Interesting perspective (don't know if this was already posted, too many posts dealing with childish personality clashes make for way too much reading :-> ):
The SmithKline/Glaxo merger talks throw a spotlight on an ongoing biotech predicament: When the elephants dance, the ants cringe.
The Ripple Effect
Alliances with pharmaceutical companies have been the salvation of many biotechnology companies. But as the giants struggle with enormous pressures to deliver growth to Wall Street and seek their own salvation with mega-mergers, projects with biotech companies are often left to twist in the winds of uncertainty -- or just flat-out dropped. Product champions may be lost or shunted aside. Management is distracted. Research priorities are reset. Internal projects at a merger partner get the nod over external collaborations. With British drug powerhouses SmithKline and Glaxo on the verge of creating the world's largest pharmaceutical company in a merger that would result in an entity selling 7.5% of the world's drugs, it's safe to say dozens of biotechnology executives involved in at least 200 different alliances the two giants have forged in recent years, are waiting for the phone to ring -- and are a bit afraid to answer it.
By Joan O'C. Hamilton
Signals editor
Alteon Inc. Chief Financial Officer Ken Moch recalls only too well the pain a partner's merger can bring. It was 1995 and Alteon Inc. was several years into a partnership with Marion Merrell Dow. They were developing a compound called pimagedine aimed at limiting the damage of diabetes. After some promising Phase 1 work, the partners skipped straight to a pivotal Phase II/III trial for kidney disease in diabetic patients. Then came the news that Hoechst was acquiring the American drug maker MMD and planned to carve off 8000 employees plus put the entire combine's research pipeline up for review. Ramsey, N.J.-based Alteon was never even invited to present its case to Hoechst management. Still, for almost a year, it got feedback that pimagedine was clearing internal hurdles. Moch recalls his euphoria in May of 1986, when the pharmaceutical newsletter SCRIP came out with a one-page list of the new Hoechst Marion Roussel's pipeline and Alteon was part of it. He happily faxed that page to financial analysts.
Three weeks later, Alteon got the knife. HMR announced it was canceling the collaboration and returning rights to Alteon following a contractually stipulated 60-day transition period. Alteon's stock plunge would have overtaken the Jamaican bobsled team on its best day; it went from a pre-announcement $16 to $2.25.
"Nobody ever envisioned termination for financial reasons, only for product failure," Moch explains. "We lost our product champion in the merger. If (the drug) didn't work, 60 days seemed like plenty of time to close down, but instead we were left with a complex scenario." Indeed, because Marion and Alteon had jumped to the big, advanced trial, Alteon was two years from the unblinding of the Ph. 3 data, but essentially had no Ph. 2 data to show would-be partners that progress was happening. In just 60 days, Alteon had to take over management of a 1600-patient clinical trial burning cash at the rate of $1.5 million per month. "It was a very traumatic period," recalls the usually irrepressible Moch. "The worst day being the day we had to cut one-third of the staff."
But there was a happy ending: Alteon managed to put together several smaller Ph. 2 trials, and the drug performed well. And in Dec. 1997, Alteon announced an even better deal with Genentech, Inc. While the 1990 MMD deal had brought Alteon $18 million and a $5 million equity stake, Genentech announced Dec. 4, that it would make an initial equity investment of $15 million, plus fund development costs up to $48 million, with $50 million in future milestone payments.
This week, of course, the industry is captivated by news that SmithKline Beecham and Glaxo are attempting to put their organizations together in a move that would create the world's largest pharmaceutical company. Who cares? Better to ask: Who doesn't? From Aradigm to Zynaxis, scores of biotechnology concerns have projects with at least one of the two players, and in the case of companies including Cantab, Axys, Ligand, and Incyte, deals with both Glaxo and SmithKline. The fact that these two firms have been aggressive deal makers in recent years is sending a ripple effect through the biotechnology industry.
The Recombinant Capital alliance database reveals that, between them, SmithKline and Glaxo have announced over 200 separate alliances over the past decade. Glaxo has a wide array of projects in cancer and AIDS with Biochem Pharma, Centocor, Vertex, and Pharmos, for example. SmithKline has announced about 150 different alliance agreements, from small equity investments in companies such as Chrysalis, to some of the industry's most noted and valuable deals, including the 1993, $125 million initial investment in Human Genome Sciences, and what now seems like an ancient licensing agreement with Biogen to sell hepatitis B vaccine. Then, of course, there was Glaxo's $533 million purchase of Affymax in 1995. That offers the potential to merge SmithKline's extensive genomic resources with Glaxo's in-house combinatorial chemistry technology.
If the deal goes through, where will the redundancies be? Where will new priorities lie? Who has anticipated such disruptions with generous "out" clauses, and who'll be left high and dry with little time to regroup? Which deals will leave small partners in the hands of a big company R&D chief who may have passed on them first time around, or whom they've never met?
These are questions executives are asking themselves right now, as they've asked themselves before. Alteon certainly wasn't the first biotech company to get stepped on in the drug industry's ongoing dance of elephants. It also wasn't the first company to turn a setback into an opportunity. "From a business perspective, (a cancellation) can actually be favorable," says John Walker, chief executive of Axys Pharmaceuticals of So. San Francisco, recently created from the merger of Arris and Sequana. "The market will overreact on the basis of Big Pharma pulling out, but what we all have to remember is we're running scientific programs at the end of the day. From a business person's point of view, it shouldn't make a difference," if one partner drops a good project for non-scientific reasons, because you can prove value to a new partner, and if the project is further along, the chances are greater that the value is clearer.
