A Strong Start to 2012

The strong boost to biotech stocks in the first two months of the year has energized the sector and allowed companies to make deals and raise funding. Of the 340 life sciences companies trading at or above $1 at the end of 2011, 253, or 74.4% of them, are trading higher after the first two months of the year, while 25% of those companies are up more than 25% so far this year.

G. Steven Burrill

There has been a sharp improvement in the price of life-sciences stocks as economic news in the US has been generally positive this year, actions in Europe to address the debt crisis advance, and news within the sector is encouraging. All of the Burrill Life Sciences Indices have posted gains for the year with the flagship Burrill Select Index the strongest performer, climbing 15.5% through the end of February. The Dow Jones Industrial Average, up 6% for the same period, closed above the 13,000 mark in February, the first time since 2008.

We are still in an environment where markets can turn quickly in response to negative news. Smart companies will take advantage of opportunities to secure financing and get deals done. Life-sciences companies through secondary offerings raised $1.4 billion in the first two months of 2012 through 29 financings, 23 of which were completed by therapeutics companies.

Roche's hostile $5.7-billion bid for the tools and sequencing systems company Illumina reflected strong dealmaking activity for the life sciences at the start of the year. The wrangling between Roche and Illumina is likely to go on for months. The deal reflects Roche's efforts to build itself into a personalized medicine powerhouse and its belief that sequencing technology will eventually migrate from the laboratory to the doctor's office.

Some of the year's biggest acquisitions have been traditionally structured takeovers. Bristol-Myers Squibb agreed to acquire hepatitis C drug developer Inhibitex for $2.5 billion. Amgen said it would buy Micromet, which is developing a new class of drugs that enlist the body's T-cells to battle cancer, for $1.2 billion. But a number of transactions of privately held companies included large milestone payments.

Privately held companies that are being acquired today often find they will have to wait to reap the rewards of a transaction. In the absence of a vibrant initial public offering (IPO) market, buyers have the upper hand and often insist on sharing risk. Increasingly, the structure of these agreements may borrow from those of partnerships and may mean investors seeking exits will have to be patient to realize their full return.

Celgene agreed to acquire privately held Avila Therapeutics for $350 million plus milestones that could push the total value of the deal up to $925 million. Dainippon Sumitomo said it would acquire privately held Boston Biomedical, a developer of oral therapies that target cancer stem cells with its lead candidate in late-stage clinical testing, for $200 million in upfront cash and milestones that could push the total deal value to $2.6 billion. Biogen Idec said it would acquire privately held Stromedix, a developer of therapies for fibrosis and organ failure with its lead candidate in mid-stage clinical testing, for $75 million upfront and milestones that could push the total deal value to $562.5 million.

A total of six companies completed IPOs on US exchanges in the first two months of 2012, but investors still lack enthusiasm for new issues in the sector. Five of the six issues came below their target price range. Only Verastem, a preclinical therapeutics company developing drugs that target cancer stem cells, managed to price at the midpoint of its $9 to $11 target, raising a total of $55 million by selling shares at $10 each. Existing investors committed to purchasing nearly a third of the offering. The company is led by Christopher Westphal, the former CEO of Sirtris Pharmaceuticals, which he sold to GSK in 2008 for $720 million.

Renewable Energy Group raised $72 million in the first life-sciences IPO of the year. The biodiesel producer sold 7.2 million shares at $10 each, well below its range of $13 to $15 a share. The therapeutics companies Cempra Pharmaceuticals and ChemoCentryx, the digital health company Greenway Medical Technologies, and the agbiotech Ceres all went public in February. Collectively, these companies that went public in the first two months of the year hoped to raise as much as $505.7 million, but raised $354.4 million, nearly 30% less than they sought. They also needed to sell 10% more shares than they set out to sell in order to raise what they did.

Venture financings also got off to a strong start with companies raising $1.8 billion globally in January and February, a 22% increase compared with the same period a year ago. Among the largest financings so far was startup Warp Drive Bio's potential $125 million in funding, $75 million of which is equity financing tied to the achievement of milestones. The company, backed by Third Rock Ventures and the drug giant Sanofi, is using proprietary genomic tools to search inside microbes for potential new natural product drugs. The deal comes with a built-in exit for investors, by requiring Sanofi to buy Warp Drive should it meet its milestones.

On the regulatory front, the Obama Administration's proposed budget for FDA in fiscal year 2013 calls for $4.5 billion, a 17% increase in funding. The increase is expected to come almost entirely from industry user fees. User fees overall are expected to fund about 45% of the agency's budget. The government's contribution to funding FDA will essentially remain flat under the proposal.

It is critical that Congress move quickly to pass the renewal of the Prescription Drug User Fee Act (PDUFA) and not allow the legislation to get bogged down in extraneous issues. User fees provide nearly two-thirds of the funding for drug reviews today. They do not, however, address the chronic underfunding of the agency, which Congress will also need to address at this time when there is continued pressure to cut spending.

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