PRINT THIS PAGE

Biotech takes a hit at the start of the year

Although the biotech industry has hit a bump in the road, it still managed to get deals done raising a total of $5.4bn in the quarter. In biotech company boardrooms across the country it is still business as usual, says Burrill & Company. With over $1.4bn in partnering deals and $4bn capital raised, biotech's fundamentals remain strong and the industry is still on target to raise over $20bn in venture capital money by year end.

Biotech’s Momentum Stalls in Q1 05

SAN FRANCISCO, CA - April 01, 2005

In contrast to Q1 04, biotech turned in one of its worst quarter performances in its stock market history, getting caught up in gathering market concerns over rising interest rates, oil prices, inflation, poor corporate earnings and a softer than expected economy. Biotech's own situation wasn't helped by the sudden and unexpected market withdrawal of Tysabri, Biogen Idec's projected blockbuster MS drug. Nevertheless, the industry was still able to attract over $5 billion through financing and partnering deals.

Burrill Biotech Select Index down 7.38%; NASDAQ down 8.1%; Dow off 2.59%

"After posting several excellent quarters of positive stock market results, biotech came down to earth with a solid bump in the first quarter of 2005," said G. Steven Burrill, CEO of Burrill & Company, a San Francisco based life sciences merchant bank. "A string of product disappointments, lower earnings projections, and heightened concerns over drug safety compounded biotech's woes.

"If those issues weren't enough, surging oil prices, which hit a record high of $57.60/barrel in March, and general market jitters over inflation, corporate earnings and a soft economy served to cap a generally miserable quarter for the biotech and industrial sectors as a whole," Burrill added.

"The fall out from the market shock that Biogen Idec and Elan were pulling Tysabri their potential blockbuster MS drug from the market has been far reaching," said Burrill. The Burrill Small-Cap Biotech Index and Burrill Biotech 2003/4/5 IPO Index were particularly hard hit, falling 28% and 20% year-to-date, respectively.

"The FDA coming under fire with the considerable public debate about the safety of high profile drugs already on the market has also shaken investor confidence. However, the FDA's swift move to create a new independent Drug Safety Oversight Board to oversee the management of drug safety issues and provide information about the benefits and risks of medicines to doctors and patients should help ease concerns over time," Burrill said, "but expectations are that the 'bar for drug approval' has been raised.

FDA responds to Drug Safety Concerns…

In an effort to improve the way the FDA manages drug safety information, the Agency is making its review and decision-making process more independent and transparent. The creation of a Drug Safety Oversight Board (DSB) that will manage important drug safety issues within the Center for Drug Evaluation and Research (CDER) is one step in what will be an ongoing series of initiatives. One these will be the establishment of a new "Drug Watch" Web page for emerging data and risk information.

The DSB will comprise members from the FDA itself as well as medical experts from other HHS agencies and government departments who will be appointed by the FDA Commissioner. The board will also consult with other medical experts and representatives of patient and consumer groups.

…and also gets "personal"
"Although the impact on drug safety might not be felt for several years yet, the FDA's just issued guidance - 'Pharmacogenomic Data Submissions' - may prove a pivotal document in ensuring patients receive the right medicine and dosage at the right time and minimizes any chance of serious drug side-effects," said Burrill.

The document is part of an agency-wide initiative to speed development of new medical products through the science of pharmacogenomics, or personalized medicine, as it is more popularly known. Instead of the standard hit-or-miss approach to treating patients, where it can take multiple attempts to find the right drug and the right dose, doctors will eventually be able to analyze a patient's genetic profile and prescribe the best available drug therapy and dose from the start. For example, genomic tests are helping to identify cancers that have a good chance of responding to a particular medication or regimen. This technology has enabled the development of targeted therapies like Herceptin for metastatic breast cancer, Gleevec for chronic myeloid leukemia and Erbitux for metastatic colorectal cancer.

"Now that personalized medicine has been elevated onto the FDA 'radar screen', this should help to spark the interest of investors in the biotechnology industry once again," said Burrill. "It is also important from the public's point of view, currently worried about the medicines they take, who will now begin to have available technology to help determine whether these drugs will work."

The voluntary data, which will be reviewed by an internal, agency-wide group and will not be used for regulatory decision making, will help FDA and industry gain valuable experience as this new field continues to evolve.

FDA believes this approach will save time and resources and eliminate possible delays in the application review process because parties will be able to familiarize themselves with these novel pharmacogenomic approaches as they evolve.

