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Biotech report: second quarter 2005

As Burrill & Company noted in the first quarter of 2005, the biotech pendulum has been swinging away from IPOs more to M&As and partnering. Investors have no real interest right now in new biotech issues or follow-ons nor, to some degree, in PIPEs. Last year at this time, the industry had raised a total of $10.1bn from financings and $4.3bn from partnering deals. This year, we are seeing a reverse of this at the same point - financings are down 27 per cent at $7.4bn, while partnering deals are up 46 per cent at $6.2bn.

The biotech sector has been one of the strongest groups on Wall Street of late. The second quarter results have made significant inroads into erasing the painful memories of what was a miserable first quarter.

"Heading into the summer, biotech widely outperformed the Dow and NASDAQ on a year-to-date basis," said G. Steven Burrill, CEO of Burrill & Company, a San Francisco based global leader in life sciences with principal activities in Venture Capital, Merchant Banking and Media. "Yet, when you drill down into the data, this positive performance is not reflective of an 'across the board' trend but attributable to only a handful of companies driving the market.

"There were enough companies that posted stellar gains to keep most of the indices in positive territory," Burrill added. "Topping this list was Genentech. Thanks to some excellent late-stage clinical results on its Avastin and Herceptin cancer drugs and expectations for Lucentis, the company posted a 27% rise in its share price in April and 12% in May. This success coupled with Amgen's relatively flat performance over the same period was enough to vault the company over Amgen, and even ahead of Merck, for top biotech market cap spot - certainly a significant milestone, not only for the company but for the industry itself. Genentech now ranks as the seventh largest pharmaceutical company by market cap that stood at $84.8 billion at quarter end," stated Burrill.

Although Genentech wasn't able to continue its tear and post double digit gains in June, up only 1% in fact, it nevertheless closed out the quarter at $80.28 a gain of 42% on the quarter and 47.5% YTD. However, other companies were able to pick up the slack during

June including Vertex Pharmaceuticals (VRTX), which has been on an excellent run itself, closing out the quarter up 80% at $16.85. Also chipping in was Trankaryotic Therapies Inc., up 46% at $36.58 since the beginning of the quarter thanks in large part to the company being acquired by Shire Pharmaceuticals Group plc (SHPGY) for $1.6 billion. Abgenix, Inc. (ABGX), also had a big quarter after announcing that it was consolidating its research and pre-clinical activities into their Canadian facility in Burnaby, British Columbia and realigning other activities that will result in a reduction of approximately 15% in the company's workforce. These steps are designed to focus resources on the company's development pipeline, and particularly the potential commercial opportunity of its lead product candidate, panitumumab, the first fully human monoclonal antibody to inhibit EGFr. Panitumumab, which was generated with Abgenix's XenoMouse technology, is being evaluated as both a monotherapy and in combination with other agents for the treatment of various types of cancer, including colorectal, lung and kidney. At $8.56, Abgenix was up 19% for the month and 23% for the quarter.

All these positive gains helped drive the Burrill Biotech Select Index to one of its highest quarter gains of 15.7%. This increase slightly excceds the gain that the American Stock Exchange Biotechnology Index (BTK) recorded in the quarter at 14.5%.

While biotech performed respectably in April and May, the month of June was fairly uninspiring for the biotech sector and the markets in general. Investors were remaining cautious about the impact on the economy in the wake of the surge in oil prices and the expectation that the Feds would keep hiking interest rates at a "measured pace" for months to come. "Not even a record-breaking attendance of over 18,730 at this year's BIO 2005 Annual International Convention in Philadelphia could ignite the enthusiasm of investors," said Burrill.

However, on the eve of the quarter end, Wall Street roared back as crude oil prices plunged more than $3 and consumer confidence surged to a three-year high. The Conference Board's consumer confidence index rose to its highest level since 2002, and consumers' optimism about the future also rose. That gave the market enough impetus to rebound and along with it biotech. However, the predicted quarter point increase on June 30 by the Federal Reserve did cause some weakening of stock prices on the general markets, as well as those for biotech, as disappointed investors sent stocks tumbling. The decline, which took the Dow Jones industrials down nearly 100 points on the market's final day of the quarter, left the market with a mixed performance for the second quarter.

"It's been a quarter that has been difficult to get a real handle on," said Burrill. "When you look at the over $7.2 billion raised in the quarter and $13.56 billion YTD that's pretty good at a time when equity markets are skittish and extremely discerning. However, biotech investors are still very tentative and risk adverse…investors are only backing companies with products that have either reached the market or are in late stage clinical trials. You can see that there is far less risk taking in this present climate."

Tired buy-side drives deal making
"Unfortunately this skittish mood is translating into the capital markets. There has been a shift away from public market financing, with the US IPO market virtually at a standstill. As far as the markets are concerned there is still disenchantment with the performance of many of the 41 companies that make up the Burrill Biotech 2003/4/5 IPO Index, 54% of whom still remain underwater," said Burrill.

"As we noted in the first quarter, the pendulum has been swinging away from IPOs more to M&As and partnering. Investors have no real interest right now in new biotech issues or follow-ons nor, to some degree, in PIPEs," continued Burrill. "Last year at this time, the industry had raised a total of $10.1 billion from financings and $4.3 billion from partnering deals. This year, we are seeing a reverse of this at the same point - financings are down 27% at $7.4 billion, while partnering deals are up 46% at $6.2 billion.

"The swing towards partnering has been dramatic, a 90% increase over the first quarter of 2005," commented Burrill "Expect this trend to continue. Strategic partnering and M&A will increase as will their transaction values and for earlier stage compounds. This will keep biotech on the radar screen and I would expect that we will have a very positive 4th quarter, mostly because with a predicted strong 2006 for biotech, investors will realize that now is the time to buy before the run up. For this reason, expect to see 10-15 IPOs to be completed in the United States in the second half of '05, with the majority occurring in Q4 05."

Financings

IPO
The IPO window has not been kind to biotech in 2005 -- seven companies have raised only $363 million in the U.S. year-to-date. In fact the $74 million raised by two companies in Q2 05 was the lowest amount since Q3 03.

Looking at the performance of the biotech companies that completed IPOs since the "opening" of this window in 2003, it is not a pretty sight. Over half are still trading below their issue price and overall the group is down 4.90%. Although the IPO window is essential closed, there are 15 companies currently on the IPO runway waiting for market conditions to improve.

IPO Class of 2003/04/05

However, IPOs are returning internationally despite the tough market conditions. In fact, there have already been 12 non-US IPOs completed in 2005.

While the IPO window in the U. S. is essentially closed, the European market for initial public offerings is open but the market conditions remain tough, especially biotechs. New issues have been facing a difficult sell and two were postponed -- Britain's Renovo and Switzerland's Speedel. However, in June, UK drugmaker ProStrakan braved the market and raised 40 million pounds ($73 million), down sharply from the 50 million pounds it had hoped to achieve, in a placing at 100 pence per share, valuing the company at around 180 million pounds. ProStrakan (PSK), a company focusing on therapies to combat osteoporosis, was created through the merger of Scotland's Strakan and French biotechnology group ProSkelia.

TopoTarget, Copenhagen, Denmark, fared a little better raising US$36.5 million (DKK225 million) in an IPO that was oversubscribed more than six times.

Founded in 1994, Burrill & Company is a San Francisco-based global leader in life sciences with principal activities in Venture Capital, Merchant Banking and Media. The company publishes an annual book on the "State of the Industry," as well as a range biotechnology/life science newsletters devoted to Canada, China, India and Japan. Full details may be found at: http://www.burrillandco.com