US, EU seek to stifle biotech exits

A novel antitrust strategy by the Biden Administration’s Federal Trade Commission and the EU is seeking to end an acquisition by Illumina that would accelerate the availability of a cell free cancer screening. More seriously, if widely adopted, it would make it much harder for successful startups to exit — and thus for them to raise money and be formed in the first place.

Ironically, the government agencies are seeking to block Illumina from paying $8 billion to buy back  Grail, its own spinoff company. As the WSJ editorial board concluded Friday:

Government Race Against a Cure

In 2016 Illumina formed Grail with the goal of developing a blood test that could detect DNA from cancer cells before people show symptoms. A year later Illumina spun off Grail. This let Grail raise venture capital to finance large clinical trials while Illumina focused on building its other businesses.

Fast forward four years. Grail’s technology can now reliably detect 50 cancers at early stages with a simple blood draw. While the tests aren’t 100% accurate, the false positive rate is less than 1%, which is lower than for mammograms and PSA prostate tests. Grail’s technology can also detect the 12 most deadly cancers with 60% accuracy and has the potential to reduce false cancer diagnoses and invasive screenings while increasing early detection of aggressive cancers.

Grail was considering an IPO last fall to raise $100 million when Illumina made a more attractive offer. Illumina says its regulatory expertise can accelerate the commercialization of Grail’s technology. Biotech startups often struggle to obtain regulatory approval and insurance reimbursements.

The argument is virtually unprecedented: most mergers (since the Teddy Roosevelt days) have been fought based on horizontal combination in restraint of trade, while Illumina is a strategic supplier to Grail (and also supplies to other firms).

What seems particularly disreputable is that the FTC is seeking to kill the merger without allowing a court to rule on the merits of its arguments. Instead, the FTC is hoping to harass and stall the applicants until the Dec. 20 expiration of the agreement.

The reality is that little companies develop new technologies, but can never scale as quickly as a big company. The June 3 editorial suggests that Grail’s competitors are fighting the merger to slow Grail’s rollout and let them capture more market share.

Meanwhile, the EU is asserting authority over a transaction (between US firms) for which they have no jurisdiction because Grail has no operations there. As the WSJ wrote on May 29:

The change in European policy marks an effort by the commission to adapt its antitrust enforcement to a fast-changing marketplace where companies can expand with great speed, including through the acquisition of pivotal smaller businesses, the commission has said. Its March policy guidance changes nothing in the letter of the law but fundamentally changes how it is interpreted.

Potential red flags for merger review now include almost any deal done by a tech giant; almost any deal in a highly innovative sector, such as pharmaceuticals; a deal that might trigger complaints from third parties; and high-price acquisitions of companies with little revenue.

“It raises a lot of questions and uncertainty,” said Salomé Cisnal de Ugarte, a partner at law firm Hogan Lovells in Brussels. “It can affect every transaction.”

Finally, beyond the policy issues are the sheer scope of transactions on the global economy. Illumina is a $3.4 billion/year company, not even on the Fortune 500 (#687). Meanwhile, Amazon ($420b), Google ($182b) and Facebook ($86b) dominate their respective segments — in a way no oil or car company ever did — and continue to stifle competition at every opportunity. A decade from now, which intervention will make the most difference to society and the vibrancy of the economy?

Biotech business reading list

On behalf of my employer, today I did an online recruiting seminar for KGI — aimed at prospective master’s students who have an undergraduate science background and were interested in our business programs. On one slide, I list the various industries we serve — biotech, pharma, medical devices, diagnostics — as well as a few areas beyond human health, like biofuels.

One student asked about learning more about life science industries. As an economic historian, I’m big on business histories, so I said I would recommend some books. (A half dozen of the participants asked for my list.)

When the webinar was over, I went to my office bookshelves and looked at what was there. It turns out they’re all about the biotech industry. I also went down the hall to visit our resident expert on biotech industry history, Steve Casper, to see what he had that I don’t. Together I came up with a list of seven books — most of which assume little or no prior knowledge of the industry or its science.

One book stands alone: From Alchemy to IPO. The first book about the business of biotech, it summarizes the key developments in the 20th century biotech industry, including histories of Genentech, Amgen, Genzyme and the Human Genome Project. Yes, it’s now more than a decade old, but nothing provides such a complete picture of the industry for those without any prior understanding.

Another book — Science Business — offers what may be the definitive view of the economics of the biotech industry. Harvard Business School professor Gary Pisano tries to explain why biotech is so hard, and thus why most biotech companies can’t make money. (It’s the most advanced of the books and thus probably not the best choice for someone without a business background).