Venture capital still flowing
"Although the biotech industry has hit a bump in the road, it still managed to get deals done raising a total of $5.4 billion in the quarter. While biotech stocks have been taking it on the chin lately, in biotech company boardrooms across the country it is still business as usual," said Burrill. "With over $1.4 billion in partnering deals and $4 billion capital raised, biotech's fundamentals remain strong and the industry is still on target to raise over $20 billion by year end."

Selected venture financings during Q1 05:

The $781 million raised in venture financing deals was only half the amount raised in Q1 04. "While on the face of it this could be seen as a negative, the first quarter of 2004 was, in terms of funds raised, one of the industry's best ever," Burrill explained.

"The current $5.4 billion quarter is in keeping with the amounts raised in the last three quarters of 2004, which themselves were considered positive numbers."

Topping the deals list was San Francisco-based FibroGen, Inc., which completed a placement of convertible preferred stock generating approximately $100 million in net proceeds. The company will use the investment to expand clinical activities in anemia and continue ongoing studies in idiopathic pulmonary fibrosis and diabetic nephropathy. It will also allow them to meet capital requirements for efficacy studies of injectable recombinant human collagen and commercial scale manufacturing for supply of recombinant human collagen in bulk and for dermal injection markets.

Another deal of note was Perlegen Sciences, Inc.'s (Mountain View, CA) $74 million private placement of its Series D Preferred Stock. The company was recently commended in the media for its involvement in the international consortium to identify and verify millions of single nucleotide polymorphisms, or SNPs, and complete a "haplotype map," that will be an important tool for finding links between genetic variation and disease or drug response.

Perlegen, which has already developed its own proprietary database of almost 1.6 million SNPs, said that it would make its data available to all researchers free of charge. Their equity financing will enable the company to continue in-licensing and developing a pipeline of late-stage drugs.

Companies Squeeze through Closing IPO Window Although initial public offerings tended to close at the lower end of each company's initial share price range six biotech companies collectively raised $289 million in the quarter.

In March, Canadian biotech Aspreva Pharmaceuticals Corp. (Nasdaq: ASPV; TSX: ASV) closed a $90 million initial public offering of 8,280,000 common shares at $11.00 per share. Although this was short of the original offering range of $13 to $15 per share, investors were obviously impressed with the company's fundamentals - veteran biotechnology and pharma management leadership and a product already in Phase III trials. Apreva is conducting global Phase III study of CellCept(R) (mycophenolate mofetil) for myasthenia gravis. Results of the study are expected in 2006.

A year ago Aspreva raised $57 million private equity financing, one of the larger series A financings reported recently. The company's share price closed the quarter up 32% at $14.55

ViaCell Inc. (Nasdaq: VIAC), which raised $60.4 billion in January, has seen its shares encounter volatile trading in March. They hit a high of $9.34 at one point but were pegged back to close the quarter at $7.54, up 18%. Putting a reversal on their share price climb was the news that the Cord Blood Registry, the leading provider of services for the storing and processing of newborn cord blood stem cells, was planning a lawsuit against ViaCell and its wholly owned subsidiary Viacord, Inc. for false and misleading advertising. The complaint, filed in the Federal District Court in San Francisco, alleges that Viacord has disseminated and continues to disseminate false and misleading advertising to the public in an effort to promote their umbilical cord blood stem cell preservation services. Cord blood banking is a process that allows parents to have the stem cells from a newborn's cord blood cryopreserved for future medical uses.

The uncertain market conditions did caused two biotech companies to withdraw their initial public offerings towards the end of March. Targacept Inc.'s plans to sell nearly 6.3 million shares at between $11 and $13 were put on hold…as was Boston-based CombinatoRx Inc.'s similarly priced IPO.

"While the IPO window did not totally close by the end of the first quarter, to get offerings done companies had to dramatically discount biotech IPOs to attract investors," said Burrill. "We are now in a holding pattern as companies wait until market conditions improve before hitting the Street again with their offerings."

Selected IPOs Completed in Q1 05:

Burrill Biotech IPO 2003/4/5 Index
"Particularly hard hit during the quarter was the Burrill Biotech 2003/4/5 IPO Index." stated Burrill. "After closing out the year in very good shape - up 24% - the Index has almost given that value back closing down 20% since the beginning of the year."

