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Biotech Endures Looking Back at 2002 and Ahead to 2003…

December 12, 2002

After a year of revaluation and restructurings, the biotech industry is more focused, more integrated, and more prepared for tomorrow's challenges

San Francisco, CA - December 12, 2002

Having been in Wall Street's penalty box for the entire year, the publicly traded biotech sector has finally bottomed, reversing its downward trend. Market capitalization for the biotech industry rose from $219 billion at the end of October to $225 billion as of December 9, 2002-an increase of 3% for the month and a half. Yet biotech's down dramatically from its February 2000 high of $490 billion (down 54%), also down by 47% from its 2000 year-end market cap of $422 billion and its 2001 year-end market cap of $382 billion (down 41% year to date). "Despite significant revaluation and massive restructuring, biotech is in better shape than many expected…even prospering, contrary to public perception," remarked G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank.

"The year began with ImClone's high profile clinical failure and ensuing corporate scandal-an event that undermined the industry's perceived value on the Street all year-and valuations finally hit bottom at summer's end. Investors are now taking another look at biotech," he said. "As we consider the year in review, it's clear to see that biotech has gotten leaner and meaner. Companies have streamlined operations, letting go of non mission critical projects and staff. Financial deals have gotten done, perhaps on less than optimal terms, and biotech has managed to raise nearly $10 billion year to date…not a bad track record in a tough bear market," noted Burrill. "The year ahead looks promising as well," said Burrill. "We now have more biotech drugs than ever lining up on the FDA's runway (more than 370 biotech medicines are in the clinic or awaiting FDA approval), billions in new funding for biotech coming out of our biodefense/bioterrorism concerns, and a renewed faith in science and technology, kindled by numerous breakthroughs in our understanding of the molecular basis of life…improving our ability to diagnose and treat disease."

  • Beleaguered by global economic insecurity, the continuing threat of terrorism, and saber rattling over Iraq, not to mention the most devastating corporate accounting scandal in US history (Enron), the capital markets were tough all year with investor enthusiasm for biotech only beginning to return in the 4th quarter.

    The industry's market cap, $225 billion on December 9, 2002, is off 41% from what it was at the start of the year ($382 billion). Still, the biotech industry has been able to raise nearly $10 billion year to date, led by the $2.5 billion convertible debt offering by Amgen (AMGN) in Q1 02. It's interesting to note that, despite the tight market conditions, more VC money flowed into biotech in 2002 than in 2001 ($2.6 billion year to date vs. $2.4 billion in 2001) and on the way to making this the record year for VC investment!

  • "Wall Street was rocked first by Enron, then WorldCom, Tyco and others…and our industry wasn't left out of the party," commented Burrill. The Bristol-Myers Squibb/ImClone/Erbitux debacle saw ImClone's stock drop 75% and pulled the industry down 15% from Christmas 2001 to the end of January 2002. ImClone challenged the very surrogates for value that Wall Street has treasured since the industry's inception-big market area (cancer), late stage compound (Phase III), good partner (Bristol-Myers), long term stable management, an all-star board of directors, lots of cash, and excellent economics in the Bristol-Myers (BMY) deal for ImClone's (IMCL) Erbitux. Wall Street loved the ImClone story at Christmas '01, but six weeks later, investors had lost 75% of the value of their shares. Then, on the heels of ImClone, Elan's accounting practices came under scrutiny and public market investors have maintained a wary stance on biotech ever since.

  • IPOs were scarce in 2002 with only three companies squeezing through the barely opened financing window. In February, ZymoGenetics (ZGEN) raised $120 million and in April, Ribapharm (RNA) and Dov Pharmaceutical (DOVP) raised $260 million and $65 million, respectively. There were, however, two major spin-offs in 2002. Pro-Skelia, a private company, was spun out of Aventis (AVE) in July and the new company raised $58 million in start-up funds. Gen Probe (GPRO) spun off from Chugai Pharmaceutical (CHGCF.PK) in September and initiated trading on the NASDAQ under the symbol, GPRO. So, we gained five public companies in 2002.

