San Diego Metropolitan Magazine - In Search Of Biotech’s Qualcomm

A history of San Diego County’s most successful biotechnology companies is, to a large degree, a history of companies no longer controlled from San Diego.

Hybritech. Agouron. Idec. They were formed and grew to national prominence here. But at some point, the management of these companies agreed to be purchased by a big pharmaceutical company — Hybritech by Eli Lilly in 1986 and Agouron by Warner-Lambert, now Pfizer, in 1999 — or merge with another biotech — Idec with Biogen to form Biogen Idec in 2003.

Look at it one way and these deals are flattering to the talents of San Diego’s biotech industry. Agouron alone sold for more than $2 billion, a clear indication that it developed valuable products and technology. And the sale of San Diego’s first biotech company, Hybritech, for $400 million, unleashed scores of newly rich Hybritech alumni who founded the area’s biotech industry.

But despite all the self-congratulatory praise San Diego’s biotech industry gives itself — Biotech Beach, third-largest nexus of public biotech companies in the country, less expensive than the Bay Area and better weather than Boston — San Diego lacks a really large locally based biotech company.

The numbers paint the picture.

Genentech, with a market capitalization of $50.5 billion, dominates the San Francisco Bay area.
Biogen Idec, valued at $14.5 billion, and Genzyme, with a $12.3 billion value, in turn define the Boston area’s biotech scene.
Amgen, based in Thousand Oaks, is worth a staggering $82.5 billion.

By comparison, San Diego County’s biggest biotech sluggers are Little League.

Idec before the merger was worth about $6 billion. Today, Carlsbad’s Invitrogen tops the list with a $3.8 billion market cap, followed by Neurocrine, worth $2.1 billion, and Amylin, worth $2 billion. To really put things into perspective, the total value of all San Diego County’s public biotech companies put together is far less than the $45.8 billion value of Qualcomm.

Will San Diego ever get a biotech equivalent to Qualcomm? Or will it always remain a glorified fermentation tank for small and medium-sized companies that get picked off just when they’re hitting the big time?

Does it matter? Local biotechnology chief executives, venture capitalists and advisers gave various answers.

What’s Good For Business

Any CEO of a publicly traded company worth his or her salt knows that making money for shareholders ranks higher than any sense of pride in building a large company. It’s a rare board of directors that will refuse to sell if offered a large premium to market value.

So at one level, public companies in principle must be willing to shelve their long-range plans and surrender control whenever a sufficiently attractive buyout offer is made.

Howard Birndorf, one of San Diego biotech’s founding fathers, has been there. He co-founded Hybritech and went on to help found Gen-Probe, Idec, Ligand and Nanogen.

Companies can consciously structure themselves so they grow into an attractive acquisition target, or they can try to grow solo without counting on a purchase, Birndorf says. But freedom of action to make that choice depends on having enough cash on hand at all times.

“Strategically you can go either way,” Birndorf says. “In the times when funding is scarce, your exit strategy is acquisition. When funding is available, you have more of an option.”

Birndorf didn’t have much of an option with Gen-Probe in the late 1980s. “We were running out of money. The market was bad and we needed to raise 10 (million) to 15 million bucks. So we decided that one option would be to see if someone wanted to buy the company.”

Playing a weak hand well, Gen-Probe put out feelers to an interested potential buyer. Then, Birndorf says, the company contacted Chugai Pharmaceuticals, the Japanese pharmaceutical company that already had a partnership with Gen-Probe.

“I went to them and said we’re thinking of selling the company and we have this other company interested. Are you interested? And they said yes, and they paid slightly more.”

Today, Gen-Probe boasts a $1.9 billion market capitalization and again is independent, because Chugai spun it off as a public company in September, 2002. Its stock sold for more than $38 per share in late January, compared to its value of less than $10 immediately after the spin-off.

But Birndorf says the odds of a biotech company remaining independent for the long haul are slender, especially in therapeutics, which most biotech companies are developing. The reasons can be summed up in four words: It costs too much.

The amount of money it takes to get a drug approved, the length of time it takes to get a drug approved, the fact that having just one drug isn’t enough (you need a pipeline) all mitigate against the go-it-alone approach, Birndorf says. “Even Idec merged because they wanted to expand their pipeline and expand the ability to spend research dollars, to compete,” he says. “Those are the issues. A small company, like any of the small companies here, is going to have a difficult time.”

So when a big pharma like Eli Lilly comes in and offers $400 million to buy a small San Diego biotech like Applied Molecular Evolution — a 50 percent premium — it’s awfully hard to say no.

