What mergers can do for you Health Care Advice

What mergers can do for you

The word merger often is associated with a big company buying a smaller one or two large companies coming together. But it is not only large companies that can succeed through acquisitions—even startups can use mergers as an effective way to grow their businesses. As a small team leading the startup Ocimum Biosolutions, based in Hyderabad, India, a decade ago, my colleagues and I could have opted to grow the company internally. But early on, we decided to take the path of mergers and acquisitions (M&As) to expand our company.

We had difficult choices to make as our business grew, and we learned invaluable lessons. Here, I share some of my experience and show how Ocimum evolved from a small company into a globally integrated genomics firm.

Ocimums long evolution

Ocimum Biosolutions currently offers informatics solutions, wet lab genomic services and products for sample storage, processing and visualization of gene expression data, sequence data organization, small interfering RNA (siRNA) design, genome analysis, gene patterns, in silico gene optimization and customized biological databases. But a decade ago when Ocimum was just getting started, biological research had not yet comprehensively embraced omics-based approaches, and our business was based on a different model.

We started by collaborating with pharmaceutical and biotech research organizations, solving their challenges and increasing the productivity of their R&D efforts through the application of our in-house informatics expertise. While doing this, we unearthed several places in the R&D value chain that could be streamlined with informatics, but in our first few years, we grew organically. We maintained a positive cash flow by licensing bioinformatics and enterprise software solutions like laboratory information management systems and by providing bioinformatics training.

Within a few years, we had built a thriving business with a steady pipeline. Money was coming in, and it would have been easy to be content with the direction of the company. However, Ocimum aspired to be more than a bioinformatics company—we wanted to be a lab next door that could provide a researcher with services across the spectrum in a timely and cost-effective manner. To do this, we knew we would have to break out of our comfort zone and expand beyond the perceived limitations of our small team and startup company. We looked at our goals—a strong presence in the US, expansion of our portfolio of services to include biomarker discovery, and a customer base in Europe—and realized growth through acquiring assets seemed like a great way to build a large, scalable and sustainable company, so long as the pieces fit with our proprietary Research-as-a-Service (RaaS) business model. Ultimately, we achieved these goals through a combination of organic growth and three mergers (See table).

When practicality conflicts with growth

Around 2005, closed microarray platforms and providers who lacked platform openness were the norm. Customers wanted customized and affordable microarray solutions, from study design to complete analysis with varying degrees of complexity, and we saw a need. Ocimum already had expertise in informatics solutions, and we thought we could acquire an open microarray technology platform, enabling us to access new customers and work more closely with existing ones.

Although we had a small lab in Indianapolis, we were headquartered in India, and an overseas acquisition seemed like a mammoth task to us. It did not at first seem practical; indeed, CEOs of biotech startups often experience the same perception that their business aims are not possible to put into practice. However, a tenet of business is to seize an opportunity when it arises; in Ocimums case, our first merger was almost handed to us and that helped convince our team we could do it. We had previously come close to signing a contract with MWG Biotech, of Ebersberg, Germany, to bring it on as a customer in 2004; but when the company began to struggle and approached us about a possible acquisition of their Genomic Diagnosis (GD) division, we decided to acquire the business.

Instincts and due diligence

Once we started thinking about a merger, we knew MWGs technology platform would help us, and so would its impressive list of clients in Europe and the US. This brings up an interesting point about acquisitions: due diligence.

In this case, we were familiar with the company because we had been in contract talks. But we used investment bankers and lawyers to conduct our due diligence, and also consulted our advisors and knowledgeable family members. Because the asset was being sold in an as-is condition with no warranties, and because their GD division had been shut down for six months before we acquired it, we needed to get a firm grip on its value, which we then stacked up against the risk. On one hand the merger had substantial issues—this was a business that had basically failed—but on the other hand, we saw that we had a chance to dramatically increase the size and capacity of Ocimum. The biggest challenge facing us was unhappy MWG customers. They had no idea what had happened to their projects as MWG faltered before our purchase, and that taught me a lesson: unhappy customers can be made happy if you engage them. The ones who did not communicate with us (though we tried) were lost forever. If the company you are buying has current customers, make sure you reach out to them at the earliest possible moment.

When the MWG acquisition closed, we went looking for another target company, this time to integrate vertically—we wanted a firm that produced oligonucleotides. We found a likely target in Germany, but talks did not progress much before falling apart because the founder was unsure (thats rather common), and he also had a health problem and that caused the deal to fall through. Another lesson learned: we had already made the announcement to our workforce that this deal was going ahead. Having to retract that announcement was a challenge in managing both internal communications and morale.

Around that time, the International Finance Corporation (the private equity arm of the World Bank) was looking to invest in Ocimum under the condition that we acquire a European company working in oligonucleotides. So we initiated the process of acquiring major assets of Isogen Life Sciences, based in Ijsselstein, The Netherlands. Due diligence was far more comprehensive here than with MWGs GD business. We went through a complete financial, business and legal review. To handle this, we charted the entire process through our internal team in addition to utilizing our usual bankers and lawyers.

Our third acquisition required perhaps the most effort regarding due diligence. Gene Logic, a company based in Maryland, had not only a database of disease-focused biomarker discovery and toxicogenomic suites it had built through dedicated microarray programs, but also a fledgling services division. The database was difficult to replicate for competitors, and when Gene Logic decided to sell their genomic assets to retain focus on their drug-repositioning efforts, we saw a perfect opportunity.

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