hour, to secure a partnership deal with · it is essential if strong companies are to Baxter Healthcare. Also, some years before, develop; organic growth is too slow, given Cantab's own partnership with Baxter, involving an the cash demands for development, and antibody product for transplant rejection control, companies may remain sub-critical; collapsed and triggered a catastrophic fall in · the management of one of the two Cantab's share price ± indeed at one moment, its cash in the bank exceeded its market capitalisation. companies leaving after the merger is not 7. Moscho, A. and Leiter, J. M. "2001), `Perfect a sign of failure; indeed, it should be seen partnering', Nature Biotechnol, Suppl. to Vol. 19, as a sign of success that they have brought p. BE21±22.

138 Journal of Commercial Biotechnology & Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Consolidation revisited

8. Williams, A. "1999), `Is partnering an opportunity pro®tability for a year or two, even though it for a biotechnology company to grow or does it seems likely to earn a pro®t at the operating create risk?' J. Commercial Biotechnol., Vol. 5, no 1, level. pp. 12±20. 13. See, for example, Financial Times, 6th March, 2001. 9. Williams, A. "1999), `Consolidation', J. Commercial 14. The pro-forma historical accounts issued by the Biotechnol., Vol. 5, no 2, pp. 106±112. company in July 2001 suggest that net income 10. Parker, S. "2000), `Consolidation ± The would have been ca US$210m on revenues of biotechnology prescription for success', Europ. US$671m. In the year 2001, the year in which the BioPharm. Rev., March, pp. 26±30. merger was consummated, there may be 11. Editorial "2001), Nature BioTechnol., Vol. 19, no. 7, exceptional expenses as indicated in the half year p. 597: `only a matter of months ago ...many ®gures released in July 2001. biotechnology mergers appeared to be last-ditch 15. One may reasonably ask what critical mass is. In acts of desperation'. one sense, the answer is circuitous, `big enough to 12. At the bottom line, Celltech made a substantial survive'. However, it seems plausible to suggest loss in the year to 31st December, 2000. However, that a more exact de®nition can be reached in terms it is fair to say that the main factor underlying the of numbers of employees, numbers of pipeline size of the loss was a write-off of goodwill products or some combination of metrics. A following the Medeva acquisition. Annual research project to de®ne critical mass would be amortisation of the remainder of the goodwill very interesting but is "regrettably) beyond the may prevent Celltech from reaching bottom line scope of this paper.

& Henry Stewart Publications 1462-8732 *2001) Vol. 8, 2, 130±139 Journal of Commercial Biotechnology 139 Copyright of Journal of Commercial Biotechnology is the property of Palgrave Macmillan Ltd. and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission. However, users may print, download, or email articles for individual use.