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Burrill's Biotech Outlook for 2005

December 22, 2004

...and a look back at 2004

San Francisco, CA - December 22, 2004

As we reflect on 2004, the biotech industry had a good (not great) 2004:

  • 30 IPOs done in the U.S. (on top of the 7 done in the fall of 2003, for a 37 company IPO window, now "open" just a little over one year...raising $2.1 billion) and 38 IPOs done internationally
  • U.S. market cap rose 8 percent to $372 billion (as of the end of November)
  • Industry raised $18.4 billion and completed over 139 partnerships (with "bioworld dollars" in excess of $13.5 billion)
  • The Bush election and the stem cell initiative in California (Prop 71) were both good news for this industry
  • Vioxx, Celebrex (and other COX-2 type inhibitors), Chiron's vaccine problems, and concerns about children's anti-depressants plaguing the FDA will result in for a more challenging 2005 (at least from a regulatory standpoint)
  • More the 20 new biotech products approved in 2004 (and counting) with nearly 80 in late stage development
…and our outlook for 2005 is:
  • A reasonably robust pubic equity IPO market with 40+ IPOs completed in the U.S. and even a larger number internationally
  • An industry raising over $20 billion in the U.S.
  • A year in which biotech stocks will out perform NASDAQ, DJIA and the pharma indices with the biotech industry market cap up over 25%
  • VCs will both raise more money for life science ventures, spend more money, and increase their interest in investing in early stage investments
  • Increased big pharma consolidation, increased biotech to big pharma consolidation, and increased biotech to biotech consolidation
  • An improve partnering environment for biotechs with even larger values attributed to earlier stage compounds (including pre-clinical)
  • A more challenging regulatory environment (post Vioxx, Chiron's vaccine issues, and concern for children's anti-depressants) driving towards increased use of pharmacogenomics and theranostics (diagnostics attached to therapeutics to identify responding patient populations)
  • Increased progress with stem cells both scientifically and economically, with more states joining the California focus on funding stem cell research
  • More pressure from payors (managed care, CMS, various country health ministries) resulting in more product bundling, more personalized medicine, less "blockbusterology" (fewer "one size fits all" drugs)
  • More approval of, and use of generics; the emergence of biopharmaceutical generics
  • Increased effectiveness at both HHS and FDA, with confirmed leadership at both, albeit continuing dialogue about the FDA's role in monitoring drug safety
  • Increased dialogue about both predicative and preventative care, as we move from just treating sickness to treating wellness
  • Increased growth of biotech internationally, especially in the BRIC countries (Brazil, Russia, India, China), Japan, and Scandinavia
  • Bioterrorism spending will increase in the U.S., initially for R&D for new vaccines, diagnostics, and eventually therapeutics

For more detailed information regarding our thoughts about 2005, please call Mandy Jones at (415) 591-5405 to set up an interview with G. Steven Burrill.

For more 2004 background data, visit the Burrill Datacenter at www.burrilldatacenter.com.

In December 2003, G. Steven Burrill provided his outlook for 2004…to see how accurate he was (nearly 100%), see attached Appendix.

About Burrill & Company
Burrill & Company is a life sciences merchant bank, focused exclusively on companies involved in biotechnology, pharmaceuticals, diagnostics, human healthcare and related medical technologies, wellness and Nutraceuticals, agricultural technologies, and industrial biotechnology (biomaterials/bioprocesses).

Venture Capital
The Burrill family of venture capital funds, with over $500 million under management, includes the Burrill Life Sciences Capital Fund, the Burrill Biotechnology Capital Fund, the Burrill Agbio Capital Fund and its successor-the Burrill Agbio Capital Fund II, and the Burrill Nutraceuticals Capital Fund.

Strategic Partnering
Burrill & Company assists life science companies in identifying, negotiating and closing strategic partnerships between large and small companies in providing access to resources, technologies or collaborations essential for executing their business plans.

