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FEATURE: Proteomics Sector Shows First Symptoms of M&A Fever

NEW YORK, April 13 – For months, market watchers have been predicting that the structural proteomics market would undergo a period of consolidation. With too many small companies specializing in narrowly focused technologies, they said, it was only a matter of time before they joined together to provide big pharma with a more complete package. Perhaps that time has come.

Over the past week Structural Genomix and Bruker AXS both announced that they had gobbled up smaller structural proteomics companies as part of their efforts to build their businesses. In addition, several other companies have signaled their intentions to shop around for new technologies.

“We’re interested in acquisitions,” said John Flavin, CEO of MediChem, a medicinal chemistry company that last year used the proceeds from its $50 million initial public offering to buy its way into the structural proteomics sector by acquiring Emerald BioStructures.

“The companies we’re interested in now are those that can bring us closer to synchrotron sources,” he said. 

Given the relatively fractured nature of the structural proteomics sector, companies seeking to grow their businesses may find that acquiring complementary technologies that already exist makes far more sense then trying to build complex instrumentation on their own, experts said.

In addition, as a result of the economic downturn and a slowdown in venture capital investments, valuations for smaller companies have come down, as have their expectations that they will be able to raise enough money to keep going as stand-alone entities.

The question a potential company has to ask often boils down to: “What's it going to cost to stay independent? What will it take to raise money?” said David Pritchard, who helped to negotiate last year’s sale of Neomorphic to Affymetrix for $70 million in stock.

For entrepreneurs at some of the smaller companies, an acquisition may also be their last chance to hit pay dirt.

A year ago, virtually every biotechnology and genomics-related company thought they would 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,” he said.

While some companies looking to fill in their technology gaps may seek exclusive licenses or partnership deals, many other players find that an acquisition is the best way to get the strategic fit they are looking for.

Tim Harris, CEO of protein structure determination company Structural Genomix, said the acquisition of Prospect Genomics, a Belmont, Calif.-based company specializing in computational protein structure prediction, provided the only avenue to get what he thought his company lacked.

“We thought about collaborating with them,” Harris said. “But in the end collaborating didn't give us what we needed.”

Collaboration deals can lead to potential conflicts down the road, where both companies are going in the same direction and may end up competing for customers. Plus, companies with proprietary assets may be disinclined to license those tools to the competition.

In such situations, smaller companies may still be able to command a high price. Structural Genomix, which raised $85 million in venture capital since its founding in late 1999, allegedly paid $35 million in stock for Prospect Genomics, according to a source familiar with the deal. Harris denied the figure, but declined to disclose the amount Structural Genomix paid.

Despite having just received an offer for venture capital, said Richard Goold, Prospect's CEO, the company opted to sell.

“We had a deal [with a venture capital firm] on the table,” said Richard Goold, CEO of Prospect Genomics. “We were fine.”

In mapping out their acquisition strategies, companies are looking near and far for potential fits. This week Madison, Wis.-based Bruker AXS, the privately held sister company of Bruker Daltonics, branched into structural proteomics by buying Nonius, the X-ray crystallography subsidiary of Delft Instruments of Delft, Netherlands. 

While terms of the transaction were not disclosed, the deal underscores that this new era of M&A knows no boundaries.

In fact, it also knows no rules.

Nick Galakatos, a general partner at MPM Bioventures, 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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