  • Biotech companies merged to fill product pipelines in 2002. Amgen (AMGN) added Enbrel through its acquisition of Immunex. MedImmune (MEDI) got the potential blockbuster, FluMist by acquiring Aviron. Millennium (MLNM) acquired products and expertise from COR, Chiron (CHIR) expanded it oncology portfolio through its purchase of Matrix Pharma. Bayer AG (BAY) also acquired Visible Genetics to enhance capabilities in its HIV viral load testing portfolio. And, by the end of Q3 02, one big pharma "marquee" M&A transaction had taken place: Pfizer's (PFE) bid to purchase Pharmacia (PHA) for $60 billion-a move that adds 12 products with annual revenue over $1 billion to Pfizer. Still subject to approval by U.S. and European regulators, the merger is expected to create a combined company with an estimated $48 billion in revenue.

  • Although partnering activity got off to a slow start, it picked up momentum as the year progressed with Aventis paying $480 million for the right to jointly develop Genta's Genasense antisense agent to induce apoptosis in Q3 02 and GlaxoSmithKline's (GSK) offer to pay nearly double Exelixis (EXEL) current stock price to acquire about a 3% stake in the company in October…and provide over $200 million in partnering support. To date, more than $5.5 billion has been generated for biotech through deal making in 2002.

  • Hemorrhaging value during the first three quarters-as of October, more than 90% of the biotechnology companies were down for the year and nearly 40% were trading at $2 or less-the biotech industry went into survival mode. Amid delisting notices, takeovers, and a handful of bankruptcies, the industry retrenched, restructured, reorganized, and refinanced, albeit on less than favorable terms. Scores and scores of biotech companies announced plans to cut research projects and staff during the second half of the year and many firms made changes at the top.

  • Aside from the Pfizer-Pharmacia merger, which has largely been viewed as positive, pharma also had a rough ride in 2002. Shares in large pharmaceutical companies have declined an average of 13 percent this year. On top of its tribulations with ImClone and Erbitux, Bristol-Myers continued to be under pressure with Glucophase, Taxol, and Buspar threatened by generic competition…and their stock is off 51% year to date. Merck had to hold off on its public offering of Medco due to market conditions, Schering-Plough (SGP) was beset with manufacturing problems and expiring patent protection on its major franchise, Claritin, saw its price decline by as much as 76% per pill. Meanwhile, Bayer spent the year in search of a buyer for part of its pharmaceutical operations. Challenged by an innovation deficit, decreased patent protection, increased generic competition, manufacturing and regulatory problems, and marketplace challenges on access and pricing, big pharma had a tough year too…

  • While there have been some major clinical disappointments (30 biotech drugs missed primary endpoints in Phase II or Phase III clinical trials) including ImClone's (IMCL) cancer treatment, Erbitux, Transkaryotic Therapies' (TKTX) Replagal drug for Fabry disease, Corixa's (CRXA) cancer drug Bexxar, Abgenix' (ABGX) ABX-IL8 for psoriasis, and Protein Design's (PDLI) Zamyl for acute myelogenous leukemia, there also have been significant successes. The FDA this year approved Amgen's (AMGN) Neulasta for decreasing infection from febrile neutropenia; IDEC Pharmaceutical's (IDPH) Zevalin for the treatment of B-cell non-Hodgkin's lymphoma; Elan's (ELN) Avinza for the relief of pain, Centocor's Remicade for the treatment of rheumatoid arthritis, Serono's (SRA) Rebif for multiple sclerosis; Sanofi-Synthelabo's (SNY) Eloxatin for colon cancer, Gilead Sciences' (GILD) Hepsera for chronic hepatitis B and Hoffman-La Roche's PEGASYS for treatment of adults with chronic hepatitis C, among others. Indeed, the FDA has taken more positive actions than negative ones on biotech drugs in 2002, but the failures have underscored the high risks associated with therapeutic development and approval, reminding investors that drug development is a risky business. As of late November 2002, only 13 biotech drugs had received FDA approval this year.