Burrill & Company also works with major life science companies to spinout internal assets and capitalizes on their value, ranging from the outright sales of products or businesses to creation of new companies to exploit these assets. Burrill uses its extensive network to help companies identify, assess and capture ("spin-in") products and companies strategic to building their businesses. We have completed more than 25 strategic partnerships with a value in excess of $1.5 billion.

Strategic Advisory Services
Burrill & Company works with leaders of life science companies of all sizes (from start-up to big Pharma) on growth strategy with a focus on how strategic transactions and partnerships can enable and accelerate the achievement of corporate objectives. We combine our scientific, business operations, financial and technical skill sets with an objective advisory approach. We then work with our external clients to implement these plans, whether it is to succeed through an M&A/partnering transaction or a financing, divestiture or a restructuring.

Biotech 2004/Burrill Datacenter
Burrill & Company's annual analysis of the "State of the Industry" has been an important part of the biotech industry's view of itself over the last 18 years. Biotech 2004-Life Sciences: Back on Track, is a perspective on where the industry has been and is going and was released Q1 04. In addition, the newly created Burrill Datacenter is an online resource for keeping up-to-date information from the biotech industry at your fingertips, including updated data from Biotech 2004. To order Biotech 2004 or to subscribe to the Burrill Datacenter, visit www.burrilldatacenter.com or call (415) 591-5400.

Appendix
Burrill Outlook on 2004
from the Burrill & Company 12/18/03 press release

Prediction: Biotech will have a big year in 2004 with Medicare resolved in the industry's favor, close to 400 drugs advancing through clinical trials, rekindled investor interest and a sizeable sum of money in the war chest. We believe that the equity markets will be robust during the year and that the industry will raise as much as $20 billion through PIPEs, secondaries, convertibles, IPOs, and venture investment.
Outcome: Nearly $20 billion raised through November 30, Medicare resolved before the 2004 election, hundreds of drugs advanced through clinicals, and biotech had its second biggest financing year ever.
Prediction: Having said that, we're unlikely to see another year on Wall Street where the industry rises as much as 50% again. However, while the gains in 2003 were mostly in the realm of "recovery", we'll see genuine gains in value in 2004 with industry gains in the realm of 25-40%.
Outcome: Industry market cap rose from $344 billion at December 31, 2003 to $373 billion (up 8.4%), versus the DJIA, essentially flat with an increase of only .25% and NASDAQ an increase of 4.67% through November 30, 2004.
Prediction: Even though the IPO market will be choppy in the first half of 2004, we expect to see between 25 and 30 IPOs getting done in 2004. We'll see a discriminatory period commence right after the JP Morgan healthcare conference in January (formerly Hambricht and Quist) where a very large number of companies will be in the markets (perhaps as many as 50 companies trying to get public financings done) …but not all the deals will fly. Early in the year, the supply of deals will likely overwhelm market appetite…and the markets will be very challenging. But as the year progresses, the supply/demand situation will equalize and the markets will improve.
Outcome: 30 IPOs completed year-to-date (through 12/15/04), 9 in the first quarter, 12 in the second quarter, 5 in the third quarter, and 4 in the fourth quarter. Biotech IPOs are up 21% through November 2004.
Prediction: Although in 2003, the lion's share of fundraising come through convertible debt, we'll see a shift away from that financing device in 2004 and see increased interest in secondaries, PIPEs and IPOs. Convertible debt is generally used when the markets are more challenging and investors are more interested in being "paid to wait."
Outcome: Secondaries/IPOs/PIPEs raised $7.03 billion in 2004 versus $7.6 billion in convertible debt (as of early December 2004).
Prediction: We'll continue to see more big pharma consolidation during 2004. In pharma's desperation to find more innovation, we'll also see more partnerships where the values are greater and the terms more favorable to biotech. We'll continue to see deals done at substantial premiums in the marketplace which speaks to the underlying strength of the biotech industry.
Outcome: Big pharma consolidation included…

