Arius Research Joins the Roche Family

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By Shawn Lawrence

On September 23, 2008, Roche officially took control of Arius Research and all of its assets in a cash deal. For Arius, the deal means financial stability while at the same time a new beginning as a research site for the global pharma powerhouse. It’s not what CEO David Young envisioned for Arius Research when he started the company nine years ago, but the timing of the Swiss drug maker’s takeover bid of Arius he states couldn’t have been any better.

Established in 1999, Arius Research is a biotechnology company discovering and developing the next wave of antibody therapeutics. At the core of the company is a unique technology platform that generates and selects therapeutic antibodies based on their activity. This antibody generation engine, the FunctionFIRST™ technology, has enabled ARIUS to assemble a portfolio of more than 500 antibody candidates, many of which have anticancer abilities.

The deal itself originated from a business round Roche held in 2006, where Roche spent a day in Vancouver, Toronto and Montreal talking to as many as 80 Canadian companies about partnership opportunities. Likewise Arius was going through a push of their own to attract a partner to help get its antibody candidates into the clinic. The two sides saw a potential fit, which lead to a deal that was mutually beneficial. It is another example of how big pharma has the money and biotech has the innovation it covets.

Young credits cutting edge science as the key reason the deal got done. Arius’ promising platform and early pipeline of new antibody candidates represent an excellent fit with Roche’s own progressing research in the fields of cancer and immunology. The platform is also designed to rapidly identify antibodies to fight other diseases but Young feels it was the inroads that Arius has made with its anti-cancer antibodies that had Roche intrigued.

“In order to do deals like this, I think you have to have a very good science offering, in other words, it has to be very compelling, it has to be in the right disease area, it has to be leading edge, those are the things obviously big pharma is shopping for,” Young stated “Cancer is the most researched area in the life sciences, there are companies trying to generate cancer stem cell targets, drugs and antibodies. But I think what sets us apart is none of them have demonstrated or met the burden of scientific proof that we’ve met. This wasn’t lost on Roche.”

On the opposite side, Arius had its own reasons for jumping at the deal, and why it willingly turned to big pharma.

“There was a lot of discussion internally on where the company was in its history, and because of a lot of circumstances we felt it was the best thing to look for a large partner,” explained Young. However, what began as a search for a co-development partner materialized into a merger and acquisition process with Roche.

“We certainly could’ve stayed the course and tried to raise more money on our own, but it would’ve had to have been a fair amount.

It’s been very hard for people to make money in the biotech sector the last five years especially since the top of the tech bubble in 2000, especially in Canada. Being in the markets as a public company, it really wasn’t a good idea to stay a public company, the tradeoffs between our situation as a public company where we had to raise money, keeping the investors happy convincing them to believe in the technology and the management, at the same time trying to raise capital to keep the pipeline moving, these were just some of things we were dealing with,” he said.

Under that backdrop, Young believes the deal is an ideal opportunity for Arius to realize the full potential of its pipeline.

“I think you have to look at it as where the benefit is going to arise in terms of the acquisition. That’s exactly why we took this approach and did the deal. Some see this as another Canadian company being swallowed up by a big multi-national, but I firmly believe there’s more to it then that. It’s not an end to what we’re trying to do or what Arius Research is all about, but rather it is a new beginning. There are a lot of benefits to the shareholders and to the company, and to the employees and to the science. Roche has a lot of expertise that can facilitate the development of the Arius pipeline, so the things that they can bring to bare we would have to raise money for and then we can’t really replicate,” he said.

At the same time it will help to grow the company in terms of its people and expertise.

“Roche is a major player in cancer therapeutics and that’s very important for us because we can benefit from the experience they have in developing cancer drugs and likewise cancer antibodies,” Young said. “There’s also an added value of being in the Roche family, of being able to interact with the rest of Roche so you can actually get the resources that you might not otherwise have as an independent company. That includes having access to Roche’s manufacturing, clinical and regulatory groups, and this alone will help us in the long run.”

The tradeoff is that Arius is now strictly a science company. The Arius site will remain open and serve as a centre for the discovery of innovative biotherapeutics, initially focusing on the areas of oncology and inflammation, but it will no longer operate as a business.

