French Vaccine Maker Poised To Dominate Market

Deals with the Pasteur Institute and Connaught Biosciences establish Institut Merieux as a global front-runner PARIS--At 8:20 A.M. on December 13, Jacques Francois Martin, general manager of the Institut Merieux, received a transatlantic call in his Lyons office from Alan Nymark, vice president of Investment Canada, a unit of the Canadian Ministry of Industry, Science, and Technology. Nymark was calling to tell Martin that Merieux could proceed with its proposed takeover of Connaught Biosciences, Canada's largest vaccine producer and the owner of Connaught Laboratories Inc., of Swiftwater, Pa. The call sealed a 5-billion franc (U.S. $800 million) deal in which Merieux won out over a competing bid from Ciba-Geigy, the Swiss pharmaceutical giant, and its U.S. partner, Chiron Corp. The acquisition puts it on the road to becoming the undisputed leader in a $1 billion global vaccine market. It's the latest evidence that the family-run but government-controlled enterprise, founded in 1897, is ready to shed its low profile and challenge the big boys in the biological sciences. "Everybody knows that 1989 was the bicentennial of the French Revolution," says Alain Merieux, chairman and CEO of the company. "But it was also the year of revolution for Institut Merieux." Those words are unusually strong for the soft-spoken pharmacist and Harvard business school graduate, whose grandfather, Marcel Merieux, founded the company 93 years ago. But they are no overstatement: Last year was, indeed, a very active one for Merieux. Along with the Connaught takeover, its most visible move was an agreement with the Pasteur Institute to handle the development and commercialization of all vaccines and serums discovered at the renowned laboratory in Paris. And Merieux's reach extends around the world: It won approval from the Indian government to create a plant to handle the vaccination needs of 25 million newborns annually; it joined with the New York State Department of Health to open new facilities at the state's virogenetics laboratory in Troy, N.Y.; and it took over Austria's leading vaccine producer, the Serotherapeutisches Institut in Vienna. Closer to home, it set up a research organization for the development of human blood protein substitutes in cooperation with the state-run French Center of Blood Transfusion. Those changes are expected to provide opportunities for the company's 5,500 employees, a staff that includes several hundred biologists, biochemical engineers, and research physicians and veterinarians working on a variety of human and animal medicines. Their number will grow with the addition of a new research facility outside Toronto that Merieux has promised to build as part of its takeover of Connaught. Merieux officials say that no layoffs are planned in the wake of the takeover, and that any reorganization will await the outcome of a series of meetings between French and Canadian scientists who are looking at ways to meld the two companies' extensive research efforts. The Merieux empire has grown from very modest roots. Marcel Merieux was a former assistant of Louis Pasteur when Merieux began to diagnose diphtheria and prepare serums in a makeshift laboratory. He later purchased nearly 100 acres in the town of Marcy l'Etoile, outside Lyon in east-central France. The land, now the world headquarters for the company, was needed to provide pasture for the horses used to produce the antidiphtheria serum and for the cows that provided serum against foot-and-mouth disease. Marcel died in 1937, and his 30-year-old son, Charles, succeeded him. (An elder brother had died of meningitis, probably contracted in the laboratory.) During the war years Charles bled cattle to produce a protein-rich extract to feed undernourished children, and set up a blood collection and distribution center for the French Resistance. After the war the government sent him to the United States to study blood transfusion techniques. His tour of U.S. laboratories introduced him to the fledgling biologics industry and planted the seed for the Merieux Institute's own growth. "Already in my mind," he recalls, "[a large enterprise at] Marcy l'Etoile took shape. If one can treat 1,000 liters of blood per day, why not 10,000? Millions of doses of serum, millions of doses of vaccine - enough to prevent the worse epidemics!" Back in France, Charles created the Institut Francais de la Fievre Aphteuse (the French Foot-and-Mouth Disease Institute), where for the first time the virus was cultured on an industrial scale. When a foot-and-mouth epidemic from Asia threatened livestock in Europe, Charles organized a "vaccine barrage" to stop its spread. A few years later, he was equally vigorous in tackling an imminent shortage of human blood. He organized the collection of human placentas from thousands of maternity wards across Europe and North America. To this day, the company processes some 30,000 placentas that yield large amounts of immunoglobulins, albumin, and other blood extracts. PARIS--Merieux staffers refer to Ciba-Geigy's bid for Connaught