Walker has faced partner upheavals himself, such as when Swiss drug firm Pharmacia and Kalamazoo, Mich.-based Upjohn merged in 1995. Previously, Arris had a deal with Pharmacia to primarily transfer screening technology to the larger partner. In the wake of the merger with Upjohn, Arris renegotiated the deal to offer the new partners non-exclusive rights to high throughput screening and combinatorial chemistry technology, but retained more rights for internal use.
For companies in the early stages of an alliance, or perhaps just negotiating one, there is the frustration of feeling like momentum you've been building with an organization is suddenly draining off to deal with the overwhelming number of details and complexity of a merger. "It freezes the ability of companies like ours to have substantive discussions with the rest of the people in the merging companies," observes Janice LeCocq, chief executive of Gryphon Sciences Inc. in So. San Francisco. "No one knows which programs will stay, who will stay, or to whom they'll have to justify decisions. The combined entities have a hard time getting their decision-making structures working again. . .at least when it comes to collaboration/technology access discussions."
One group of executives feeling pretty good right now are those at genomics companies. The Feb. 2 story in the Wall Street Journal discussing the merger between SmithKline and Glaxo suggested that this is a merger driven by "white coats," and even quoted HGS head William Haseltine suggesting that SmithKline was so overwhelmed by the "cornucopia" of genetic riches from HGS it simply had to get bigger to handle them. Even in genomics companies, a few eyes rolled at that. But there is no question SmithKline is bullish on genomics: Although SmithKline has made no secret of its challenge in dealing with the oceans of genomic data from HGS, SmithKline has not backed off of genomics. It has renegotiated aspects of its deal several times with HGS (Twist, "Rewriting a Genomics Alliance") in ways that give it more freedom to work with other partners, including the diaDexus venture SmithKline inked with Incyte Pharmaceuticals Inc. of Palo Alto, that resulted in a whole new diagnostics company started by SmithKline and HGS' biggest rival.
Incyte's CEO Roy Whitfield, who happily has both Glaxo as a subscriber to his LifeSeq genomic database and SmithKline as a partner in diaDexus, says the prospects of a SmithKline/Glaxo merger bodes well for his company: "I've gotten to know senior management at SmithKline and it's no secret this is a management team that's really sold on genomics. From Incyte's perspective, that's great because that's not the case in every pharmaceutical company. A lot are still really skeptical."
While Incyte and SmithKline went to considerable pains to make sure there was no mingling of the Incyte and HGS databases in diaDexus, for example, says Whitfield, the notion that a combined SmithKline and Glaxo together will have access to both Incyte's core database and its contributions to diaDexus is just all for the good, Whitfield insists. For one thing, it was HGS that was mainly concerned about Incyte data flowing back to SmithKline, not Incyte, and as far as Incyte is concerned, the more scientists who work with its database, the better, regardless of where they are. "For people doing exclusive-type deals, these mergers are quite scary," Whitfield acknowledges. "I think it works to our advantage because every time novel clones are accessed they become royalty-bearing to us. If they choose to wall off the Incyte databases from SmithKline researchers that's up to them." The market seemed to see it Whitfield's way: In the wake of themerger announcement talks, Incyte's stock zoomed to its all-time high of 50 3/8 (as of close, Feb. 4, 1998.)
Throughout the industry, biotech executives are trying to determine the partners' motivations in creating such a huge company. Haseltine's comments notwithstanding, anyone who listened to Jan Leschly at the January H&Q conference clearly heard that while he admits to being somewhat overwhelmed by the sheer volume and pace of new technologies appearing to address different stages of the drug development pipeline, genomics is just one facet of a wide array of technologies SmithKline realizes it will need to achieve his goal of reducing "cycle time" and creating more safe and efficacious drugs. If the merged entity continues on that tack, it would seem to bode well for even more external alliances. "Today we consider biotechnology as partners and friends. We need you and you need us," he told the H&Q audience.
Former Glaxo chief executive Ernest Mario, now CEO of Alza Corp. in Palo Alto, believes the value in creating such a huge drug company lies far more broadly and strategically than just exploiting genomics. "There are therapeutic categories everybody is interested in. It's possible that each of these companies is in about six of them, and if they merge the two respective organizations they could leverage the opportunity, spend the same amount of money and be in ten areas. The (genomics research) is all motoring ahead, but it's not a reason to combine R&D groups, it's too narrow," Mario said. Rather, once the technologies --whether in pharmaceutical R&D, diagnostics development, or patient/disease information management -- prove their mettle in one disease area, they can be expanded (at least in theory), to other disease areas. The more disease areas you're in, the greater the leverage.
The industry desperately needs more technology leverage because it still is faced with huge bottlenecks in R&D. As Millennium Pharmaceuticals Inc. Chief Business Officer Steven Holtzman observes, "Having the genome available changes the way you do biology. And having combinatorial chemistry changes the way you do biology. But if you don't change the way you (screen agents) you do need more scale. All you've done is move the bottleneck, so you need more bodies to throw" at the problem. He says Cambridge, Mass.-based Millennium (which has major functional genomics partnerships with such players as Roche, Eli Lilly, American Home Products and Monsanto, but does not work with SmithKline or Glaxo), doesn't fear the merger competitively, because plenty of pharmaceutical companies look at the issue of grappling with genomic data and say: "This is not what we're good at so we need to out-source."
So, it's nail-biting time for some, but possibly the brink of new opportunities for others. Here are some more perspectives to consider while you're waiting for the phone to ring:
c 1998. Signals |
