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ANALYSIS: Aurora Bioscience--Better Off Alone?

NEW YORK, May 1 – In a conference call Monday morning to discuss Vertex Pharmaceuticals' acquisition of Aurora Biosciences, managers from both companies went out of their way to stress that the deal would create a “win-win” situation for both companies.

But some analysts aren’t so sure. They questioned whether mergers such as this one actually allow the acquired company to grow its business or  between t pharmaceutical company and the provider of genomics technologies and research services would benefit Aurora, since typically the genomics company ends up collaborating only with its pharma parent, and forfeiting revenue it would have received from collaborating with its parent’s competitors.

In addition, because Aurora also has an interest in discovering drugs of its own, it would seem unwise to surrender the potential for full control of downstream payoffs just to be acquired, analysts said.

“If it were strategic for either party, I would think it would have been Vertex,” said Winton Gibbons, an analyst with William Blair in Chicago.

Aurora and Vertex, however, are quick to point out that the acquisition allows currently-profitable Aurora to remain intact as a wholly-owned subsidiary of Vertex, and as such, free to collaborate with other drug companies in addition to its parent.

“In the future, we continue to see collaborative relationships as a very important part of what the combined company will be doing,” said Collinson.

In essence, analysts said, the company wants to hold on to its current business of extracting revenue from research collaborations, while preparing to reap the much larger profits from selling patented drugs.

“It’s a little surprising that they would sell at this price unless they felt their [current] model was not going to be as successful,” said Gibbons.

Collinson and others at Aurora also said that it would have taken the company years and a great deal of money to build the capabilities for internal drug discovery now accessible through Vertex. 

As a result, “we can offer a much broader array of technology to our collaborators,” said Doug Farrell, Aurora’s senior director of investor relations and corporate communications. And because Vertex has one drug on the market, a protease inhibitor used in the treatment of HIV, and 12 drug candidates in clinical trials, “our shareholders are particularly interested in Vertex’s drugs.”

Indeed, most analysts agree that obtaining a stake in downstream drug revenue is the key to genomics companies’ profitability, and that for this to happen, more consolidation must occur.

“Ultimately the means through which genomics proves itself is through drugs,” said Michael King, an analyst with Robertson Stephens in New York. “It just makes sense; the industry needs to consolidate.”    
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