Biotech Shows Glimmer of an Upward Trend

The markets closed out May in positive territory following their April performance, which was their best month in nine years. The Dow Jones industrial average posted its third straight monthly gain, closing up 4%, with the NASDAQ close behind—up 3.3% in May. This positive market trend helped biotech; the Burrill Biotech Select index posted a modest monthly gain of 0.4%.

G. Steven Burrill

Vaulting Cougar Biotechnology's share value by 33% in May was the news that Johnson & Johnson (J&J) bid approximately $970 million in cash to acquire the company and gain access to compounds in development for the treatment of prostate cancer, breast cancer, and multiple myeloma. Cougar Biotechnology is currently conducting two Phase 3 trials for abiraterone acetate, a late-stage, first-in-class compound for the treatment of prostate cancer.

The predicted land grab of biotech by Big Pharma because of biotechs' depressed values has not yet panned out as pharmaceutical companies acquire each other instead. We may now see an upswing in merger and acquisition activity heading into the summer months, however, because the J&J acquisition of Cougar may prompt pharmaceutical companies, who have been generally been sitting on the sidelines, to "pull the trigger" on biotech deals so that they don't lose out to their competitors.

Shares of Dendreon have increased in value by a whopping 440% since the company first announced it had positive Phase 3 data showing that its lead product, Provenge, extended the lives of men with advanced prostate cancer by an average of 4.1 months. According to analysts, Dendreon should be able to file for regulatory approval during the fourth quarter of 2009. On the basis of its positive clinical data and strengthening share price, the company raised $221 million, the second best biotech financing deal so far this year, to help fund the manufacture and sale of Provenge.

Although the industry overall is still going through tough times and it probably will take many more months before biotech starts on the road to full recovery, it is encouraging to see that investors are prepared to reward biotech companies that achieve significant milestones.

Moreover, despite the prevailing economic recession and travel restrictions some countries imposed because of the H1N1 flu outbreak, the 2009 BIO International Convention, held in May, attracted well over 14,000 attendees to Atlanta, Georgia. The success of the meeting demonstrates that business is still ongoing and companies are actively looking for strategies and partners to help them get through the challenges they are currently facing.

BY THE NUMBERS

The first quarter 2009 (Q1 '09) financial results from biotech's elite companies did not inspire investor confidence and confirmed that the worldwide economic crisis is taking a tougher-than-expected toll on drug sales.

Amgen reported lower-than-expected Q1 earnings as sales of virtually all of its key drugs fell well short of Wall Street estimates and the company lowered its 2009 revenue forecast, blaming deterioration in the global economy. The company's shares closed down 2% in April. Other companies followed suit. Genzyme's shares dipped 10% in April. Shares of Biogen fell almost 8% on weaker-than-expected first-quarter sales, although its per-share earnings beat Wall Street estimates. Celgene beat lowered first-quarter earnings expectations on weak sales of its cancer drugs but blamed its first-quarter financial shortfall on weakening demand for its cancer drugs, including Revlimid.

Our prediction that biotech would face tough times during 2009 and into 2010 is unfortunately playing out as financing and investor support remain in short supply.

Our monthly Burrill Report (www.burrillreport.com) provides ongoing statistics and analysis on the 343 biotech companies that are publicly traded on major US markets. According to the report, at the end of May this group of companies had an aggregate market cap of $297.6 billion (up 3.6 % for the month). Other key findings in the report include:

• There are 43 companies that have market caps greater than $1 billion.

• 154 public biotechnology companies (44%) have a market cap below $100 million.

• 69 are trading below their cash level.

• More than 110 companies have announced corporate restructuring, slashing staff and putting promising projects on hold.

• Year-to-date (YTD), the Burrill Biotech Select Index has fallen by 7%.

• The performance of the top five biotech companies since the beginning of the year is as follows: Amgen (–13.8%); Gilead Sciences (–16.5%); Celgene (–24%); Genzyme (–11%); and Biogen (+ 8.6%).

It is not just biotech that is feeling the pain of the economic downturn. IMS Health has reported that it now expects the global pharmaceutical market to grow by an anemic 2.5% to 3.5% in 2009, down two percentage points from the forecast it issued six months earlier, and the lowest growth rate in at least 25 years.

US BIOTECH FINANCINGS

There is just a glimmer of an upward trend for biotech as evidenced by the performance of the Burrill Mid-Cap Biotech Index, (Table 1). Overall, the members of this index have been particularly hard hit during this economic downturn, but for the past couple of months, a few companies in the index, such as Cougar Biotech, Geron, and Dendreon, have been on a tear, pushing the YTD performance of the index up a remarkable 16%, with a 5% jump in May alone.

Table 1. The Burrill Biotech Select index posted a modest monthly gain in May

Financings and partnering deals collectively brought in almost $10 billion for US companies in Q1 '09 with more than $5 billion through financings and another $5 billion in partnering capital. The 47% increase in funds raised compared to the Q1 '08 total shows that despite the market conditions and the lower valuations of public companies, capital is still flowing. However, there were several outlier deals, including Amgen's $2-billion two-part sale of an oversubscribed debt issue. Remove this transaction and it becomes clear that companies had a hard time with this form of financing in the first quarter of 2009.

Overall, public financing remained below last year's quarter levels with PIPEs and secondary offerings off by 18% and 17% respectively (Table 2). Even though venture capital deals generated 77% more capital than in 2008, the number of deals rose by 100% to over 200 and the average size of a deal fell from $20 million in Q1 '08 to $7 million in Q1 '09.

Table 2. Quarter comparisons of the number of financing events (in USD)

PARTNERING ROBUST

Partnering deal making generated almost $5 billion in Q1 '09. Contributing to this total was the potential $1.1 billion dollar global collaboration that ZymoGenetics made with Bristol-Myers Squibb for PEG-interferon lambda (IL-29), a novel type 3 interferon currently in Phase 1b development for hepatitis C. Bristol-Myers Squibb agreed to pay ZymoGenetics an upfront cash payment of $85 million for the development and commercialization rights to PEG-interferon lambda, and to pay an additional license fee of $20 million in 2009. ZymoGenetics could receive additional payments of up to $430 million based on pre-defined development and regulatory milestones for PEG-interferon lambda in hepatitis C, up to $287 million in development and regulatory milestones for other potential indications, and up to $285 million based on predefined sales-based milestones. Other notable deals are included in Table 3.

Table 3. Notable deals in Q1 09

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