Two books are about Amgen, the SoCal biotech company with closest ties to KGI (they’ve hired 1/6th of our graduates). The Amgen Story is a coffee table book and authorized history of the company’s first 25 years. Perhaps a more useful source is Science Lessons, the memoir by Gordon Binder of his years (1988-2000) as Amgen CEO.

Surprisingly, only one book has been written (so far)about Genentech, the company that converted the Cohen-Boyer patent into a new industry. The newest book on the list, Genentech: The Beginnings of Biotech documents Genentech during the 1970s and 1980s, based on UC Berkeley’s unprecedented archive of interviews with early California biotech pioneers.

Steve had two books that I didn’t. One is The Billion Dollar Molecule, a story of the successful efforts by Vertex to develop therapies for AIDS and hepatitis C. (I guess this is biotech’s version of The Soul of a New Machine, sans Pulitzer).

The one he highly recommended is Invisible Frontiers, an early book that documents the race between Harvard, UCSF and Genentech to clone the gene that would allow synthesis of human insulin.

The only one I’ve read so far is From Alchemy to IPO. I won’t be able to make a dent in the list this semester, but I’m going to take some for my long trips this summer.

References

1. Cynthia Robbins-Roth, From Alchemy to IPO: The Business of Biotechnology, Cambridge, Mass.: Perseus, 2000.
2. Gary P. Pisano, Science Business: The Promise, the Reality, and the Future of Biotech, Boston: Harvard Business School Press, 2006.
3. David Ewing Duncan, The Amgen Story: 25 Years of Visionary Science and Powerful Medicine, San Diego: Tehabi Books, 2005.
4. Gordon Binder and Philip Bashe, Science Lessons: What the Business of Biotech Taught Me About Management, Boston: Harvard Business Press, 2008.
5. Sally Smith Hughes, Genentech: The Beginnings of Biotech, Chicago : University of Chicago Press, 2011.
6. Barry Werth, The Billion Dollar Molecule: One Company's Quest for the Perfect Drug, New York: Simon & Schuster, 1994.
7. Stephen S. Hall, Invisible Frontiers: The Race to Synthesize a Human Gene, Redmond, Wash.: Microsoft Press, 1988 (originally published in 1987 by Atlantic Monthly Press, and also published in 1996 by Genentech and most recently in 2002 by Oxford).

Buying biotech firms to kill them

(Cross posted from the Engineering Entrepreneurship blog)

At #IndustryStudies2011 this week in Pittsburgh, I heard an interesting talk about what happens to biotech startups after they are acquired. Panos Desyllas of the University of Manchester presented his study (with two Manchester co-authors) of UK biotech firms acquired 2006-2010 by non-UK companies.

The team studied in depth six acquisitions, interviewing executives from both sides of each transaction and also analyzing five years of trailing patent data. They also traced what happened to the key scientists after the merger by noting their affiliations in subsequent patents.

From this data, they came up with a simple (but useful) 2x2 typology: are the two firms similar in technology and are they similar in capabilities?

The firms might be exploring different technological frontiers. Or the acquired firm might have something that the acquirer does not — or vice versa — whether it be UK marketing by the acquired firm or global marketing by the acquirer. The (plausible) intuition is that complementary acquisition is more likely to create ongoing value than a more directly competing one.

The typology worked as predicted. In the case of acquisitions where both the technology and capabilities overlapped, the buyer closed the acquired company, keeping only an IP expert or two as a temporary consultant to transfer the tacit knowledge.

In discussion during and after the session, we discussed the case where the buyer bought a rival with the sole purpose of killing it. This happens all the time, and in some ways it seems like a special case with an utterly predictable outcome.

The other case I brought up was when the acquisition starts out as being complementary — but the acquired firm gets killed anyway.

In April, Cisco killed the Flip camera line that it bought for $590 million in 2009. Pure Digital founder Jonathan Kaplan was sorry to see Cisco knife his baby rather than put it up for adoption, particularly when it remained profitable.

The other example (from the life sciences industry) was Biogen Idec, billed in 2003 as a merger of equals between two biotech startups, Boston-based Biogen and San Diego-based Idec Pharmaceuticals. However, the failed merger brought the closure of the former Idec operations in San Diego last November, and the layoff of some 300 employees (including a close personal friend).

During Desyllas’ session, we discussed whether the closure was a good thing or a bad thing for the local economy. In true Schumpeterian fashion, the creative destruction makes available skilled talent to the local economy for other ventures. On the other hand, some off the displaced workers may never have a similar opportunity again.

But in the end, we agreed that the pattern proved a familiar point: companies get sold when the owners want to sell — usually when they want liquidity for an illiquid investment. Whether the founder (such as Kaplan) or the venture investors, once the company is sold all bets are off.