In the wake of this summer's flood of mergers involving biotechnology firms (see Table 1), industry insiders and Wall Street analysts say not all of these highly publicized deals will succeed. A clash of corporate cultures, inadequate synthesis of the firms' product lines, and internal pressures can conspire to turn a stock-boosting deal into a disaster if corporate executives haven't done their homework. In some cases, a merger may be worse than a failure.

Table 1 Recent M&A activity involving biotechnology companies.
Full size table

Board members of 12-year-old ImmuLogic (Waltham, MA), for example, called it quits this summer and returned $40 million to shareholders after the firm's allergy vaccines failed to impress federal regulators. Although individual investors and mutual fund managers have become wary of small- and mid-cap biotech stocks, ImmuLogic turned down a potential suitor because the offer "lacked specificity, contained contingencies, and was not superior to the plan of liquidation," according to a company statement.

The history of AxyS Pharmaceuticals supports this kind of thinking. In November 1997, shares of Sequana Therapeutics (San Diego, CA) surged 25% when it announced plans for a merger with Arris Pharmaceutical (South San Francisco, CA). The new company, AxyS Pharmaceuticals, kept its Bay Area headquarters, and executives said that the combination of Sequana's gene-hunting research and Arris' library of drug components and combinatorial chemistry would be a winning match (Nat. Biotechnol. 15, 1326).

But less than a year later, AxyS announced a $13.2 million second-quarter loss and with it plans to shut down the former Sequana facility and lay off 85 of its 120 employees. In early October 1999, AxyS was trading between $3 and $4 a share, compared to the $11–12 a share at the time of the initial deal. "The merger of two money-losing organizations is only going to compound the problem," says Viren Mehta, an analyst with Mehta and Associates. "That was the Sequana and AxyS story."

AxyS CEO John Walker, who now questions the long-term viability of the partnership, says there are several lessons he learned from the deal—the first being that Arris simply paid too much money. Sequana's market capitalization was $100 million when Arris began courting it in mid-1997, but by the time of the deal, it was closer to $140 million. The final offer was for $166 million. "We should have been more patient," he says. "We probably could have waited for a downturn in the market for a better price."

Mehta says money isn't the only reason why mergers fail; often the dealmakers don't make it clear who's in charge in the boardroom and in the laboratory.

Indeed, AxyS's Walker says researchers and executives at the two firms had different approaches to drug development: Arris was looking for a vertically integrated approach from research to marketable products, while Sequana believed it should continue to hunt for disease-causing genes, which is expensive and time-consuming. "Their scientists wanted to expand science horizontally, we wanted applications that we could use for specific targets for drugs," he says. "The program was really not progressing."

Despite the potential problems, a merger between two fiercely independent firms can be fruitful, at least for the winner. Mehta points to the acquisition of Cadus by OSI in mid-July. Cadus' troubles began with a patent suit in 1996 by rival Sibia that kept it from using its core technology for genomics screening. It also lost $18 million in damages and a collaborative deal with Bristol-Myers Squibb.

In July, Cadus sold its drug discovery assets (and employees) to OSI for only $1.5 million. Overnight, OSI became a $130 million firm with 220 employees. OSI's CEO Colin Goddard says he gained an important line of preclinical G-protein coupled receptors, core yeast technology, and, perhaps most importantly, talented researchers from Cadus. (Cadus's chief scientific officer remains on staff.) OSI developed a business plan within one month of the acquisition.

"There are no true mergers. There has to be one company that takes charge," says Goddard. "From the beginning, the situation at the top has to be clear. Biotech is entrepreneurial business, and entrepreneurs by their nature aren't easily changed."

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