"In additional to being caught up in the prevailing market conditions, the dramatic drop in value has been fueled by a string of companies reporting disappointing clinical trials results," Burrill added

Reinforcing this fact, Corgentech Inc.'s (CGTK), share price lost half its value following the news, March 30, their Phase III trial with edifoligide (E2F Decoy) to treat vein graft failure after coronary bypass graft surgery failed to show any benefit. The investigational drug had already failed to significantly delay vein graft failure in patients who had the procedure performed in their legs. Bristol-Myers Squibb (BMY), Corgentech's partner, ended its collaboration on edifoligide after the results had been made known. Corgentech shares closed the quarter at $2.32 down 85% from their opening IPO price of $16 in February 2004.

Suffering a similar fate in their share prices were Renovis Inc. (RNVS) and Xcyte Therapies, Inc. (XCYT). Renovis halted development of its drug candidate REN-1654 to treat persistent pain from shingles after a Phase II trial showed the therapy did not provide significant pain relief, while Xcyte withdraw its FDA clinical protocol submission for a Phase II/III trial of Xcellerated T Cells in chronic lymphocytic leukemia. The FDA requested the withdrawal to allow additional discussion of the design of the trial. Xcyte expects a delay in the initiation of the trial beyond the second quarter of 2005. At $1.23 Xcyte's share price is down 55% since the beginning of the year and over 80% on its issue price. The share price of Renovis closed the quarter at $8.07 down 44% from the beginning of the year.

"These reversals are certainly dampening Wall Street's enthusiasm for the biotech market," explained Burrill, "as a result, companies are increasingly turning to alternative financing strategies. The pendulum is swinging away from IPOs more to M&As and partnering. In the last two years alone these actives have generated over $20 billion for the biotech industry."

IPO Class of 2003-04-05:

Solid performance on Capital Markets
Biotech companies were able to generate $4 billion in the first quarter of 2005. This amount is 30% down from the $5.7 billion raised in the same quarter of 2004.

"The market showed that it still had an appetite for biotech company debt and secondary issues and the $2.3 billion raised in the quarter compares with the same amount recorded in Q1 2004," Burrill noted.

Protein Design Labs, Inc. (PDL) closed a debt financing of $250 million of its convertible senior notes due 2012. In addition, the initial purchasers of the notes have an option to purchase up to an additional $50 million principal amount of notes. The notes will be convertible into PDL common stock at a price equal to approximately $23.69 per share, subject to adjustment in certain circumstances, which represents a 30 percent premium over PDL's closing price of $18.22 on February 8, 2005. PDL said that it might use a portion of the net proceeds to pay for its planned acquisition of ESP Pharma Inc. for approximately $475 million ($300 million in cash and approximately $175 million in PDL common stock). ESP Pharma was founded in April 2002 around the acquisition of several therapeutics from Wyeth (WYE), including leading product, Cardene(R) IV, an intravenous anti-hypertensive used extensively in cardiac- and neuro-surgery. In February, ESP Pharma acquired the U.S. and Canadian rights to the thrombolytic Retavase® (reteplase) from Centocor, Inc.

AtheroGenics, Inc. (AGIX) expects to use the proceeds from the sale of its 1.5% Convertible Notes due 2012 to fund the ongoing costs of the ARISE trial of AGI-1067 and other research and development activities, including clinical trials, process development and manufacturing support.

Amylin Pharmaceuticals, Inc. (AMLN) topped the list of companies that completed follow-on offerings with the sale of 9.2 million shares of common stock at $22.00 per share, which included 1.2 million additional shares of common stock to cover over-allotments. In March, Amylin also received FDA approval for its Symlin(R) (pramlintide acetate) injection to be used in conjunction with insulin to treat diabetes. The company's share price still weakened in the quarter closing at $17.49, down 22%.

Valeant Pharmaceuticals International (VRX) improved its bank cash balance by completing its underwritten public offering of 7,200,000 shares of common stock at $24.00 per share and 1,080,000 additional shares in allotments.

Selected Convertible Debt Offerings during Q1 05:

Selected Secondaries during Q1 05:

Selected PIPES during Q1 05:

Partnering continues at a healthy pace... "Although the reported $3.5 billion in partnering deals in Q4 04 would be a tough act to follow," Burrill said, "transactions did not show any signs of slowing down as the total of $2.1 billion for Q1 05 indicates.