Sanofi Synthelabo/Aventis     $65.5 billion
Fujisawa/Yamanouchi     $7.6 billion
Mylan/King Pharmaceuticals     $4 billion
Fischer/Apogent     $3.7 billion
Strategic partnerships were favorable to biotech as well…
Biotech Pharma Indication DevelopmentStage Value($M, USD)
Pharmasset Roche HCV Late preclinical $300M
Sucampo Takeda IBS Phase II/III $210M
Human Genome Sciences GSK Diabetes Late preclinical $183M
Nastech Merck Obesity Phase I $210M
Xenon Novartis Obesity Late preclinical $157M
Plexxikon Wyeth Diabetes + Metabolic Disorders Late preclinical $372M
Medarex BMS Metastatic Melanoma Phase III $350M
Prediction: As the larger cap biotech companies compete nose to nose with big pharma, we may have one or two "marquee level" biotech mergers in 2004, similar to that of IDEC/Biogen in 2003.
Outcome: Big biotech M&A included:
UCB/Celltech $2.7 billion
Charles River/Inveresk $1.5 billion
Amgen/Tularik $1.3 billion
QLT/Atrix $750 million
Invitrogen/Bioreliance $500 million
Genzyme/ILEX $330 million
Genzyme/IMPATH $215 million

Prediction: With the resolution of Medicare and some of the associated reimbursement issues behind us, we'll see the focus on Capital Hill shift to other things. Drug reimporation will continue to be a challenging area and Project BioShield has yet to pass muster in the Senate. There's also a full court press in Washington to get the new energy bill passed so that bioenergy research and development will continue to be supported. The biotech industry is also urging congress to restore SBIR eligibility for venture backed biotech companies.
Outcome: Drug importation/re-importation continues to dominate the healthcare dialogue: Project BioShield was passed with $6 billion in funding.
Prediction: We can expect to see numerous important product approvals in 2004 as the FDA finishes streamlining the review process and continues to approve drugs early on signs of efficacy. Lining up on the runway are Genentech's cancer drug Avastin, ImClone's Erbitux, Genta's Genasense and CV Therapeutic's Ranexa, among others.
Outcome: Selected major approvals in 2004 included:
Company Drug
Amgen Kepivance
Amgen Sensipar
Biogen-IDEC Tysabri
Celltech Codeprex
Chirhoclin Human Secretin
Connetics Evoclin
Duramed Enjuvia
Eyetech Macugen
Genentech Avastin
Gilead Truvada
ImClone Erbitux
Indevus Sanctura
Organon Follistim
OSI Tarceva
Palatin NeutroSpec
Pharmion Vidaza
Salix Xifaxan
Santarus Zegerid
Sepracor Lunesta
Serono Gonal F
Serono Luveris
Shire Fosrenol
Skye Pharma Depodur