Biosciences as "a declaration of war." Just as the counterbid was called Overlord, after the Allied invasion of Normandy, the company's response was called Marignan, in honor of a battle in the year 1515 in which French troops defeated the Swiss. Chairman and CEO Alain Merieux even talks about his firm's strategy in military terms. "We had heard that the Swiss were ready to raise their bid to $34 or $35, so we set our mortar fire a bit higher." (The company's winning offer of $37 per share represents about 25 times earnings.) But success required more than increased firepower. Connaught, which grew out of research carried out at the University of Toronto, is a prized Canadian possession that couldn't simply be sold to the highest bidder. And its Swiftwater plant, on U.S. soil, raised the question of whether the acquisition would violate antitrust laws. In addition, Ciba-Geigy and Chiron posed a formidable threat. They were ready to strengthen Connaught's research and production activities in Canada, and they offered little competition in vaccine production. In contrast, Merieux's strong position in the field was seen as a threat to their home-grown industry by some Canadians, who also did not welcome the fact that Rhone-Poulenc, which controls Merieux, was in turn owned by the French government. That fact was not lost on Alain Merieux. "Clearly, in a deal such as this that involves public health, you cannot succeed without the agreement of both governments," he says. "The French ministry was kept well informed. But we had to convince Canadian authorities that we, as managers, were autonomous and that our offer would benefit Canada." The talks did not always go smoothly, says general manager Jacques Martin. He recalls numerous negotiating sessions after which he and his team would return empty-handed across the Atlantic. In fact, the frustration was so great at times that the group was dubbed "Canada Dry." In the course of the negotiations, Merieux sweetened its offer with the promise to preserve existing jobs on Canadian soil, offer 49% of the shares in the new company to Canadian investors, invest $160 million in research in Canada over the next five years, build a new biotechnology research and production center in a suburb of Toronto, and finance $5 million worth of university research over the next five years. "What finally carried the Canadian decision," says Alain Merieux, "was our intention to intervene not simply as purchasers, but as real partners. We have made an agreement with the Canadian scientific community, and at the same time we have proposed to open up the capital of Institut Merieux to Canadian investors. The new company will be at the same time French and Canadian, with large research centers in both countries." --A.D. That response to a societal need is typical of how the company has grown. In 1973 Charles tried to ward off an epidemic of A-type meningitis in Brazil by building a plant that produced enough vaccine for 90 million Brazilians. Later he designed and built a portable plant that could fit into a Hercules airplane to treat flare-ups of epizootic disease on the spot. In 1975 the company used research conducted jointly with U.S. immunologists Jonas Salk and Hans Cohen to be the first to produce a polio vaccine from cultured cells grown on tiny glass beads rather than the less efficient method of using monkey kidney cells. By that time the company was in the hands of Charles' son, Alain. In 1968 Charles sold 51% of Institut Merieux to Rhone Poulenc, the French chemical and pharmaceutical company. (Rhone Poulenc was nationalized in 1981 by the socialist government of Francois Mitterrand, and today ownership of Merieux is divided among Rhone, the family of airplane manufacturer Marcel Dassault, the Pasteur Institute, and a small number of shares held by the public.) But Charles' handing over of the reins did not mean he had lost interest in the company. At the time he compared his activities to that of a snowball rolling down a hill, picking up new flakes and "growing indefinitely." One such flake is the Marcel Merieux Foundation, a philanthropic effort dedicated to supporting research and training in the biological sciences and preventive medicine. At one point Charles hoped to use his business acumen to diversify into communications and cultural activities. But those plans were interrupted in 1975 when his grandson, Christophe, was kidnapped. The boy was recovered after a hefty ransom was paid, and the episode caused him to refocus his energies on health. "In a way," he says, "the 20-million-franc ransom rid me of my capitalistic worries. And I decided to devote myself entirely to the foundation." In the meantime, the company has grown steadily over the past two decades under Alain's direction. In 1988 its sales topped $500 million, with a majority of its revenues outside France. It has edged in revenue ahead of Lederle Inc., Merck & Co., and SmithKline Biologicals in the crowded field of vaccine production. But Alain Merieux wanted to do more than stay the course: He envisioned a quantum leap forward for the