  • 2002 was a year of consolidation for the diagnostics sector with Bayer acquiring Visible Genetics and LabCorp acquiring DynaCare. Quest (DGX) acquired American Medical Laboratories and Clinical Diagnostic Services, and is in the process of acquiring Unilab Corporation. The molecular diagnostics market is expected to grow to $4.2 billion by 2006 with nucleic acid testing expected to be the highest growth segment predicted to continue growth at a rate of 25-35%. The growing popularity of Herceptin (with consistent quarter-over-quarter sales growth in the U.S. since it's introduction) and Gleevec (with total prescriptions in the US up 40% this year) is due in great measure to the ability to identify the best responders for the disease using molecular diagnostics. In 2002, high throughput proteomic profiling emerged as a potential breakthrough in early detection and therapy monitoring using a mass spec technique to detect early stage ovarian cancer. Researchers also made headway on a DNA assay that could be used as a first-line test for diagnosing colorectal cancer. The diagnostics sector is on a roll…

  • Change has been the name of the game at the Food and Drug Administration (FDA) during 2002. In June, President George Bush signed into law the five-year renewal of the Prescription Drug User Fee Act (PDUFA) III. The new act gives the agency more funding for reviewing drug candidates in a more consistent and timely fashion. In addition, the FDA announced a major reorganization calling for the shifting of major parts from CBER to CDER. The change, though perceived as positive in the long run, is expected to cause some amount of short-term dislocation as the two branches of the agency put their plan into action. Another boon for the FDA in 2002 was the Senate's speedy approval of Dr. Mark McClellan as the new FDA commissioner-a choice that has been widely praised.

  • Mid-term elections in the US provided the Republicans with dominancy over both houses of congress and reduced concerns held by big pharma. While the new regime is expected to move forward on an industry-friendly version of the Medicare prescription drug benefit, the more conservative congress will continue to view issues like therapeutic cloning and stem cell technology with a jaundiced eye.

  • Although legislation to create a Department of Homeland Security received final passage by the U.S. Senate in November, it is still unclear how much of the $40 billion in funding associated with the bill will find its way into the pockets of the biotech industry. Senator Joseph Lieberman (D. Conn) and Senator Orrin Hatch (R. Utah) introduced a bill in October that carried incentives for biopharmaceutical companies to pursue an anti-bioterrorism agenda. Included in the bill were calls for fast-track FDA approvals and tax breaks. To date, the NIH has earmarked $1.7 billion and the Department of Defense has committed $1 billion to biodefense R&D.

  • The publicly traded platform technology companies practically melted away in 2002, nonetheless, technological breakthroughs abounded. Numerous fields advanced, most notably proteomics and systems biology. Giants in information technology, such as IBM, Sun, HP, and others have taken a huge interest in the life sciences marketplace. Personalized medicine, the link between diagnostics and therapeutics and the use of biomarkers all gained traction in 2002. Nanotechnology and its use in medicine has also garnered attention. One company, Nanosphere, introduced a nanoparticle-based detection device for research laboratories that is 100 times more selective and up to 10,000 times more sensitive than a standard PCR device. The confluence of biotech/nanotech/informatics (even wireless technology) is upon us.

  • The proportion of US crops planted with genetically modified varieties set a new record in 2002 while consumer support for genetically modified food was generally more positive-at least in the US. A 2002 survey by the International Food Information Council found that 71% of U.S. consumers said that they would be likely to buy produce that had been enhanced through biotechnology to be protected from insect damage. Still, agbio suffered in 2002 due in great measure to the global drought, Europe's continued reluctance to embrace GMO crops, failure to get Brazil to embrace GM seeds, and continued industry consolidation. In addition, consumer and environmental groups in 2002 called for a ban on using food crops for the production of therapeutic proteins and industrial enzymes. An incident involving the discovery of renegade GM corn encoding a gene for a therapeutic protein in a field of soybeans destined for human consumption exacerbated the debate in November. On a less controversial note, two different research groups, one in China and the other at Syngenta published papers on the draft sequences on the indica and japonica subspecies of rice…critical to biotech's progress in enhancing the input and output traits in rice, which makes up 80% of the diet for half the world's population.