However, Genta's Genasense failed in late stage trials, as did Corgentech's Edifoligide and Isis Pharma's Alicaforse.
Prediction: Although we may yet hear a lot about healthcare and healthcare reform with the new Medicare and prescription drug legislation in place, the talk will be about productive ways to get the job done, rather than just the political rhetoric required to get the bill passed.
Outcome: Mark McClellan took over CMS, after a brief stint as Head of the FDA, and the realities of CMS (Medicare) as the largest buyer of drugs and biologics became a reality.
Prediction: In the diagnostics sector where there are now well over a thousand genetic tests available, we'll see more of a linkage between the Dx and the Rx side of the equation. Indeed, in 2004, we can expect to see more interest in pharmacogenomics and theranostics driven by the science. Regulators and payors who have a strong interest in trying to screen out adverse reactions and non-responding patients will continue to embrace molecular diagnostics with gusto.
Outcome: FDA Draft Guidance on Pharmacogenomics was issued in 2004. Increasingly Dx/Rx combinations/patient stratification was necessary for regulatory approval (e.g. Iressa-AstraZeneca, OncoType-Genomic Health, Cell Track-Immunicon and DiaDexus/GSK-Lp-PLA2.
Prediction: The nutraceuticals industry will continue to do well, although it's unlikely that we'll see as spectacular a year as 2003 on Wall Street. Nonetheless, we're seeing more and more companies obtaining better clinical data and better correlation between diet and disease. The nutraceuticals side of biotech will swiftly matriculate into a stronger player in the overall healthcare scene in 2004, one with credentials and good science backing it.
Outcome: The nutraceuticals sector continued to gain prominence in 2004-with the Burrill Nutraceuticals Index up nearly 10% in 2004 (as of November 30, 2004).
Prediction: With some progress made in the EU GMO front and with Brazil embracing GM soybean seeds at last, agbio will do better in 2004. Still, there are some difficult times ahead as the industry contends with the last of the GM hold outs. Output traits, rather than input traits will be emphasized and people seem more willing to accept and pay where they perceive a benefit.
Outcome: The Burrill Agbio Index was up nearly 24% YTD 2004, with considerable progress made during 2004 on the science and regulatory front. GM crops are new being planted worldwide.
Prediction: As for biopharming, we see a move towards using non-food crops to get around some of the perceived problems with containment and migration. While biopharming is clearly a longer term play, the economics are often so compelling that we see this as an important component of the manufacturing armamentarium of providing certain lower cost antibodies and proteins.
Outcome: The tobacco plant may become the chosen factory for much of biopharma (antibodies and proteins). Other non-food crop technologies are currently under development which may also become dominant.
Prediction: We will continue to develop new tools and technologies to support genomics, proteomics and systems biology. As we move from the Genes 'R Us and SNPs 'R Us models, into a better understanding of proteomics and how our biological systems really work, we will bring protein medicine further, faster and hopefully cheaper.
Outcome: Great strides in 2004 with our understanding of "systems biology", lead by advances in sequencing of a multitude of other less well-known "model" organisms (chicken, feline, dog, fly, sea urchin)-unlocking the mysteries of disease progression and ultimately helping to predict and prevent such processes. Already, more than 15 companies and several institutions are leading the charge.
Prediction: Although biogenerics are inevitable, we believe there is still reasonable protection for biotech drugs because of the manufacturing issues. Still, it would be naïve to assume that we won't have biogenerics selectively competing with biopharmaceuticals on the world stage in the not too distant future.
Outcome: Patent battles between Amgen and TKT raged during 2004 regarding claims to production of erythropoietin, finally settled in favor of Amgen. Challenges to Monsanto's technology for inserting gene traits into cotton and other dicot plants by Max Plant Institute were also resolved. Monsanto emerged as the victor.
Prediction: Biodefense will continue to be a focus in 2004. Although the primary markets for countermeasures will be military, research will discover more understanding about the immune system, and the way pathogens work, or how to detect miniscule amounts of dangerous materials in the air and water. This biodefense "moonshot" for the biotech industry will begin to bear fruit in 2004.
Outcome: With the passage of Project BioShield, a $6 billion spend for biodefense, work by the biotech industry seriously began in 2004.

Project BioShield:
  • Authorizes $5.6 billion over 10 years for the government to purchase and stockpile vaccines and drugs to fight anthrax, smallpox, and other potential agents of bioterror.
  • Gives the government new authority to expedite research and development on the most promising and time-sensitive medicines to defend against bioterror.
  • Will change the way the government authorizes and deploys medical defense in a crisis. The Food and Drug Administration will be able to permit rapid distribution of promising new drugs and antidotes in the most urgent circumstances.

Prediction: Outside the US-Europe, China, India, Eastern Asia and Australia-the biotech industry will be more robust. These countries will continue to contribute new technology, increasingly become markets for biotech products and sources of capital, as biotech becomes an increasingly global industry.
Outcome: Biotech in all the above mentioned areas made great progress in 2004, and worldwide, we saw 38 IPOs for biotech companies in 2004, and substantial industry growth. Nearly 20,000 people from all part of the world convened in San Francisco, in June, for BIO's annual meeting, bringing together the world's largest contingent of "bio-technologists".

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