Biotech Closes the Year on an Upswing

Monday, January 4, 2010 Corporate News
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Upcoming Burrill annual report says that companies have to adapt to a new environment

SAN FRANCISCO, Jan.. 4 -- The biotech industry closed its books on a year where the industry's stock values dipped dramatically during a turbulent

opening quarter, then to be followed by a slow, steady recovery. The "V-shaped" stock chart performance of biotech in 2009 mirrored to a large extent what happened in the general capital markets. From their lows in March, the markets, as measured by major indices such as the Dow and S&P 500, gained about 50 percent. In the final analysis, the Dow closed the year up 19 percent and the Nasdaq did even better, up approximately 45 percent and the S&P 500 index closed up 24 percent, its strongest performance since 2003. The Burrill Biotech Select Index, a price-weighted index tracking 20 of biotech's "blue chip" companies, closed the year up 4 percent in value.

"We have to thank a strong closing month for the Burrill Biotech Select Index, posting a strong 5 percent gain, as the reason for it finishing in the black at year end," said G. Steven Burrill, CEO, Burrill & Company, a San Francisco based global leader in life sciences with activities in Venture Capital, Private Equity, Merchant Banking and Media. "The Index's fourth quarter performance, by contrast, was lackluster as a consequence of residual investor nervousness about the relative strength of the economic recovery, fears over health care reform and continuing concerns about a mounting backlog of drug approvals at the Food and Drug Administration.

"Also weighing down on the industry was the performance of some 'blue-chip' biotechs in 2009," noted Burrill.  "Both Amgen and Genzyme saw their share values decline and finish in negative territory to close the year down 1.7 percent and 26 percent, respectively."

Amgen's shares took a hit in the final quarter after the FDA said it wanted more information on the potential osteoporosis treatment Prolia. Genzyme shares were impacted as manufacturing problems slowed sales of its drug Cerezyme used to treat Gaucher disease.

"On the plus side, several companies saw their share values increase dramatically," added Burrill. "Leading the charge was Affymetrix whose share value almost doubled benefitting both from an improvement in its quarterly sales performances and a general resurgence of interest in genomics and tools companies during 2009.

"The specter of personalized medicine is gaining traction thanks to big pharma adjusting their business models from discovering blockbuster drugs to developing targeted medicines. Advanced tools to uncover genetic information will be central to this new strategy, which is why we saw significant gains in our Burrill Personalized Medicine Index," said Burrill. "The drive to slash the cost of genomic sequencing to $1,000 has also focused attention on advances under way in next-generation sequencing, which is one of the reasons why the share values of companies such as Illumina, Life Technologies and Helicos BioSciences, who provide various sequencing tools, performed so well during the year."

"The upswing in the capital markets during the second half of the year was certainly a positive influence on the industry's emerging companies. While the tough economic environment took its toll, those companies that survived performed well with the Burrill Large Cap Biotech index up 21 percent, the Burrill Mid-Cap Biotech index up 19 percent and the Burrill Small-Cap Biotech index up 12 percent, for the year, respectively."

Helping pad these gains was the dramatic year-over-year share increases of companies such as Human Genome Sciences (+ 1370 percent), Compugen (+ 1000 percent), Athersys (+821 percent) and Targacept (+524 percent), whose share values were driven by positive clinical trials data and/or the signing of lucrative partnerships with pharmaceutical companies.

Biotechs test IPO waters in 2009

We did see three IPOs get out the door during 2009, generating over $1 billion between them. Cumberland Pharmaceuticals raised $85 million by offering 5,000,000 shares at $17.00, below the expected range of $19.00 to $21.00. The specialty pharmaceuticals company has products on the market, including a new injectable treatment for pain and fever. Talecris Biotherapeutics, a manufacturer of plasma-based proteins, raised a whopping $850 million in its IPO. Like Cumberland, the company has products on the market and its 2008 sales were $1.4 billion.

In the early part of October it looked as though the IPO window was set to open a little wider when Omeros became the first venture-backed biotech to go public. It priced its IPO of 6.82 million shares at $10 per share, but then saw its shares drop almost immediately, closing down 13 percent on its first day of trading (it closed out the year down 26 percent). The company is using the funding to complete its phase III trials of its lead drug candidate, which is being evaluated for use during arthroscopic surgery to improve postoperative joint function and reduce postoperative pain. Cumberland's shares closed the year down 16.5 percent and Talecris finished the year up 17 percent from its opening day debut price.