company as a result of some form of association with two of the world's major independent vaccine producers, Pasteur and Connaught. Founded in 1887 to treat rabies, the Pasteur Institute soon took on the role of producing vaccines and serums for the public health needs of the country. Along the way it also became a leading center of biological research and teaching. But for the past several decades the institute has been chronically short of money. Its mounting debt has been reduced several times by government bail-outs, and most recently by the Duchess of Windsor, who willed her collection of jewelry to the institute. (The bequest resulted in a $50 million gift after the jewels were auctioned off in April 1987.) Pasteur officials, in an effort to improve their bleak financial picture, created a vaccine marketing division that was partly owned by Merieux. But its $60 million in sales in 1988 hardly tapped the potential of an institute that can boast of eight Nobel Prize laureates. Alain Merieux realized that a more direct approach was needed, and so last July an agreement was signed that created a wholly owned subsidiary, Pasteur-Merieux Vaccins et Serums. The company, starting in June of this year, will market all Pasteur products and have first refusal rights on patents received by its scientists. The agreement protects the independence of the Pasteur Institute itself. At the same time that deal was being worked out, Alain Merieux began to turn his attention to Connaught Biosciences. "Connaught Laboratories [the vaccine-producing arm of the company] has long interested us because it has a great complementarity with Merieux," says Alain Merieux. "Ninety-five percent of its business is carried out in areas where Merieux is absent, essentially the North American market." But the process of acquiring Connaught would not go nearly as smoothly as the arrangement with the Pasteur Institute. In June 1987 Merieux bought 12.6% of outstanding Connaught shares, but it was rebuffed in December when it attempted to purchase another 20% of the company at $32 per share. Last March, after more than a year of negotiations, a tentative merger agreement between the two companies was reached. But then Merieux discovered it was not the only suitor. "It was at this moment, just when we were about to reach Canadian shores, that Ciba-Geigy, together with the Chiron Corp., made its offer [of $30 per share]," says Alain Merieux. Merieux waged an all-out battle to succeed (see story on facing page). And it convinced the Canadian government that the takeover would also strengthen that country's position in vaccine development and production. But company officials emphasize that the merger is not an example of unbridled ambition. Merieux is happy to stick with what it knows best. "The $1 billion worldwide vaccine market is relatively modest," says general manager Martin. "A single pharmaceutical drug, such as Tagamet, sells more than that. A new vaccine may represent a sales potential of $100 million or so, much less than many new pharmaceutical products." At the same time, he adds, such a vaccine has considerable potential for growth in both the developing and the developed world. One immediate impact of the acquisition, says Martin, will be an influx of capital for Pasteur-Merieux Vaccins. Another will be the linkage of product lines such as Merieux's injectable polio vaccine and Connaught's diphtheria-tetanus-whooping cough vaccine, marketed in the United States. Connaught also produces a meningitis vaccine that can be sold through Merieux's worldwide commercial network. In addition, Merieux produces an oral rabies vaccine that has been used successfully in Europe to slow the spread of the disease. Trials to immunize skunks and raccoons are being planned for several sites along the East Coast. "The alliance between Institut Merieux and Connaught will immediately create a global force in research, development, production, and marketing," says Alain Merieux. "This agreement comes at the very time when the applications of biotechnology, and particularly of recombinant DNA technology for the preparation of vaccines and new products, constitute one of the most promising areas of the health industry." Last month Canadian scientists and managers began to arrive in Lyons, and French scientists in Toronto. Their missions are to get to know each other, to study potential joint efforts, and to organize collaborative teams. Research costs are expected to reach 18% of sales in the first half of the year, and profits may decline in the short term as the two companies gear up for greater cooperation. But Alain Merieux likes the looks of the alliance. "We are now reaching the critical size needed to integrate the cost of new technology and clinical trials into a worldwide operation," he says. As Charles Merieux had hoped, the snowball formed in Lyon is growing rapidly as it keeps rolling along. Alexander Dorozynski is a freelance writer in Paris and associate editor of Science et Vie.

French Vaccine Maker Poised To Dominate Market

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