Biotech Posts Strong Gains

Value is returning to biotech. For the first time since late February 2009, the industry's collective market cap has risen above $400 billion. At that time, Genentech was contributing close to $100 billion of that total. When it was acquired, the industry's market cap dropped by about 25%. Despite the ensuing tough financial climate, it has taken just two years to recoup this loss, which is remarkable given that in the interim Big Pharma has been nibbling at the valuation by acquiring large biotech companies such as Sanofi's acquisition of Genzyme. This deal created a surge of interest and a great deal of speculation about other blue-chip biotech companies that might be in Big Pharma's crosshairs.

G. Steven Burrill

We didn't have to wait long for this predicted mergers and acquisitions (M&A) activity. Canadian-based Valeant Pharmaceuticals made a hostile takeover offer for Cephalon in late March 2011. The cash offer of about $5.7 billion was eventually rejected by Cephalon who believed the offer undervalued the company's key assets and prospects. Just as investors were digesting this information came the news a few weeks later that Teva Pharmaceuticals and Cephalon had reached a definitive agreement whereby Teva would acquire Cephalon for $6.8 billion in cash.

It wasn't only deal making that kept investors engaged. Pharmasset's shares have been on a tear, vaulting almost 60% in March (168% year-to-date), and is now one of biotech's hottest companies, with its shares currently trading at $116. Investors were encouraged by the company's data from the European Association for the Study of the Liver's annual meeting held in Berlin late in March 2011. The company reported that its candidate hepatitis C drug PSI-7977, a nucleotide analog polymerase inhibitor, was effective when added to standard therapy in 98% of patients in a 121-person clinical trial. Pharmasset also announced that screening had begun in a Phase 2b study of PSI-7977.

Biogen Idec's stock value jumped 33% following their news announcement about positive top-line results from the first of two pivotal Phase 3 clinical trials designed to evaluate their investigational oral compound BG-12 (dimethyl fumarate) as a monotherapy in people with relapsing-remitting multiple sclerosis. Results showed that BG-12, administered either twice or three times a day, met the primary study endpoint. Biogen also reported that it had signed a collaboration with Amunix for next-generation long-lasting blood factor products.

In the regulatory area, FDA gave the green light to the blockbuster biotech drug Benlysta, the first new lupus medicine to be approved by the agency in 56 years. Human Genome Sciences (HGS) and GlaxoSmithKline have collaborated on the drug's development since 2006. San Diego-based Optimer Pharmaceuticals' Dificid (fidaxomicin) tablets for the treatment of Clostridium difficile-associated diarrhea also received approval.

PARTNERING STILL REMAINS HOT

Following on from the record amount of partnership dollars generated by US biotechs in 2010, the first quarter of 2011 saw a further $7.5 billion being raised through partnership deals.

Table I: Performance of biotech initial public offerings (IPOs) completed in 2011.

One of the top deals in annouced value was Aveo Pharmaceuticals, which signed a major cancer drug licensing deal with Astellas Pharma that netted the biotech $125 million upfront and could be worth more than $1.3 billion if all milestones are met. Their experimental drug, tivozanib, is currently in a late-stage trial as a treatment for advanced renal carcinoma, and in other studies as a treatment for other solid tumors. It is designed to optimally block the vascular endothelial growth factor (VEGF) pathway by inhibiting all three VEGF receptors, for the treatment of a broad range of cancers.

Another of the top deals is the collaboration between Takeda Pharmaceuticals and Intra-Cellular Therapies. The two companies are teaming up in a worldwide collaboration worth up to $750 million. The companies will develop and commercialize Intra-Cellular Therapies' preclinical selective phosphodiesterase type 1 (PDE1) inhibitors for the treatment of cognitive impairment associated with schizophrenia. ITI's PDE1 inhibitors are orally available and have potential to be treatments for a variety of psychiatric and neurological diseases.

Table II: Burrill biotech indices.

QUIET PERIOD FOR INITIAL PUBLIC OFFERINGS

Only three US biotech companies priced initial public offerings (IPOs) during the past three months:

• Specialty pharmaceutical company, Sagent Pharmaceuticals sold 6.6 million shares including over-allotments at $16.00 per share, which was at the high end of their projected $14 to $16 share price range. Since its formation in 2006, Sagent has developed an extensive portfolio of injectable pharmaceutical products.

• For its IPO, Tranzyme Pharma priced 13.5 million shares at $4.00 per share. The North Carolina biotech had hoped to debut mid-March in the $11 to $13 per share range, but its underwriters couldn't get any traction for the offer until they slashed the price more than two thirds and tripled the number of shares offered. Tranzyme is a clinical-stage biopharmaceutical company focused on discovering, developing and commercializing novel, first-in-class small-molecule therapeutics for the treatment of acute (i.e., hospital-based) and chronic gastrointestinal motility disorders.

• South San Francisco-based Solazyme, which transforms plant-based sugars into petroleum-based chemicals and fuels, raised $198 million by offering 10.975 million shares at $18, above the range of $15 to $17. The company had originally planned to offer 9.975 million shares, with the upside coming from additional primary shares; in total, the company raised 24% more than originally planned.

There now have been 10 US biotech IPOs since the beginning of the year. Their improving performance is reflective of biotech's better fortunes in parallel with the strengthening of the capital markets. The IPO runway is full and it is likely we will see several more biotech companies complete their IPOs in the coming months, although to get the deals done they may have to modify their pricing strategies to offer a lower price and sell more shares, as was the case for Tranzyme.

G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, publications@b-c.com.