Monoclonal anitbody therapeutics are the focus for CAT. Credit: © Karol Sikora/Photo Researchers

What could be a long overdue consolidation of the UK biotech industry has begun, with the planned merger of two of the country's leading biotech firms.

The deal will see Cambridge Antibody Technology (CAT; Melbourn, UK) take control of Oxford GlycoSciences (OGS; Oxford, UK) for £110 ($180) million—considerably less than the value of OGS's £135 ($220) million cash pile. CAT produces antibody libraries with its proprietary phage display technology and uses them for testing candidate therapeutics such as protein and drug molecules. OGS investigates proteins that it hopes will be therapeutically useful, and has patented about 4,000 of them.

The acquisition will result in cost-cutting measures of £10 ($16) million in the year to September 2004, to remove duplicated activities. An unknown number of jobs will be lost, coming on top of a £5 ($8) million cutback program initiated by OGS last year.

From CAT's point of view the merger improves neither pipeline nor short-term profitability. The combined group will have only two marketed products, both relatively recently approved and not yet established in their markets. These are OGS's Zavesca for Gaucher's disease, and CAT's Humira anti-TNF antibody for rheumatoid arthritis.

But CAT will be left with cash reserves of £260 ($424) million, which at currently estimated burn rates should be enough to see it through the five years to 2008 when it expects to reach profitability. The merged firm has a further seven compounds in the clinic and seven in pre-clinical development.

CAT's chief executive Peter Chambre says CAT will now be able to keep control of its own products for longer, enabling it to retain a greater share of the profits before making a deal with the pharmaceutical industry. Nor will the company have to return to the troubled equity finance markets in the foreseeable future. And it will inherit OGS's lucrative partnership with Pfizer, scheduled to continue until the end of 2003.

The acquisition will also strengthen CAT's prestige and strategic position. Merchant bank ING Financial Markets (London, UK) compared the deal to Celltech's acquisition of Chiroscience in the late 1990s, and suggested it would be a prelude to a series of future acquisitions.

But the distressing aspect of the merger for the rest of UK biotech is that it ties up a large amount of the available cash in one company while simultaneously removing one of the most attractive targets. Many analysts had instead expected the consolidation to begin with a traditional type of acquisition in which a a cash-rich firm with a weak pipeline buys a cash-strapped firm with a strong portfolio. Tools and services firms were the obvious targets, as pharmaceutical R&D budgets continue to shrink and company valuations continue to fall.

ING's biotech analyst Richard Parkes predicts further restructuring, as companies slim down and focus on key programs. He believes that the European public biotech sector is too fragmented, with many companies lacking the funding to survive the expected prolonged drought in the equity markets.

But ING points out that only well-funded companies—probably led by British Biotech (Oxford, UK)—can afford to toy with deals of this kind. Such mergers bring highly complex logistics, with most targets offering only a single asset, and few potential acquirers willing to take on the extra risk.

“The harsh reality is that there are too few companies in Europe with the cash to conduct consolidation and take on the associated extra cash burn,” says Parkes. “The emerging profitable biotechs in Europe are also unwilling to sacrifice earnings growth by acquiring cash-burning companies.”

Some analysts, such as Glenn Crocker, biotech expert at Ernst & Young Health Sciences Group (Cambridge, UK), feel the CAT–OGS deal is a one-off rather than the start of an avalanche. “Deals will be done this year, and probably more than last year, but I don't believe this will prompt a wave of consolidation in the industry,” says Crocker. “The barriers to consolidation—valuation, investor disagreement, executives—remain the same.”

Crocker's 'dream scenario' would be to see consolidation among the 30 or 40 initial public offering candidates in Europe, forming a vanguard of substantial companies ready for flotation when the next window opens. “However that is unlikely to happen except in a few instances,” he laments. “Consolidation tends to happen only when there is a change of chief executive. Look for a company changing its chief executive and there you will find the next M&A [mergers and acquisitions]candidate.”