Opportunities for Bioterrorism Defense Firms With Multi-Purpose Products

While the new fear of biological and chemical weapons attacks may have suddenly thrust bioterrorism defense companies into the spotlight, industry followers think it’s unlikely that the threat of biowarfare will serve as a call to action for firms to seek out acquisitions in order to access bioterrorism detection or prevention technology. In the days and weeks following the September 11 terrorist attacks, shares of companies involved in detecting infectious biological agents soared amid growing concerns about bioterrorism. A biological or chemical weapons attack against the United States or overseas is now a real threat, and health officials are preparing to deal with biowarfare by stockpiling vaccines and drugs needed to protect against diseases caused by biological weapons. New vaccines, such as a new smallpox vaccine, are being developed and additional products will be needed to counteract the effects of biological and chemical weapons. Although the prospects of these firms have increased significantly, experts in the field believe that the long-term viability – and attractiveness as an acquisition target – of these companies lies in the application of their biowarfare detection and prevention technology to other fields. Scottish biopharmaceuticals firm Acambis PLC recently was contracted to develop 54 million doses of its smallpox vaccine for the U.S. government which will be used to create a national supply for the purpose of countering bioterrorism threats. But such companies are also buoyed by the long-term growth prospects of the vaccines market in general, due to increased international travel and exposure to new diseases. Among other projects, Acambis is working on developing a vaccine for West Nile encephalitis, a mosquito-borne disease that is spreading throughout the U.S. The technology of Sunnyvale, Calif.-based Cepheid Inc., which develops genetic profiling and detection systems for biological agents and contaminants, has a variety of applications ranging from testing food and beverage quality to testing for environmental contamination, in addition to detecting biological or chemical warfare agents. “We have always stressed that our technology should be applicable across a number of markets. We do not want to be a one-trick puppy,” says Thomas Gutshall, the company’s chairman and CEO. “The anthrax problem was something that we’ve always said we’d be prepared to respond to if it occurred. The beauty of a universal platform is that its applications are numerous; what you wait for is for the market to perceive a need for a certain application and step up and ask you to configure your equipment in such a way to help solve a particular problem.” Gerard A. Wills, vice president and CFO of Nanogen Inc., feels similarly about his firm, which develops devices for detecting biological warfare and infectious disease agents in human blood samples. “The key for us is that we don’t do any government projects that don’t translate well into our commercial business. There definitely is a long-term opportunity on the commercial side, and I believe there will also be a long-term opportunity on the biowarfare side, but it’s a matter of how quickly the government wants to get there,” he says. Dennis Hruby, chief scientific officer of SIGA Pharmaceuticals, a development-stage company involved in creating vaccines, anti-infectives, and antibiotics for infectious diseases, agrees. “The big pharma players have not been active in the biowarfare defense arena. It is difficult to justify developing products for which there may never be a market. I think these biotech firms are trying to use their funding to develop biowarfare defense products while at the same time advancing their basic science which can spill over into commercial development. I don’t think anyone’s planning to make money solely on bioterrorism defense products,” he notes. The driving forces behind mergers and acquisitions in this sector are typically the desire to acquire proprietary technology or the need for additional production capacity, says Chris White, vice president of the pharmaceutical and health care practice at A.T. Kearney. “This, however, is not a capacity-constrained industry. And with regard to vaccines, we are not talking about a lot of sophisticated, proprietary technology. There are many big players that could respond to the new environment we are in through in-house development, without having to do acquisitions,” he says. But if a company has a technology advantage in identifying genomic markers, for example, then it’s possible that the firm’s products could be more in demand now, White adds. It is a compelling industry dynamic that larger players are eyeing smaller, more technologically advanced companies in order to enhance their capabilities from a pharmacogenomic standpoint, he says. While many of the most promising biowarfare detection and vaccination products are developed within smaller companies, these firms, many of which are private, lack the scale to attract global investment, notes Holly Hartman, a senior associate at Houlihan Lokey Howard & Zukin who specializes in the biotechnology and pharmaceutical fields. Although these biotech companies are focused on lucrative and quickly growing markets, their lack of size often prevents them from attracting investors, broadening their product pipelines, and funding huge product development costs, she says. Because of this, the sector may be ripe for consolidation. Hartman says she would first expect to see dealmaking among the smaller players. Next, big pharmaceutical companies, facing high barriers to entry in biotechnology, may look to enter the field through acquisition. “Development of new vaccines or drugs will require big-company muscle to bring those products to market, and m&a and alliances may be used to facilitate that,” she says. Industry dealmaking will be propelled by product and technology development. As smaller participants become more integrated and bring their products to market, they will start to become attractive acquisition targets for big pharmaceutical companies, says Alexis Korybut, president of Sterling Financial Investment Group, a Boca Raton, Fla.-based investment banking firm that specializes in biomedical and health care companies. “No one can predict what future demand for anti-bioterrorism products will be, but I think there is a long-term business there. I’m not sure that this will be a huge industry on it’s own, but it’s definitely a significant business for the Baxters and the Bayers of the world to get into, certainly in the preventative and diagnostic areas,” he says. “I also think these are areas where you are going to see some venture capital money getting thrown at,” he adds. Movements by pharmaceutical companies into the biotech field have already begun to happen. In a recent deal, Abbott Laboratories acquired DNA testing company Vysis Inc. for $355 million. Vysis’ diagnostic tests detect genetic changes in cells and are applicable to detecting many kinds of cancers. Companies like Vysis are the kinds of targets that Dan Shine, global director of aerospace and defense consulting at A.T. Kearney, thinks will be most attractive. “A company focused on a genetic approach toward diagnosing or treating cancer, for example, will be attractive. I don’t think a genetic approach toward detecting or treating bacterial or viral agents is going to be attractive from a research dollar perspective or from an acquisition perspective. A company must have technology that can be put to broader use.”