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To Build, Buy, or Lease? That Is the Question

NEW YORK, April 10 - At first glance, Structural Genomix's purchase of Prospect Genomics last week might not have seemed terribly significant--just another strategic move to combine complementary technologies for determining protein structures, analysts say. 

However, despite the deal's low profile--Propsect Genomics has a total of about five employees--the transaction may offer a case study in how a relatively small genomics company should go about acquiring technologies for the business to expand. In the usual scenario, said Nick Galakatos, a general partner at MPM Bioventures, the question becomes: "to build, buy, or lease?"

"We thought about collaborating with them," said Tim Harris, CEO of Structural Genomix, "but in the end collaborating didn't give us what we needed." The strategic goals of the two companies overlapped to such an extent that it made sense to acquire Prospect Genomics, he added.

But in other cases, said Lawrence Neibor, an analyst with Robert W. Baird in Milwaukee, an exclusive license might be a suitable alternative to acquiring a company outright. "The advantage is you can get a lock on the technology" without making an acquisition, he said. The challenge, said Daniel Pritchard, a consultant to genomics companies and former executive at Neomorphic, which was acquired by Affymetrix last year, is to define the structure of a license so that it satisfies the needs of both companies.

The company considering the purchase should also determine how much involvement it would want from the acquired company's management, Neibor said. Depending on how greatly the two companies differ in terms of corporate culture, "it may make sense for the acquired company's management to stay involved to help develop the technology. You don't just want to put a check in their pocket and have them go home," Neibor said.

Likewise, there may be factors from the acquired company's perspective that may influence their willingness to be acquired. Certainly, the difficulty in raising capital on the markets makes small companies more vulnerable to acquisitions, said Winton Gibbons, an analyst with William Blair in Chicago, and in many cases a small company will prefer to stay independent.

The question a potential acquiree has to ask, said Daniel Pritchard, a consultant to genomics companies and former Neomorphic executive, often boils down to: "What's it going to cost to stay independent? What will it take to raise money?"

 A year ago, virtually every biotechnology and genomics-related company thought they would all go public, said Lawrence Neibor, an analyst with Robert W. Baird, "now if a company has determined it wants a big liquidity event, it can't do an IPO, so the alternative is to sell the company."

But Richard Goold, CEO of Prospect Genomics, said it wasn't that his company was out of money and looking for a way to stay alive. "We had a deal [with a venture capital firm] on the table," he said. "We were fine."

Galakatos, the venture capitalist, stressed that many factors go into determining what strategy will work best for any given scenario. "It all depends on the terms," he said. "I wish I could say there is a recipe."

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