"We expect IPO activity to pick up in 2010, as the economy continues to improve and investors become more willing to test the public equity markets again," said Burrill. "However, expect them to remain selective, which is why we only see about 15 biotech IPOs getting done in 2010.

"The companies that have added themselves to the IPO runway are hoping that around the time of the JP Morgan Healthcare Conference in early January 2010 the markets will be receptive enough to invest in new biotech issues. The first biotech IPO movers of the new year will have to perform well if we are to see the IPO window opening wider for others to follow."

On the runway are:

  • Alimera Sciences: developing products that treat retina-related diseases..
  • Anthera Pharmaceuticals is focused on inflammatory diseases and has one drug ready for phase III clinical trials.
  • Aldagen: develops regenerative cell therapies.
  • AVEO Pharmaceuticals: developing cancer drugs.
  • Codexis: develops enzymes and microbes that make industrial processes cleaner and faster.
  • Ironwood Pharmaceuticals whose first in class compound, is being evaluated in a confirmatory Phase III program for the treatment of irritable bowel syndrome.
  • Rules Based Medicine: a diagnostics company.
  • Tengion: involved in regenerative medicine.
  • Trius Therapeutics: focuses on the development of antibiotics for serious infections.

A record year for fundraising

Despite the tough economic environment, the biotech industry in the US raised, through public and private financings and partnerships, over $55 billion in 2009 – setting a new record. 

"Partnering was on a tear through much of the year with the industry raising almost $37 billion in total deal values—a record for the industry. With $55 billion raised, this will go down in history as our industry's largest financing year, albeit during one of the most difficult financing environments ever," explained Burrill. "The message - when companies have to raise capital, companies do, even when the cost of capital is unfavorable.

"It also reflects the urgency that big pharma's places on accessing biotech innovation as their 'patent cliff' gets ever closer. The number of deals inked in the year is unprecedented. What did come as a surprise to many was that they did not acquire biotech companies at the rate that was predicted.

"In our upcoming annual report on the industry - Biotech 2010-Life Sciences: Adapting for Success – we examine in detail the financings and M&A and partnerships that took place in 2009 and provide an analysis on where the industry stands today and how it will need to adapt to a new challenging environment which include: health care reform, comparative effectiveness, the specter of biogenerics and reimbursement pressures that will all hit the industry hard if it is not fully prepared.

"Adopting a Darwinian theme for our new publication, we present insight and analysis that points to the fact that those companies that are the most responsive to the changes around them will thrive and be successful."

Burrill's predictions on what lies ahead for biotech in 2010

As a prelude to the upcoming release of Biotech 2010-Life Sciences: Adapting for Success – the 24th edition of Burrill & Company's annual report on the biotechnology industry, the biotech visionary Burrill has provided his predictions for what lies ahead for biotech in the new global financial environment. Biotech 2010 expands on this insight and the 400-page book will contain detailed analysis and perspectives on 2009 and forecasts for 2010 and beyond.