"Pharma's appetite for what biotech has to offer will continue to remain healthy throughout the rest of the year, and the Shire alliance with New River Pharmaceuticals to strengthen its franchise in the ADHD area is a typical example of deals, which are designed to boost pharmas drug pipelines," Burrill added.

Shire Pharmaceuticals Group plc (SHPGY) and New River Pharmaceuticals Inc. (NRPH) have entered into an agreement for the global commercialization of NRP104, New River's Phase III compound for treatment of Attention Deficit Hyperactivity Disorder (ADHD), as well as for other potential indications. Shire pays an initial sum of $50 million on signing, a further $50 million upon acceptance of filing of the New Drug Application by the FDA and up to $300 million in milestone payments; an additional $100 million milestone would be payable as a sales bonus upon achieving a significant sales target.

NRP104 is an amphetamine prodrug that is inactive until metabolized in the GI tract, it may offer the advantage of reduced potential for abuse or overdose and may have a unique safety profile versus traditional stimulants. Phase II trial results have been positive. The primary endpoint of the trial involving 52 children with attention deficit hyperactivity disorder, demonstrated similar efficacy compared with Adderall XR, which is manufactured by Shire. New River's share price closed the quarter at $25.50 up 70% year-to-date, and over three times its issue price.

Pfizer Inc. was active in the quarter with a significant partnering deal and an acquisition. Its exclusive global license agreement to develop, manufacture and commercialize Coley Pharmaceutical Group, Inc.'s ProMune (CPG 7909) involves an initial payment of $50 million, with the potential for up to $455 million in additional milestone payments, plus royalties. In addition, under certain circumstances, Pfizer will invest up to $10 million in Coley's common stock upon an IPO by Coley.

ProMune is a toll-like receptor 9 agonist for the potential treatment of a variety of cancers. Toll-like receptors (TLRs) have the ability to recognize the distinct molecular patterns characteristic of bacteria, parasites and viruses and thus play a critical role in early innate immunity.

Pfizer will fund future development of ProMune, including planned Phase III trials for the treatment of non-small cell lung cancer. A variety of additional tumor types also will be explored. The technology licensed to Pfizer includes IP licensed by Coley from the University of Iowa Research Foundation and the Ottawa Health Research Institute in Ottawa, Canada.

…as does M&A
Although financial terms of the deal have not been disclosed, Pfizer plans to acquire San Diego-based Idun Pharmaceuticals Inc., gaining access to their leading intellectual property position in apoptosis. Idun's technology is focused on the control of caspase activity, a group of cellular proteases involved in the pathway of apoptosis and inflammation. Idun has developed therapeutic applications focused on inhibiting caspase activity as potential treatments for liver disease and inflammation. Idun also has programs targeting the activation of caspases as potential treatments for cancer. Idun's lead compound, IDN-6556, a first-in-class pan caspase inhibitor, is in Phase II clinical trials in liver transplantation and in patients infected with Hepatitis C virus. In addition to IDN-6556, Idun has a robust pre-clinical pipeline including a number of programs in inflammation and oncology. The acquisition is expected to close during the second quarter of the year.

Protein Design Labs, Inc. (PDL) is also planning to acquire ESP Pharma Inc. for approximately $475 million ($300 million in cash and approximately $175 million in PDL common stock). ESP Pharma was founded in April 2002 around the acquisition of several therapeutics from Wyeth (WYE), including leading product, Cardene® IV, an intravenous anti-hypertensive used extensively in cardiac- and neuro-surgery. In February, ESP Pharma acquired the U.S. and Canadian rights to the thrombolytic Retavase® (reteplase) from Centocor Inc.

In the quarter, Valeant completed its acquisition of Xcel Pharmaceuticals, following the early termination by the U.S. Federal Trade Commission of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976. The acquisition of Xcel is expected to expand the company's business in the US with $60 million in revenues from in-market products. Aphton Corporation (APHT) also completed its acquisition of Igeneon AG, Vienna, Austria. The transaction, Aphton says, is a key component in their strategy to become a global player in the oncology market.

"There is a very clear indication that M&A, along with partnering, is becoming a more attractive option for biotech companies to help drive their product development programs and ultimately increase shareholder value," said Burrill. "Now that the IPO window is essentially closed for biotechs, I would expect to see 'deal making' become a preferred option for them during the rest of 2005."

A good example of this trend is Peninsula Pharmaceuticals Inc.'s decision to postpone its initial public offering while it explores a possible merger with a pharmaceutical company.

Selected Partnering Transactions during Q1 05:

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