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UPDATE: Pharmacopeia and Eos Call Off Merger

NEW YORK, Jan. 18 - Powerful opposition from at least two influential institutional holders of Pharmacopeia stock--not one, as originally believed--ultimately helped convince Pharmacopeia and Eos Biotechnology to nix their planned merger, GenomeWeb has learned.

"We remain optimistic about the future prospects of the science, technology and people at Pharmacopeia," Joseph Mollica, chairman, president and CEO of Pharmacopeia, said in a terse statement released late on Thursday that announced that a shareholder vote on the deal scheduled for Friday morning has been cancelled.

David Martin, president and CEO of Eos, added in his own press release that his company "has the people, technology, partners and vision to build a leading therapeutic development company. We will continue to move forward aggressively with our plans for other therapeutic candidates and look to partner when appropriate."


In an interview with GenomeWeb on Friday, Martin conceded that the failure of the proposed merger was a sign that the shareholders "had a problem with the deal. It doesn't take a lot of speculation to wonder why the meeting was called off. It wasn't because we weren't getting along, or because we didn't think that it wouldn't have been a good strategy--I think we both felt it was a very good strategy.


"But Pharmacopeia is a public company and I guess if nothing else [the scuttled deal] proves that shareholders do have influence over public company strategies," said Martin, who would have become president of the new company.


Martin, who has said in an interview last week that Eos was not relying on the Pharmacopeia deal to stay alive, stressed on Friday that he will turn his sights to try to build value from within the firm rather than "trying to capture value through a merger. Our plans for the foreseeable future are to focus on building our pipeline of therapeutic antibodies," said Martin.


Pharmacopeia would not return telephone calls seeking comment.

Anatomy of a mergicide


The announcement comes after a barrage of letters to stockholders from at least one powerful institutional shareholder that tirelessly berated the deal and pleaded for its demise.


Beginning in mid-December last year, OrbiMed, an asset-management company that owned some 10 percent of Pharmacopeia stock, or roughly 2.4 million of the firm's 23.9 million shares outstanding, said in letters to investors and later in filings with the US Securities and Exchange Commission that the deal was "ill-advised," that the $196 million in stock Pharmacopeia planned to pay for Eos was "overpriced," and that the merger, if consummated, would be "highly dilutive to Pharmacopeia shareholders."


In responses played out in his own letters to shareholders, Mollica led a crusade urging them to stand by the deal. He was "confident that [the deal] will position both Accelrys and our drug-discovery unit as viable, stand-alone businesses," he wrote in one letter. "We need your support to take decisive strategic action now to control our own destiny," read another.


Soon OrbiMed launched new salvos, Pharmacopeia issued renewed pleas, and shareholders began to look askance at the deal.


But New York-based OrbiMed wasn't alone. Wellington Management, a huge money management firm based in Boston, which held nine percent of Pharmacopeia stock, shared OrbiMed's view that the deal, for similar reasons, should not go through, according to an analyst who covers Pharmacopeia.


That analyst, who asked not to be named, said that Wellington, OrbiMed, and a number of other large shareholders expressed concern about the Eos deal-and that Pharmacopeia's head knew about it before he and Eos announced the deal in mid-August last year.


"Joe [Mollica] really and truly knew about two of the major shareholders not wanting any deal like this maybe two weeks before the deal was even announced," the analyst said. "Joe had been on a non-deal roadshow [not long before the deal was announced] and a number of shareholders were under the impression that there wasn't about to be a very large acquisition. And in fact there was."


Officials from Wellington were not available for comment.


Very quickly voices began to emerge calling for the proposed deal to be axed. "In fact I had comments from a number of people inside of Pharmacopeia that they went for days without anyone ever saying anything good about the deal, only bad," said the analyst.


"As it happens there were a few shareholders-some of them large-that actually did like the deal, or maybe not that they liked it they though, 'Well, what's the alternative,'" said the analyst. "In the end, though, the vote was no. Pharmacopeia established ... from their sources [that the deal was dead in the water], and once they established that, why show up and get embarrassed?"


According to the analyst, Pharmacopeia's and Eos' journey was an expensive one for both firms. He estimates that Pharmacopeia "spent well over $2 million to get to where they are today [and] ... my guess is that Eos has $5 million less than when they started this whole process."


Worse than that, he said, the planning cost Pharmacopeia a lot of time.


"This has been the number one focus for the management team for a number of months now-not the business, in my opinion," he said. "Both companies have good businesses, and they have to get their act together, they need to focus [on their businesses], and they have to turn around what they got. And mergers don't help you turn around. Mergers give you other complications."


Pharmacopeia  said as much in its statement last night: "We believe there are many ways in which we can prosper by adding to and leveraging our existing biology and chemistry capabilities. We will continue to pursue the many alternatives available to us."

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