  • The Nutraceuticals industry faired comparatively well in 2002. The Burrill Nutraceuticals Index was the only biotech-related index to have gained ground for the year (up just over 1% by the end of November). One of the drivers for the segment's relative success is an increasing body of clinical evidence that certain nutrients benefit health. For example, an American Heart Association report released in November concluded that healthy people should eat omega-3 fatty acids to protect their heart. Another study that appeared in the Journal of the National Cancer Institute reported that men who eat onions and garlic had a 50% lower risk of having prostate cancer than those who didn't eat them. One nutraceuticals start-up, CreAgri, discovered a way to extract one of the strongest natural antioxidants from the pulp of depitted organic olives by recovering the water by-product during the olive oil extraction. The resultant product, a dietary supplement called Olivenol™ delivers benefits that are backed by scientific proof. Increasing spending on "wellness" is fueling the nutraceuticals segment…we're not just treating sickness anymore.

  • Concerns over energy security-underscored by the current unrest in the Middle East-as well as worries over global warming and the depletion of oil reserves stimulated continuing interest in the development of sustainable sources for fuel. In 2002, there was a great deal of interest surrounding the use of hydrogen-powered fuel cells and scientists focused on ways to turn biological and industrial waste into hydrogen. One researcher in the UK created a simplified microbial fuel cell that runs only on sugar cubes. Biomaterials for tissue and bone repair made headway in 2002 as well. Orthovita, for example, recently received FDA approval for conducting human clinical trials for Cortoss, its synthetic cortical bone void filler, which has been marketed in Europe since January.

  • Biotech's popularity grew around the globe in 2002 with dramatically increased interest coming out of Asia and momentum gathering in places like Israel, Eastern Europe and Scandinavia. Attendance at the Biotech Industry Organization's annual conference in mid-June broke all industry records with representatives from 28 nations. Nearly every state in the US and every country in Europe views biotechnology as a vehicle for economic development and countries like China, Turkey, Estonia, and Cuba are important new players.

  • Notwithstanding a relatively strong fourth quarter of 2002, the capital markets are going to remain volatile for the next 12 months and we will see continued restructuring and a few more delistings, particularly in the first half of 2003. Some struggling companies will go under, although a number of companies will opt for a distressed merger or expensive financing over outright bankruptcy. There will still be disappointments-earnings not met, clinical approvals not received-but we are unlikely to see another situation like the ImClone debacle which profoundly affected investor trust. Notwithstanding a tough first quarter in 2003 (based on the uncertainty with Iraq), the biotech industry is likely to raise between $12 and $15 billion in 2003 with the second half of the year seeing a reopening of the public equity markets. We'll see more than a dozen IPOs take place in 2003, but the timing for the return of a more positive investment environment will be deeply affected by US activities in Iraq. Until that wild card plays out, the investment community is likely to proceed with caution.

  • Industry consolidation will continue both on the biotech and the pharma side as companies seek to achieve dominance and jockey for power. At the same time, the US will continue to move towards a paradigm where players in the healthcare system have more buying power than ever before. As a result, we'll see more big economic transactions where bundling and incentives are used to get the best bang for the buck.

  • After two years of downward revaluation, the surviving technology platform companies are on the path to building growing, sustainable businesses. These companies will gain value in the year ahead based on positive revenue trends and projected earnings. As investors begin to grasp that not only products but also the tools used to discover and develop them are valid business models, we'll see investor interest in these technology companies return (by mid-year) as companies succeed in integrating along the drug discovery value chain.

  • There will be continued interest in the intersection of biotechnology, information technology, and nanotechnology-all-important components to understanding biology on a systems level. We will see more intra-industry integration as companies link disparate technologies and different pieces into a grander whole. In addition, we'll see the an increased use of toxicogenomics to rout out the losing compounds far earlier in the discovery process-an event that is likely to save drug companies considerable time and money.

  • We also will see increased investment in biotech outside the pure healthcare side where biotech will be used to improve our food system, our energy resources, and our environment.

  • Stem cells and therapeutic cloning will continue to be scrutinized by the now right-wing dominated government. While the scientific community has succeeded in stalling an outright ban by emphasizing that new medical treatments and solutions for devastating illnesses are emerging from this research, the fear is that the religious right may win out over the pragmatic center on this emotionally charged issue.

