BTECH NEWS - Controversy Over Pharmacopeia / Eos Merger

The controversy over the Pharmacopeia (NASDAQ: PCOP) / Eos merger highlights some of the issues that will drive biotechnology mergers in the next year. Last August, Pharmacopeia announced plans to acquire the privately held Eos Biotechnology. The acquisition has the support of the boards of both Pharmacopeia and Eos but is being opposed by OrbiMed Advisors, a major Pharmacopeia shareholder.

When the merger was first announced, Btech News wrote that Eos would help Pharmacopeia make the transition from a service company to a drug development company. Eos's expertise in genomics based target identification and validation is a good fit with Pharmacopeia's expertise in small molecule drug design. Additionally, Eos's expertise at DNA microarray experiments will help Pharmacopeia's software subsidiary, Accelrys, which develops enterprise software for management of genetic, chemistry, and protein structure information. Accelrys has recently announced a major alliance with IBM to develop information systems to facilitate drug research and development. At the JP Morgan H&Q meeting last week, Pharmacopeia stated that it would eventually separate the software business from the combined Eos and Pharmacopeia drug development business.

OrbiMed objects to the merger because it will be dilutive for Pharmacopeia, driving the now profitable Pharmacopeia back into the red. While supporting Pharmacopeia's strategy to become a drug development company, OrbiMed argues that Eos's primary expertise is discovering drug targets and that the targets that Eos brings to the merger are not highly valuable. Therefore, OrbiMed does not believe that Eos has the right expertise to help Pharmacopeia's transition to a drug development company. Additionally, OrbiMed argues that Pharmacopeia is overpaying for Eos.

The issues that this merger and the subsequent controversy sparked by OrbiMed's objections highlight some of the issues that will continue to appear in the next few years. These issues include:

1. In order to support high valuations, most biotechnology tool, service, or technology platform companies must eventually become drug discovery companies. Companies can do this by developing internal capabilities, such
as Abgenix (NASDAQ: ABGX), now developing an internal drug pipeline built on expertise in developing human monoclonal antibodies. The other method is to acquire companies that provide expertise in drug development, usually a more expensive but faster route. The biotechnology industry is likely to continue to see companies such as Celera (NYSE: CRA) and Pharmacopeia acquire companies that help them make the transition to drug discovery.

2. The genomics revolution has led to the discovery of many novel drug targets, decreasing the value of companies focused primarily on target discovery. This is one basis of OrbiMed's objections to the merger. However, the growth in the number of targets has made target validation expertise more valuable. Eos's target validation expertise using DNA microarrays makes it a valuable acquisition for Pharmacopeia.

3. The use of DNA microarrays is likely to become more and more important in target discovery, validation and pharmcogenomics. Companies like Eos that have developed expertise in the use of DNA microarrays will likely be more attractive as acquisition targets.

4. As highlighted by the IBM / Pharmacopeia collaboration, large IT companies will continue to develop a presence in bioinformatics. However, in order to be successful in bioinformatics, traditional IT companies will need to partner with biotechnology companies that have established expertise in biotechnology research. In the next few years, collaborations between biotechnology companies and IT companies will likely dominate the growing bioinformatics industry.

OrbiMed's opposition to the Eos acquisition due to its dilution to Pharmacopeia's earnings illustrates the dilemma that many biotechnology tool or service companies will face. By focusing on obtaining sales for a developed technology, some service-oriented companies may be able to approach profitability in the next couple of years. However, this profitability may come at the expense of long term shareholder value if it requires deferring or not making investments to become a drug discovery company.

BTECH NEWS
by Leon Henderson, M.D.
Bennett Weintraub, Ph.D.
Christopher Martin
www.btechnews.com
January 14, 2002

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BTECH NEWS, published by Btech Investor, Inc., highlights selected events in the life sciences sector that the Btech Investor team believes are particularly relevant to biotechnology investors. The Btech Investor team combines scientific, clinical, and business experience to perform comprehensive analysis of the biotechnology industry and to identify future industry leaders.

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