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Burrill's Biotech Outlook For 2006 ...and A Look Back At 2005

December 23, 2005

San Francisco, CA - December 23, 2005

"Overall 2005 turned out to be an exceptional year for the biotech industry in terms of financings and partnering, bringing in a record $34 billion for US companies," said G. Steven Burrill, CEO, Burrill & Company, a San Francisco based global leader in life sciences with principal activities in Venture Capital, Merchant Banking and Media. The U.S. biotech industry raised over $17 billion through financings and $15 billion in partnering capital in 2005. PIPEs and secondaries remained flat while IPO and debt financings declined. Public financings overall also remained flat.

The industry's market cap hit an all time high of $488 billion at the end of November 2005 surpassing the previous record of $475 billion reached in the summer of 2000. The Burrill Biotech Select Index widely outperformed the NASDAQ and Dow Jones Industrial on a year-to-date basis - an incredible testimony to the industry's successful year (up 20% versus 4% for NASDAQ and 0.4% for the Dow). Biotech's "blue chip" companies such as Amgen and Genentech led the way, both hitting the $100 billion market cap. But, it wasn't all good news. The capital markets remained extremely cautious throughout the year, being assailed by worries over rising interest rates, sky rocketing energy prices and the aftermath of Gulf Coast hurricanes.

"Most of our 2005 predictions for the industry's performance in terms of money raised and market performance were accurate, except our expectation of a better IPO market during the year," added Burrill.

A look back at Burrill's Predictions about 2005

Capital Markets
Prediction: A reasonably robust public equity IPO market with 30+ IPOs completed in the U.S. and an even larger number internationally.

Outcome: The IPO market was negatively influenced by the prevailing "macro" economic climate with only 17 biotech IPOs managing to get done in the US in 2005 (so far…), most at the low end of their pricing ranges, raising $809 million. Europe mirrored the U.S. in terms of biotech IPO's this year also with 17 completed.

Prediction: An industry raising over $20 billion in the U.S

Outcome: The biotech industry raised an estimated $32 billion in financing (+$17 billion) and partnering ($15 billion) capital in the U.S. PIPEs and secondaries remained flat while IPO and debt financings declined. Public financings overall also remained flat.

Prediction: VCs will raise more money for life sciences ventures, spend more money, and increase their interest in investing in early stage investments.

Outcome: U.S. based biotech funds raised approximately $7 billion in 2005 (up from $5 billion in 2004) and life science investments by the VC community have increased from 2004.

Mergers & Acquisitions/Partnering
The predicted improved partnering environment for biotechs with even larger values attributed to earlier stage compounds (including pre-clinical) certainly was the major story of 2005.

Prediction: Increased big pharma consolidation, increased biotech to big pharma consolidation, and increased biotech to biotech consolidation.

Outcome: Pharma/biotech and biotech/biotech consolidation was hot, hot, hot…Some examples:


Big pharma/pharma:

Teva/Ivax $7.4 billion

Novartis/Hexal $7.3 billion

Solvay/Fournier $1.7 billion


Big pharma/biotech:

Novartis/Chiron $5.1 billion

Pfizer/Vicuron $1.9 billion

GSK/ID Biomedical $1.4 billion


Biotech/biotech:

Amgen/Abgenix $2.2 billion

Shire/TKT $1.6 billion

OSI/Eyetech $0.9 billion

Quest/LabOne $0.9 billion

Genzyme/BoneCare $719 million

Prediction: An improved partnering environment for biotechs with even larger values attributed to earlier stage compounds (including pre-clinical). Pharma partners earlier…

Outcome: Pendulum swings from IPOs toward M&As and partnering. The over $15 billion garnered by biotech in 2005 smashed the record $10.9 billion raised through partnering in 2004. What many of the small, private biotech companies have - products and innovation - many big pharmas need and the trend for them has been to move away from their traditional Phase II "partnering entry point" towards discovery stage deals with rather sizeable total payouts if all milestones are successfully achieved. Although significant-sized discovery deals are nothing new, pharma has focused rather narrowly on identifying potential therapeutics to a single target or pathway, rather than on numerous targets.

