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BIOTECH–Insiders Provide Glimpse Into Biotech Mergers

Two former San Diego-based biotechnology chief executives offered an insider’s look at the ups and downs of being acquired by pharmaceutical giants.

Peter Johnson, former chief executive of Agouron Pharmaceuticals, Inc., and William T. Comer, former chief executive of Sibia Neurosciences, Inc., were among the four-member panel during a seminar March 28 at the BIO 2000 conference in Boston.

The event was a five-day industry association meeting and drew nearly 10,000 people from the global biotech community to the city’s Hynes Convention Center.

Agouron was bought by Warner-Lambert Co. last May, while Sibia was purchased by Merck & Co., Inc. of Whitehouse Station, N.J., in September 1999.

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During the question-and-answer session, Johnson, Comer, and two other former CEOs who sold their independent biotech firms to health-care giants answered questions about their financial challenges, the rumor-mill stage and the aftermath of the merger.

Consolidations

Last year was marked by a wave of consolidations in the biotech industry. Biotech leaders face an ongoing struggle to raise funds and cut deals with deep-pocketed pharmaceutical firms, panel members said.

That’s because moving drugs through research and development costs hundreds of millions of dollars.

Said Johnson, “This is an industry where every day you try to defy the odds.”

The last seven years have been difficult for small biotech firms. Last year, especially, many local biotech leaders complained investors were turning their backs on them in favor of hot Internet stocks, which offered faster returns.

Even Johnson, whose company was at one time the darling of San Diego’s biotech community, questioned how many times he’d be able to defy the odds.

In the case of Agouron, Johnson, said the decision to sell wasn’t driven by capital deprivation but by structural problems. Agouron was the first local biotech to get a drug approved by the Food and Drug Administration and its HIV-drug Viracept soon became the most successful protease-inhibitor on the market.

Still, problems prevailed.

Recruiting

Johnson said the firm spent 20 percent of its sales on R & D.; He added the level of investment to drive growth was minimal.

One of the biggest challenges was to recruit talent, he said. Back then, Agouron had 1,200 employees; they needed 3,000.

“The bottom line is a company with less than $2 billion in revenues can’t make an adequate investment in research and development.”

In 1998, Agouron reaped $466.5 million in sales.

Johnson said Agouron was looking for a strategic fit in oncology and HIV research. Morris Plains, N.J-based Warner-Lambert wasn’t on Agouron’s list of merger candidates.

But after the two companies managed to overcome sticking points regarding money and the fate of senior management, Agouron agreed to be acquired by Warner-Lambert for $2.1 billion, Johnson said.

In hindsight, Johnson said, the rumor stage was probably the toughest period.

“You have to look people you trust in the eye and can’t explain realities to them,” he said.

Sadly, said Johnson, Agouron’s employees are now once again faced with uncertainty.

On Feb. 8, Pfizer and Warner-Lambert agreed to merge in a $92.5 billion deal. The merger could have implications for Agouron’s employees, said Donna Nichols, a spokeswoman for Agouron. She added a decision whether Agouron will remain in La Jolla has yet to be made.

For Johnson, who left Warner-Lambert on Jan. 1 to begin his retirement, the issue is old news.

End To A Struggle

For Sibia, which had no products approved, consistently lost money and had trouble raising capital on Wall Street, consolidation marked the end of a longstanding struggle.

“We had many projects, but no money,” Comer said.

He said he’d been looking to merge with another biotech firm unsuccessfully for nine months before agreeing to the Merck deal.

“But all we found was 1 plus 1 equals 1,” he said. “It was discouraging.”

The Merck deal offered a 75 percent premium over the trading price. That comes out to $87 million in cash, or $8.50 per share.

Comer said he agreed to the deal in part because Sibia’s scientists thought Merck would inject the necessary funding so they could continue with their projects.

In the end, the scientists were left disillusioned, Comer said.

‘Wrong Kind Of Conversations’

Merck made no efforts to reorganize Sibia between July 30 and Nov. 12, putting a halt to scientific progress and encouraging the “wrong kinds of conversations in the hallways,” he said.

In the end, nine out of the total 122 employees lost their jobs. To Comer’s surprise, many scientists who came to Sibia to experience the “free-spirited” biotech culture remained with the drug powerhouse.

Still, Comer and Johnson said they have no regrets.

Comer, who is now working as a consultant for Merck, said he’s in the process of starting two biotech firms in San Diego. But he has no plans to run a company and work 12-hour days.

His words of advice for biotech leaders looking to merge: Don’t jump too quickly at a deal, develop long-term strategic options, and assemble capable board members.

After all, Comer said, “It makes a rather dirty discussion until it’s over.”

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