By Nancy Volkers

Special To BioWorld Financial Watch

The consolidation of the biotech industry has been anticipated, predicted and debated. Now, it appears to be happening.

"A lot of us have talked about the need for consolidation in the biotech industry for a long time," said Peter Ginsberg, senior research analyst at U.S. Bancorp Piper Jaffray in Minneapolis. "We saw a pickup in overall activity, but we've really seen an acceleration recently."

Actually, said Alex Zisson, senior analyst and managing director at Hambrecht & Quist LLC in New York, "If you go back over the last seven or eight years, we're in a long-term consolidation trend in the pharmaceutical industry. Every year there seems to be one mega-merger and three or four large ones." However, Zisson said, "It does seem like we've had a lot recently."

Jay Silverman, senior analyst at BancBoston Robertson Stephens in New York, agreed. "For the most part, we're seeing activity across the board," he said. "Some of [the acquisitions] made sense, some not so much."

One that makes "not so much" sense, Silverman said, is Merck and Co. Inc.'s recent acquisition of Sibia Neurosciences Inc., of La Jolla, Calif. "If Merck is going as small as Sibia then the level of interest by big pharma is at an unprecedented level," he explained.

Acquisition headliners include the June announcement of Abbott Labs' acquisition of Alza Corp., after Alza completed its purchase of Sequus Inc. in March. The dollar value of those two deals alone approached $8 billion. Other major acquisitions were Johnson & Johnson's purchase of Centocor Inc. for $4.9 billion; Pharmacia & Upjohn's purchase of Sugen Inc., for $650 million; and the merger of Celltech plc and Chiroscience Group plc, a $1 billion deal that creates the largest biotech operation in Europe.

Acquisitions tend to follow a pattern, Ginsberg said.

"If you look at most of the major acquisitions Alza, Sugen, Centocor they have something in common," he said. "The target companies had late-stage or commercial products and they had retained rights to those products either full rights or some downstream profits. Right now, the larger pharmas are looking to enhance late-stage pipelines. It doesn't make sense for a major drug company to acquire a biotech only to get an 8 percent royalty on a product."

Zisson agreed.

"Up until now, mostly there's been platform acquisitions," he said. "But now, biotechs that can maintain most of their marketing rights are viable takeover candidates."

When it acquires Centocor, J&J will also acquire that company's "three R's" - ReoPro, Retavase, and Remicade. ReoPro (abciximab), an anti-platelet agent, was approved in 1994. The monoclonal antibody, used for angioplasty, had sales of $365 million last year and also is in trials for ischemic stroke and acute coronary syndrome. Retavase (recombinant reteplase) is a fibrinolytic for acute myocardial infarction. And Remicade (infliximab), a therapeutic approved last August for the treatment of Crohn's disease, also is on track for approval for rheumatoid arthritis.

Sugen's SU5416, an angiogenesis inhibitor, will enter Phase III trials later this year for lung cancer and colorectal cancer, and is in an open-label Phase II study in AIDS-related Kaposi's sarcoma. SU101, a small-molecule inhibitor of platelet-derived growth factor receptor, is in a pivotal study in glioblastoma, which is expected to yield interim data later this year. The drug also is expected to enter a pivotal study this year to treat pain associated with hormone-refractory prostate cancer. SU101 is in Phase II trials in ovarian and non-small cell lung cancers.

SU6668, a multi-mechanism inhibitor of angiogenesis and tumor growth, is in Phase I trials for treatment of solid tumors.

Alza has several products close to market launch. In June, the Oncologic Drugs Advisory Committee recommended accelerated approval of a supplemental new drug application (sNDA) for Doxil (doxorubicin HCl liposomal injection) for refractory ovarian cancer. Doxil, a liposomal formulation of doxorubicin, already is on the market for AIDS-related Kaposi's sarcoma.

Other Alza products include Ethyol, Duros leuprolide and Oros methylphenidate.

In addition, there was a mix of smaller deals. In May, PolyMASC Pharmaceuticals plc was purchased by Valentis Inc. itself a product of a merger (Megabios Corp. and GeneMedicine Inc.) in a $20 million transaction. Geron Corp. bought Roslin Bio-Med, the home of the cloned sheep Dolly, for $26 million. Invitrogen Corp. purchased Novex for $50 million. And Quidel Corp. bought Metra Biosystems Inc. for $23 million.

Corixa Corp. was busy, purchasing Anergen in February for $8.1 million and Ribi ImmunoChem Research Inc. in June for $56 million. The latter purchase was aided by a $50 million equity-based credit line that Corixa secured in April, which partially was earmarked for acquisitions.

Though many of the acquired companies were small biotechs, and many of the acquiring companies were big pharma, Ginsberg doesn't think that signifies a lack of position for bigger biotech companies.

"I think we will see the large-cap biotech also playing a role," he said. "Amgen, Biogen, Chiron they all have significant resources to make acquisitions, in terms of cash resources and stocks acting pretty well. Plus you have the looming concern of pooling accounting going away."

Other than the natural progression of the industry, and the Darwinian weeding out of the weakest companies, consolidation may be accelerating now due to a recent decision announced by the Federal Accounting Standards Board (FASB). In April, FASB voted unanimously to eliminate a popular bookkeeping method used for mergers. The method, known as pooling of interests accounting, or just "pooling accounting," has gained popularity during the past several years over "purchase accounting."

If pooling accounting disappears, Ginsberg said, "The companies would have to employ purchase accounting, which leads to a significant hit to the income statement. Many companies are seeking to get acquisitions in, prior to the change."

Silverman agreed. "If pooling is going to be rescinded then they're going to want to do it sooner rather than later."

Pooling accounting allows the two merging companies to simply add the book value of their net assets. In purchase accounting, assets and liabilities are recorded at fair market value, with the amount paid over fair market value to be written off as goodwill, which is written off the buyer's earnings over time.

Regulators believe the use of pooling accounting can lead to overpayment of an acquisition, with no trace of a poor deal left on the books. Also, because no goodwill charges are subtracted from revenue, companies can report illusionary growth. According to the FASB, widespread use of pooling accounting is largely a U.S. phenomenon, and some countries ban its use.

Last year, for the first time, $852.9 billion in mergers (in all industries, not just biotech) were accounted for using pooling accounting, compared with $773.9 billion for purchase accounting. Pooling accounting is common for mergers in banking, pharmaceutical, biotech and other high-tech industries.

The change will be effective for mergers and acquisitions initiated after the FASB issues a final standard on the issue, which is expected late in 2000. As yet, the decision does not affect not-for-profit organizations, or combinations of companies under common control.

"My guess," Zisson said, "is companies who are seriously thinking about an acquisition may decide to pull the trigger earlier to take advantage. It also puts pressure on big pharma, because they may think everyone else is going to pull the trigger. I think that's why you might see one or two deals inciting a flurry of deals."*