Why It Matters

As any chamber of commerce type will tell you, a large, successful company gives a city instant name recognition, helpful when recruiting workers or companies. And the buzz, although intangible, boosts a city’s morale.

Qualcomm, for example, sank the stereotype that San Diego is a just a land of laid-back weather wimps who live well because of an accident of geography, not because of their own hard work and ingenuity.

The telecom giant also helped San Diego shake off its traditional inferiority complex about Los Angeles. Those “let’s do sushi” cell phone chats are most likely conducted using Qualcomm’s Code Division Multiple Access technology.

Qualcomm’s ascendancy in the telecom world has formed an expanding solar system of new telecom companies and spin-offs. For example, Qualcomm sold its cell phone manufacturing division to Kyocera in 2000. That San Diego-based division, now known as Kyocera Wireless, employs 3,000 people.

A biotech equivalent of Qualcomm could be expected to do all these things, aside from creating thousands of new jobs, directly and indirectly. Large corporations usually do a lot of charitable giving, either directly or through their executives.

Smaller biotechs also may find it easier to do deals with a larger biotech that’s in their backyard, says David F. Hale, another biotech veteran whose career includes stints at Hybritech, Gensia and now CancerVax in Carlsbad.

Hale says a mega-biotech also would expand the local biotech talent pool. A really big company would not be able to meet its needs just by hiring locally, so it would recruit employees from other parts of the country. “Once these people come here, they tend to stay in San Diego,” says Hale, himself an example of that principle.

So when Idec merged with Biogen last year and established its headquarters 3,000 miles away in Cambridge, San Diego lost its best chance to host such a biotech Qualcomm — at least for now.

(Biogen Idec will still maintain its expansive San Diego campus, however, and continue to build a large manufacturing plant in Oceanside.)

No Evidence Of Harm

Mark Wicker, attorney and veteran of biotech merger and acquisition deals, says there’s no evidence that mergers and acquisitions of San Diego area biotech companies have diminished the industry’s vitality here. On the contrary, the industry is increasingly strong by just about any yardstick. There are more employees, more products reaching the market and more scientific discoveries by locally based companies and research institutions.

“Since the early ’90s, there have been rumors year in and year out of the impending consolidation of the biotech and life science industry,” says Wicker, co-chair of the national life sciences group at the technology-oriented law firm Gray Cary, which is headquartered in San Diego. “There will always be mergers, there will always be combinations, but I don’t see it as an increasing trend ... you will see M&A activity ebb and flow over time, but you’re not necessarily going to see a particular trend over time that’s accelerating.”

The biotech scene is not static, Wicker emphasizes. New companies are being formed all the time, and some of them become very successful. Moreover, mergers or acquisitions are also a necessary part of business activity. In some cases, it just makes sense for a company to be acquired, not just because shareholders will get a lot of money quickly, but because the combined company will be stronger than either one alone. “From a local pride perspective, it is too bad to see your flagship companies end up being acquired and being controlled elsewhere, because then you can no longer take local credit for their successes, and you must look to the smaller companies that are growing up for those successes,” Wicker says.

Offsetting this loss of pride is a tangible gain in sophistication and scale, as smaller local companies become branches of large pharmaceutical companies.

“Take a look at what has happened in San Diego over the last five or six years,” Wicker says. “You’ve had major R&D effort put into the San Diego area by Novartis, by Pfizer, by J&J and you’re also probably going to have another one coming in with Lilly as a result of the (Applied Molecular Evolution) acquisition. And of course, you’re still going to have a major campus here for Biogen Idec.”

Those all are very good things, because they bring very large R&D budgets, they employ a lot of people and they do very good science, and it’s done in the region,” Wicker says.

Also, new companies tend to be formed in the wake of an acquisition. “So you have a number of startup opportunities that are then venture capital financed and exploit exciting new technologies, hire new people, put products in the clinic, and start the cycle all over again.”

Stuart Collinson went through a takeover firsthand as chairman, chief executive and president of San Diego-based Aurora Biosciences when it was purchased in 2001 by Vertex Pharmaceuticals for $600 million. (photo/alandeckerphoto.com)

When A Takeover Makes Sense

Stuart Collinson went through a takeover firsthand as chairman, chief executive and president of San Diego-based Aurora Biosciences, which was purchased in 2001 by Vertex Pharmaceuticals of Cambridge, Mass., for $600 million in stock.