  • Financial Environment: The worldwide financing environment in 2010 will be more robust but choppy and selective at times. This environment favors risk mitigated companies rather than earlier stage development companies. Capital markets in the US and globally will continue to strengthen, building on a return of investor confidence. Much of the global economic recovery has so far been driven by stimulus funding and, as a result real economic growth will remain uncertain.
  • Biotech and the Capital Markets: We expect to see biotech's elite companies to perform well with their financial returns meeting analysts' expectations. Although the Burrill Biotech Select Index lagged the general markets in 2009, by year end the index will have outperformed the Dow Jones industrial average and Nasdaq composite index.
  • Biotech IPOs: The biotech IPO window will continue to crack open. During the first half of 2010 there will be at least five companies that get their offerings done, particularly after the JP Morgan Healthcare Conference. By year end, we predict that 15 biotech IPOs in the US will have been completed, but supply will overwhelm demand, and the markets will be very selective.
  • Biotech consolidation to continue: The large universe of small public companies and private companies looking for venture capital will still face challenges as they try to find ways to extend their runway and stretch out their remaining funds. Expect to see further consolidation in 2010 although at a slower pace that we saw in 2009.
  • Capital: Over $15 billion will be raised by US biotechs; partnering/M&A will again trump financings and in total $35 billion will be raised. The industry's market cap will grow from its present level of $350 billion to $400 billion, despite significant consolidation and attrition as valuation is lost through M&As. There will be significant funding available for public companies through secondary financings, registered direct offerings, and PIPEs, especially after they report good news.
  • Partnering: To deal with their impending patent cliffs, Big Pharma will continue to keep a robust pace of partnering deals.  Both Big Pharma and Big Biotech will compete for companies with advanced product pipelines, as well as important land grabs of technology. There will also be new players competing for technologies – such as major medical devices, instrumentation and healthcare IT companies, and even generics companies will be acquirers. The traditional sector lines of pharma, biotech, devices, diagnostics, healthcare IT, services, and generics/biosimilars will blur as we see converging technologies (and companies) responding to new market opportunities that present themselves as we move a system focused on treating sickness to one that seeks to maintain wellness.
  • Mergers & Acquisitions: Big Pharma consolidation will continue as these companies position themselves for the new market realities and competitive pressures from the generics world. Pharma will also start to adapt from a vertically integrated business model to one that reflects virtual integration. Companies will build dedicated business product units with their own management structures and decision making processes.
  • Healthcare reform: Obama's State-of-the-Union address (1/20/10) will report on a new healthcare reform bill. The reform will stimulate ways to move the system from one based on cost to one based on value. Providers will look for ways to reduce costs by improving healthcare delivery and rewarding behaviors that promote healthier lifestyles.  But most of the impact of this healthcare reform bill will be on reforming the insurance industry and who pays for a largely dysfunctional system. Healthcare reform II will begin immediately, trying to fix what still remains a broken system.
  • Biosimilars: The growing use of biologics and their high price tag will put pressure on US legislators to establish a pathway to allow the FDA to approve biosimilars.
  • Regulatory environment: The regulatory world will become more complex as comparative effectiveness research enters the equation (cost/value + utilization/comparative efficacy).
  • Increased government involvement: The federal government, through Medicare and Medicaid, will play a greater role in the delivery and reimbursement of healthcare. This trend will create an array of new regulatory and compensatory rules, issues, and challenges for healthcare providers.
  • Science and Technology: We will continue to see companies both large and small build their business models around the technologies that are driving personalized medicine. Targeted therapies will be developed that focus more on subpopulations rather than the traditional one-size fits all model. Expect to see Big Pharma operate more like innovative biotech companies. Stem cells will become increasingly important as tools for technology development, especially in the areas of cancer and regenerative medicine.
  • Clean tech will boom: The clean tech boom (biocleantech) in non-food crops will continue in 2010 as major investments in solar power, wind power, and next generation biofuels gets attention.  The market will not only embrace green, but technologies that improve energy efficiency and environmental "friendliness"—less polluting, less consuming.  As a result clean technology companies will attract financing in record amounts.
  • Biofuels: Biomass must be sustainable, affordable, reliable, and available. Significant investments will be made in the development of "cheap sugars" to feed the advanced biofuels industry. The market for the by-products of biofuel production will grow as companies leverage their technologies for more near-term opportunities in renewable chemicals and biopolymers, and a diverse use of their resources.
  • Ag/Animal Health: The ag/animal health sectors will also see an increase in interest and funding - driven by the world food crisis and companies looking to spin their units off as a source for funding.
  • Global markets: Global emerging markets, particularly in China, India and Brazil, will grow faster than the US and Europe. Increasing affluence, a growing middle class, and government policies will make healthcare big business in these countries. The global nature of biotech will put pressure on the US to maintain its dominance and we will see increasing evidence of other countries/regions taking the lead in some technologies and business sectors.
  • Global arbitrage: will be a major driving force as companies increasingly look beyond their borders to maximize the value of their businesses and access sources of capital that may be unavailable locally.
  • Biotech clusters: Will be redefined away from geography focused clusters and be more virtual built around diseases, pathways, markets, and unique industry segments. As such, business models will continue to evolve more virtually.
  • The year ahead: Overall, 2010 will be a productive year for the industry as companies learn to adapt to their new environment. The past 12 months has exacted a significant toll on the biotech industry (through bankruptcies, downsizing, and cost-cutting) and we have a very different industry today than previously existed. The companies that have survived the difficult financial conditions will have to adapt to this new environment.

SOURCE Burrill & Company

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