Often times the takeover of one company by another brings unwelcome side effects, such as eroding the culture and innovation largely responsible for the target company’s success, but Young feels that won’t happen with Arius.

“Arius will be maintained as a separate innovation site with its management remaining intact. Likewise, the jobs will stay while opening the door to the possibility of future job creation. That’s what happens with the Roche model of acquisition. The acquired site or in this case, company continues to run independently. This is one thing Roche has been brilliant at, keeping a company’s culture intact allowing it to continue forward as a productive and innovative entity.”

Young points to the agreement between Roche and Genentech, as well as the relationship Roche has built with its other research sites as prime examples of how the Roche model works, and how a relationship between a big international pharmaceutical company and research-oriented biotech company can be a successful one.

For Young, with the business worries set aside, the next task at hand, which is in some ways the most challenging, is how the two sides will get through the integration phase, specifically in how a small company like Arius will be able to interface with a large company like Roche.

“We’re going through integration planning, and everything from the financial system being subsumed into the Roche corporate finances, integrating our IT and so on. All of these things are very mechanical but it takes effort and time. And so the challenge here is how are we going to do all that and still keep everything on track. The longer term challenge is being more productive then we were as an independent company, because we have more resources and pressures to still maintain innovation, but from our perspective we have to figure out how to work well within the system, and yet retain the essence of what made us the acquisition target in the first place,” he explains.

The key here, states Young, is that as long as Arius continues to do the innovative science and brings through drug candidates into the Roche pipeline, there’s a lot of leeway in terms of independence.

“In some ways it’s an ideal situation between our two companies, because Roche as a large pharmaceutical company, they have a lot of resources, many scientists, they have lab space and equipment, and so that’s not what they’re missing, what they’re missing is the entrepreneurial, innovative drive that a biotech company brings to this branch of science. They can hire people any time that they want, but they can’t duplicate the culture of an entrepreneurial biotech company. So that’s what I think is going to determine whether Arius grows under the Roche stewardship or whether it basically gets assimilated into the parent company.”

On a more personal level the deal means that Young will leave behind the hassles and worries that followed him around daily while running a business. Additionally, he will now have more time to concentrate on what really mattered to him, which is the science. With a medical degree and a career practicing cardiac surgery, this is a welcome change he says.

“I started the company to basically test an idea, and that idea was the possibility of future job creation. can we make anti-cancer antibodies that kill cancer cells and not normal cells? And somewhere along that path I sort of fell into this role of CEO of a biotech company out of necessity and probably because I didn’t know any better.”

It was a big transition in learning how to run a company, states Young, going from the lab to the boardroom, talking to investors, raising money and focusing on advancing the operations. At first he found it exciting and in fact he was even quite good at it, but with the biotech market in a slump, he has found the business side less appealing. He adds that deep down his heart has always leaned more towards the science side.

“When I first got into this, the biotech market was booming and so running a business was new and exciting. Now I feel it’s the opposite way, in that Arius is advancing the technology and making serious inroads with its antibodies and I can’t wait to see what’s next whereas the business side of things begins to weigh on you, wondering if the money will be there to see you through.

I liken it to a teeter-totter, you’re either enjoying your work on the one side, being the science or on the other being the business. Right now I think getting back to the science is what will make me happy, and mentally I’m going back to where I belong."

One might add that Young along with the rest Arius Research’s shareholders have 191 million other reasons to be happy with this deal. The final price on the all-cash purchase came in at about C$191 million or C$2.44 per share. That figure represents a return of investment six times over.

“Obviously our investors did very well with this deal. It really is a homerun, especially to our investors in the last round where we raised the majority of that money. That metric stands out head and shoulders above pretty much any biotech company in terms of return,” said Young.

As hard as it is to let go of the company he founded, he has no regrets.

“It took a lot of soul searching to move down this path, there’s obviously an emotional commitment to Arius, just because not only did I start it, but the history of Arius, is so eventful. We put a lot of emotional capital into the company, a lot of sweat and commitment and labour. But you reach a point where you have to do what’s best for it. It’s like having children, sometimes you have to send them to college, sometimes you just have to let them go.”