  • The link between diagnostics and medical treatment will increase as the Mayo Clinic and other major clinics pursue a more personalized, information-based approach to treating patient populations. Pharmacogenomics will continue to gain ground as a valuable tool first for determining the best patient outcomes in clinical trials and ultimately for building more tailored therapeutics.

  • We will also see diagnostics become less hospital-centric and more patient-centric in their product development. We'll see increased interest in the use of patient specific diagnostics and we'll see a rise in the number of individuals who will be willing to pay for those tests out of their own pocket.

  • On the agbio side, GM acreage will grow and we are likely to see more penetration of GM crops in South America and in Europe as consumers and decision makers are educated about the economic and health benefits associated with biotech products. We are still not out of the woods with the "plants as factories" debate in the US and other locations where concerns about cross-pollination and the co-mingling of crops has folks worried about inadvertently eating industrial enzymes or therapeutic proteins in their corn flakes.

  • The nutraceuticals segment will continue to gain ground in 2003 as we discover more correlative evidence that regimens involving herbs, supplements, and specific foods are very adjunctive to regaining and maintaining health. As we understand more about how various active ingredients contained in plants and herbs affect human health, we'll see more people embracing nutrition as part of their overall health program. Wellness is an industry with lots of new players participating.

  • The international markets, which typically lag behind the US, will go through serious revaluation and restructurings in 2003. While the US paid a heavy price in 2002, that pain has yet to be shared abroad where many of the companies are still living on their earlier financings. As they go for their next round of funding, many of the European biotech firms will find that both the private and public markets in Europe will be slower to return to value than the US.

  • We will see increased investment in Asia, Scandinavia, and parts of Eastern Europe where acceptance and interest in biotech is strong and there is a powerful belief that biotech can solve huge problems affecting human health and welfare.

  • Once the politics are over, we can expect to see a considerable sum of money pour into anti-bioterrorism efforts ranging from the discovery of new vaccines and therapeutics to the development of powerful portable biosensors capable of detecting minute levels of toxins. The bioterrorism/biodefense spend will be "moon shot" for the biotech industry and most of the R&D will be applicable beyond immediate homeland security needs. Both R&D funding and new markets will spur this biodefense segment.

"As we enter into 2003, it's important to remember that biotech is the one industry that's poised to grapple with every major human and environmental challenge from global hunger to global warming," Burrill noted. "We have moved a long way from the initial mapping of the human genome just two years ago. The industry not only survived the economic challenges of 2002, it moved forward dramatically breaking new scientific ground in human healthcare, diagnostics, agriculture, nutrition, energy, industrial processes and materials, as well as the environment," he added. "This is an extraordinary industry which is characterized by long timetables and high financial risk. But investment in biotech is not just about money, it's about humanity, health, and the preservation of the planet."

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, agricultural technologies, nutraceuticals, and biomaterials/bioprocesses.

Venture Capital
The Burrill family of venture capital funds, with over $400 million under management, includes the Burrill Biotechnology Capital Fund and its successor- the Burrill Biotechnology Capital Fund II (under development), the Burrill Diagnostics Fund, the Burrill Agbio Capital Fund and its successor-the Burrill Agbio Capital Fund II, the Burrill Nutraceuticals Capital Fund, the Burrill Biomaterials/Bioprocess Capital Fund and the Burrill Life Sciences Capital Fund.

Strategic Partnering
Burrill & Company assists life science companies to identify, negotiate and close strategic partnerships providing access to resources, technologies or collaborations essential for executing their business plans.

Spin-outs/Spin-ins - Burrill & Company works with major life science companies to spin-out internal assets and capitalize on their value, ranging from the outright sale of products or businesses to creation of new companies to exploit these assets. We also use our extensive network to help companies identify, assess and capture ("spin-in") products and companies strategic to building their businesses.
BioStreet™ - Burrill & Company's BioStreet™ is an internet-based life sciences transaction service which enhances dealmaking capabilities by offering a broad range of services designed to streamline and facilitate deals. BioStreet combines the efficient distribution power of the worldwide web with the scientific skills and strategic relationships necessary for concluding successful transactions.

We have completed more than 25 strategic partnerships with a value in excess of $1.5 billion.

For more information, please visit Burrill & Company's website at www.burrillandco.com

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