A Revolution in R&D

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INDUSTRY CHANGES
The genomics landscape features many small startups
amid the larger genomics companies and the
genomics divisions of big pharmaceutical corporations.
But that landscape is changing. The number
of deals—of genomics companies combining with
each other or being taken over by big pharmaceutical
firms—has been growing steadily. What is driving
this tendency toward consolidation?
The Pressure to Extend Scope
Increasingly, genomics companies are aspiring to
become full-fledged drug companies. No specialized
company, it seems, has yet succeeded in building a
truly stable competitive position as a drug-industry
supplier; intellectual-property statutes do not
appear to be enough to guarantee long-term protection;
and the chances of proprietary advantage are
being nullified by the trend toward public-private
partnerships or consortia, underwritten by big pharmaceutical
companies.
Wall Street appears to place a far higher value on
integrated drug producers than on pure technology
companies (if only because the drug sector has traditionally
enjoyed such high profits and such high
regard among investors). According to a recent USB
Warburg study, the average integrated drug company
has been able to raise $870 million, as against
a mere $330 million for the average technology
company. (The study noted a further interesting
divergence among technology companies themselves:
biology companies—those focused on target
identification and validation—raised $480 million
on average, whereas companies in the chemistry
area—those focused on screening and lead optimization—raised
on average only $170 million.)
In keeping with this expansionist aspiration, most of
the recent deals have consisted of acquisitions of
downstream drug-development capabilities. Witness
LION’s acquisition of Trega (for $35 million),
Celera’s acquisition of AxyS (for $173 million), and
Lexicon’s acquisition of Coelacanth (for $32 million).
The Pressure to Achieve Scale
As sections of the value chain have become industrialized,
the value of scale in R&D has gained
prominence. And for genomics platform companies
and pharmaceutical companies alike, it may appear
quicker and neater to achieve scale through a merger
than through painstaking in-house upscaling. (Of
course, pharmaceutical companies might have other
reasons to acquire genomics companies: to jumpstart
their genomics efforts, for instance, or to
acquire otherwise rare capabilities.)
Sure enough, most of the recent mergers and acquisitions
have clearly been initiated for the sake of
increasing scale: Sequenom’s acquisition of Gemini
Genomics (for $238 million), for example, or
Sangamo’s acquisition of Gendaq (for $40 million).
These scale deals have been primarily in target identification
and validation rather than in chemistry—a
reflection of the urgency of the land grab.
The Pressure to Spend
Whatever the inducements to merge, there is a traditional
impediment—lack of wherewithal. The spirit
is willing but the purse is weak. That is certainly not
a constraint, however, on some of the large
genomics companies at the moment. In mid-2001,
three top companies—Human Genome Sciences,
Celera, and Millennium—boasted over $4 billion in
cash between them, representing about 25 percent
of their combined market capitalizations. Idle money
cries out to be spent—probably, for these companies,
on diversification more than on scaling.
Market expectations, a sense of urgency, an abundance
of funds: all signs pointing to continued consolidation
in the near term.