PerspectivesAre you interested in submitting a Perspective Article? Be sure to read The Science Advisory Board's Editorial Guides for Perspective Articles. Click here. Mergers and Acquisitions in the Life Sciences: The Timid New World and Its Impact on the Life Science Consumer by Richard Wintle, Ph.D. Introduction For those who follow trends in the biotechnology and pharmaceutical industry sectors, history will record the early years of the 21st century as the time when the genomics boom went bust, private capital markets dried up, and business activity in the biotech/pharma sector began to focus less on genomics start-ups and much more so on mergers and acquisitions (M&A). This activity has been driven by a number of factors, the most important of which are the overall maturing of the industry, the lack of commercial success of many small (and some very large) genomics players, and the dearth of new venture financing over recent years. Small- to medium-sized companies are being acquired by larger ones (e.g., the recent acquisition of Visible Genetics by Bayer Diagnostics), large companies are busily merging (including the biggest example, resulting in the creation of Glaxo-SmithKline), and even medium-sized biotechs are looking for strategic mergers or acquisitions to improve their cash positions and product pipeline. This "timid new world" has certainly not been restricted to the drug-discovery side of the life sciences business. Life science and laboratory supply houses are also participating in the current M&A frenzy for many of the same reasons, although M&A activity in this arena has been going on for some years. Invitrogen, for example, seems to have embarked on a campaign to dominate as much of the life sciences lab supply sector as possible through strategic acquisitions. The struggling biotechnology industry has put further pressure on suppliers as their biotech customers have less and less cash to spend on research equipment and supplies. The conglomeration of life science suppliers can, however, have real benefits to the customer as well. It should come as no surprise, however, that hand-in-hand with these benefits are also a suite of disadvantages. Before exploring these in detail, let us briefly consider two case studies. Each relates to a company with bioinformatics software products that has been acquired by a larger company. However, the outcome for the end user of these software tools is very different. Case one: InforMax acquired by Invitrogen Recently, InforMax, a software company best known for its VectorNTI suite of bioinformatics software tools, was acquired by Invitrogen, a life science supply heavyweight. At the time of the announcement, InforMax had almost $47 million in cash, cash equivalents and investments, and was losing approximately $5 million per quarter. Consequently, the company's cash position was not too bad—about two years' worth "in the bank." However, sales were weak, R&D spending was decreasing and the company's shares were worth little enough that they were in danger of being de-listed from the NASDAQ stock exchange.(1) By purchasing InforMax for $42 million, Invitrogen acquired a healthy dose of cash, increased informatics expertise for their own in-house R&D (which will likely feed into some of its laboratory kit products), and an established product line of bioinformatics software.(2) For existing and future InforMax customers, this is good news. Invitrogen—with almost $750 million in cash reserves—has the capability to apply its considerable worldwide marketing, sales and support for these products. Additionally, the long-term survival of the software is much more likely than if InforMax had continued to supply and support it on its own. This type of acquisition perhaps represents the "best case" scenario for the customer—the saving of a small company likely doomed to go out of existence within two years, without (at least for now) the reduction or elimination of useful products. Case two: Genomica acquired by Exelixis By contrast, the acquisition last year of Genomica by Exelixis seemed to represent the "worst case" scenario for the consumer. Exelixis CEO George Scangos made this clear right from the outset: "We do not intend to get into the software business. We believe that Genomica's substantial cash and investments will significantly enhance our ability to move our drug-discovery programs forward, and that their software will be an important tool to manage human data during the clinical development of our compounds".(3) Exelixis, a drug-discovery firm, was interested in Genomica's cash and investments, and their software tools and expertise, to accelerate Exelixis' own research programs. In this case, the acquisition was terrible news for the user of Genomica's products, casting long-term support into doubt and effectively killing off development of any new products and enhancements to existing ones. The key difference between this and the Invitrogen/InforMax case is in the purchaser—in one case, an established life science supply house, and in the other, a drug discovery firm with no expertise or interest in marketing these kinds of products to end user customers. Fortunately, it seems that Genomica’s software tools have re-surfaced under the name Visual Genetics after their purchase by Visualize, Inc., so the news is not as gloomy for Genomica users as it initially appeared to be. These two cases serve as a cautionary tale to researchers who are dependent on smaller, "boutique" style suppliers of equipment, reagents, software and other tools for the life sciences. The reality, however, is that most laboratory supplies come from very large suppliers with global presence. Generally speaking, these players in the life sciences supply arena have either merged with others, acquired smaller companies, or both, in order to achieve the critical mass necessary to capture a significant share of the supplies market. Dealing with this kind of company can have advantages and disadvantages to the consumer, as is discussed below. Merging of suppliers: the "big book" approach to lab supply M&A activity in the lab supply sector has resulted in the establishment of what one could refer to as the "big book" companies—suppliers with extensive catalogues of many different kinds of lab supply products. Two notable examples are Fisher Scientific and VWR International, each with paper catalogues numbering thousands of pages. The use of such suppliers can have distinct advantages to the consumer over purchasing from smaller vendors, including: • extensive supply chain, sales force and customer support networks • bulk purchasing power, resulting in dramatic discounts to the customer • the ability to warehouse extensive inventory, resulting in stability of supply and fewer back-ordered items • infrastructure to support web-based shopping, facilitating ordering • "one-stop" shopping for everything (or nearly everything) needed, reducing the time commitment required for lab supply ordering • reduction in time used in speaking with many sales representatives from many different companies • availability of different brands of similar items, enabling direct price comparisons • confidence that the supplier is a multinational that will not disappear in the short- to medium term. These represent considerable advantages to the consumer, and seem to argue strongly for large, merged suppliers as being preferred. However, customers may also experience disadvantages, including the following: • availability of many brands of similar items may cause confusion as to which is the most suitable • merging of several smaller companies into one larger one may result in a decreased sales force (i.e. one sales representative covering a large area), rather than an increase in sales presence as one might expect • may result in a reduced number of competing brands and elimination of "old favourite" items if they compete with other brands the supplier stocks • may be less intangible "good will" feeling than when dealing with a smaller, "boutique" supplier • re-branding of items under the new supplier's name may result in confusion or inability to determine if the new item is in fact identical to the original one • sales representatives may take significant amounts of time to provide technical information on a specific product. Each of these disadvantages may be sufficient to discourage a researcher from using a large supplier, if this is avoidable. Conclusion There are likely many other advantages and disadvantages to the merging of supply houses than are listed here. It is, however, safe to say that M&A activity in the lab supply and instrumentation sectors is likely to continue at a rapid pace over the next few years as biotech and pharma customers continue to tighten their spending, and as companies try to avoid going to capital markets for new money. Each customer must assess the impact on research efforts individually. However, it seems unlikely that individual consumers will be able to affect the process much, as smaller suppliers continue to be gobbled up by larger ones. In the meantime, consumers will have to decide whether to support the "big book" companies, their favourite boutique suppliers, or (most likely) a combination of both. ### Richard Wintle, Ph.D. is Director of Research Development for Ellipsis Biotherapeutics Corporation in Toronto, Canada. He also currently serves as a member of the Steering Committee for The Science Advisory Board and a member of the Board since April 2002. References 1. InforMax reports fallen revenues, receded R&D, and narrowed loss in Q3. Genomeweb, 10/30/02 2. Invitrogen to buy InforMax for $42M; "substantial" custs in SG&A costs foreseen. Genomeweb, 10/15/02 3. Update: Exelixis to acquire Genomica for its cash. Genomeweb, 11/19/01 ### << Previous Next >> [ View All Perspectives ] |
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