BioWorld International Correspondent

LONDON - Push is coming to shove.

There has been much talk in the past 18 months to two years of the need for the European biotechnology sector to build its strength through mergers and acquisitions. Now there is no choice but to consolidate because the money is running out, and so is investors' patience.

That was the stark message to CEOs at the 3rd annual BIA European CEO and Investor Conference in a session titled "Making the M&A Moves: the consolidation opportunity."

There is no shortage of rumors about imminent biotechnology mergers and acquisitions, but "the question is, is this all talk or does the survival imperative mean that the barriers to consolidation are coming down?" asked Heather Bell, associate principal at management consultants McKinsey and Co. On the one hand there are CEOs who believe that most European biotechnology companies are too small to survive alone, but on the other hand there are companies that believe they have built a specialized and highly integrated unit - trying to marry that with another company would be like trying to merge two soccer teams.

"CEO egos are about to be reduced in size," said Martin Dewhurst, Head of UK Healthcare at McKinsey. "European biotechnology is subscale and ripe for consolidation. In the current market you would expect to see more M&A activity."

But he acknowledged that with so much else on their plates, CEOs may be nervous about the degree of distraction. "Sixty-five percent of M&As fail, so we understand management skepticism," Dewhurst said.

Furthermore, Dewhurst said that with backs to the wall it could be easy to be pushed into the wrong sort of deal. "The problem is you have to reconcile two irreconcilable things - the need to make both parties feel good about the merger vs. the team you need to run the [merged] company," he said.

Many people are put off trying to do mergers and acquisitions in Europe because they believe legal barriers make it impossible to rationalize European operations and get the necessary cost savings, noted Simon Best, CEO of Ardana Bioscience in Edinburgh, Scotland. His company recently acquired Europeptides SA, of Paris, from its German owner Degussa GmbH. "We researched in advance if we could close [Europeptide's Paris operation] down if we wanted to," he said. "It costs money, but you can do it. Specialist advice is available, and the problems are not insurmountable."

However, Best admitted that the legal fees were testimony to the complications of cross-border mergers and acquisitions. "We needed a lot of legal, intellectual property and tax advice," he said. "We were a Scottish company, buying a French subsidiary of a German company, so we ran up some big bills."

Shareholders are putting CEOs under pressure to merge, but at the moment the only result is a huge amount of time wasting, Andrew Heath, CEO of Protherics plc, told delegates. "CEOs are being sent out by the venture capitalist on the board to talk to people, when the CEOs themselves don't want to merge," he said. "You've got to want to merge."

One of the recent rumors making the rounds in the UK was that five of the quoted oncology companies were receiving encouragement from investors to negotiate a simultaneous merger to create UK Oncology plc, a company with enough products and money to compete internationally.

"This will not happen," said Heath. "If you put five CEOs and five chairmen in a room there would be so much plumage flying around that I just can't see it getting done."

But one-to-one deals will be done, Heath said, because "mergers will be born out of need, not of desire. Suddenly you will get to the point where you wonder if you can pay the mortgage in three months' time, and that's when a CEO will do a deal."

Inevitably, with the market so low, there is talk of M&As as the way out, said Andrew Clark, founder and fund manager at Reabourne Technology Investment Management Ltd., which specializes in investing in quoted companies, but he cautioned that there must be a genuine case for it. He also noted that valuations have fallen so low, many institutions that would like to invest, can't, because "the smallest investment most big funds could make would amount to a takeover bid, and they don't want to do that."

At the moment, Clark said, the quoted companies fall into one of two categories: those with money and no products, and those with late-stage products but no money.

"This raises the question, which is worth more, the science or the money?" he asked. "And if you merge, would you rather be run by a team that raised money but couldn't develop a product, or one that developed a product but the management didn't have enough charisma to raise money?"

Clark concluded that the outlook is grim. The sector needs to consolidate and the time to do it is running out.

"There is no sign management teams are getting it done, so I think shareholders will have to get it done," he said.