Challenging Regulatory Environment
Prediction: A more challenging regulatory environment (post Vioxx, Chiron's vaccine issues, and concern for children's anti-depressants).

Outcome: The bar for drug approval was raised in 2005. The FDA put personalized medicine on the radar screen driving the industry towards increased use of pharmacogenomics and theranostics (diagnostics attached to therapeutics to identify responding patient populations). Drug safety labeling and warnings from the FDA were up 40% from year to year - 2004 (~29) vs. 2005 (~41). Despite the challenging environment, biotech industry continued to get its products approved by the agency (although the single digit number was well down over 2004).

Stem cells dominate the technology story
Prediction: Increased progress with stem cells both scientifically and economically, with more states joining the California focus on funding stem cell research.

Outcome: Subject of stem cells has dominated both the science and the political agenda during 2005. Technology advances abroad while US politics is further creating a not so ideal environment for research and investment community domestically. A stem cell bill is "stalled" in congress with official timeline set for voting on the bill until sometime in the first half of 2006 at best. California's $3 billion stem cell bond initiative is tied up in the courts. However, other states are racing to join California and develop dedicated funding for stem cell research.

Reimbursement - a "hot" issue
Prediction: More pressure from payers (managed care, CMS, various country health ministries) resulting in more product bundling, more personalized medicine, less "blockbusterology" (fewer "one size fits all" drugs).

Outcome: The CMS Medicare part D was enacted in November 2005 - is predicted to be the beginning of a government price controls system on the drug industry as a whole. Payers have become more demanding of drug companies to justify the cost of a drug with true clinical utility.

Biogenerics
Prediction: More approval of, and use of generics; the emergence of biopharmaceutical generics.

Outcome: "Biosimilars" - The EU regulatory agencies are predicting that they will surface in no later than two years from now. In the U.S. leading biotech company executives believe that will be probably be many more years before we see them on the market. The debate continues… but they are coming (and very evident in cetain non-U.S. markets).

Globalization of biotech
Prediction: Increased growth of biotech internationally, especially in the BRIC countries (Brazil, Russia, India, China), Japan, and Scandinavia

Outcome: The predicted increase in the growth of biotech internationally continued to take place in 2005 with China and India emerging with the potential to be biotech "powerhouses" in the next five to ten years.

Burrill's Predictions for Biotech in 2006

  • Biotechnology will continue to fuel a major transformation in healthcare-one that emphasizes earlier disease detection, more targeted treatments, and adjunctive support through enhanced nutrition.
  • Biotech stocks in 2006 will continue to out perform NASDAQ, DJIA and the pharma indices although biotech's performance will be out of its direct control and in the hands of the macro-markets (impacted by the price of oil, inflation, the war in Iraq, rising interest rates, and corporate earnings in the non-biotech sector). This may retard biotech's growth somewhat because overall the world economy will not be as strong as it should be.
  • A reasonably robust public equity IPO market - 30+ in the U.S. in 2006 and even a larger number internationally.
  • The industry will raise over $35 billion in 2006, with approximately $25B from the public equity markets capital and $10B in partnering.
  • More pricing pressure - managed care, CMS, various country health ministries
  • The trend towards M&A's will continue with substantially more deals than 2005, especially among the larger companies.
  • Similarly, we will see more and larger partnering deals with an emphasis towards discovery stage deals.
  • Drug safety issues will be high on the agenda and approvals will be tougher to obtain.
  • The trend towards personalized medicine will accelerate.
  • We will see both scientific and political progress in stem cells.
The year 2006 will be a good one for biotech…

Contact: Peter Winter, Director of Communications of Burrill & Company, +1-415-591-5474

About Burrill & Company
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" - the 20th Edition, Biotech 2006-Life Sciences: A Changing Prescription, will be available in February 2006. Burrill also publishes a range of biotechnology/life science newsletters and reports. Full details may be found at: http://www.burrillandco.com/

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