Collinson, now a partner at the San Diego-based venture capital firm Forward Ventures, says the deal made sense for both companies. M&A deals can be divided into those done from a position of weakness and those done from a position of strength, Collinson says. The Vertex/Aurora deal was in the latter category. “We had about $100 million in cash, good revenues, very strong technology and the ability to go it alone.”

But what Aurora, primarily a biology company, didn’t have was chemistry. Vertex, a much larger company than Aurora, was stronger in chemistry than in biology. So acquiring Aurora would immediately give Vertex capabilities it would otherwise have to build up over a period of time.

“So two strong companies came together to create an even stronger company with very strong biology, very good chemistry, and a pipeline of clinical drugs,” Collinson said.

Vertex post-merger has had major setbacks, reflected in a steadily declining stock price. Last November, Vertex stock fell 37 percent in one day, to $8 per share, after it voluntarily stopped a human clinical trial of the arthritis drug Pralnacasan because animal toxicology studies showed liver abnormalities associated with high dosages of the drug. (The drug was in testing by Vertex and its partner, Aventis, before the Aurora acquisition).

Vertex, of course, is far from the only biotechnology company that has had setbacks and a declining stock price over the last few years. At the time the merger was announced, the Amex Biotech Index stood at 568, down from a high of nearly 800 in late 2000. As of late January, the index stood at 522.

Aurora would have faced difficulties if it had stayed independent, Collinson says. The company would have had to spend more money and taken more time to build a chemistry program.

A Look Ahead

Hale, the CancerVax chief executive, says some biotech companies in San Diego County show potential for growing quite large. Hale points to Invitrogen, also in Carlsbad, as a biotech that has grown rapidly, in part because of a series of large acquisitions that have expanded the company’s product line.

Invitrogen got its start making biological research products for use by scientists. The company aggressively developed kits that help isolate and clone genes. It complemented these products by purchasing companies in related fields, such as Molecular Probes, an Oregon-based maker of fluorescent labeling products.

In December, Invitrogen announced it would pay $500 million in cash, including assuming about $70 million in debt, to purchase BioReliance of Rockville, Md., a biotech manufacturer.

Gregory T. Lucier, Invitrogen’s chief executive, says the deal advanced the company’s goal “to create a company that has an operating system from original research to final production of new biologically based therapeutics.”

This is exactly the thing Lucier was known for doing when he was at General Electric’s Medical Systems Information Technologies division. He joined Invitrogen last May.

Invitrogen stock sold for slightly less than $32 per share at the beginning of 2003. By the beginning of this year, the price had soared to nearly $70.

Gen-Probe’s progress since its spin-off also bears watching, Hale says.

Birndorf says there may be room for expansion because financing has gotten easier. “You go through cycles,” Birndorf says. “There’s good times and bad times. In the bad times, everybody talks about there’s going to be more acquisitions and consolidation, and there was no worse time than the last three years in the history of biotech, as far as I and many people are concerned.

“Since March of 2000 until the last six months, roughly, things have just been horrible. There was very little venture money, the public markets were closed, secondary offerings were closed. The only place to get money, basically, was through angel investors or from corporations.”

Nanogen itself survived because it had raised $85 million “right before the bubble burst,” Birndorf says.

Had Nanogen been forced to look for a buyout a year ago, it wouldn’t have fetched very much money. Its stock price was $2 per share, giving it a market capitalization of less than $50 million — one thousandth that of Genentech. Today, Nanogen stock sells for just under $12 per share. “We had enough to weather the storm,” Birndorf says. “Had it gone on for another year or year and a half, we might not have. We might have run out of money.”

Although on the rebound, Nanogen remains a bio-gnat, with a valuation of just under $320 million. And the odds remain formidable against it or any other San Diego biotech growing up into a community-transforming Eli Lilly, a Merck, or Pfizer. If their products fail, they fall. If they succeed, they become attractive to a big pharma with billions of dollars to spend.

But some companies beat the odds. Amgen and Genentech did. Genentech was even bought a few years ago by Roche Holding AG, the Swiss pharmaceutical giant, which turned right around and spun off Genentech again as a public company — with its stock still mostly owned by Roche, to be sure.

What convinced Roche to keep Genentech legally separate was the company’s record of scientific research and innovation, a culture that no large pharmaceutical company has been able to master.

And in San Diego Qualcomm beat the odds, for similar entrepreneurial reasons. Both companies are led by academic scientists who turned out to be extraordinary businessmen — Arthur Levinson for Genentech and Irwin Jacobs for Qualcomm.

Somewhere among San Diego’s hundreds of public and private biotechnology companies, there may be a third industry-transforming leader to rank with Levinson and Jacobs. Maybe more than one.