Biotech is up Nearly 2% in February

While it braces for potential new FDA leadership

San Francisco, CA - March 01, 2004

Despite product approvals, successful IPOs and clinical success, biotech stocks for the month of February responded negatively to the potential move of Dr. Mark McClellan from Commissioner of the FDA to the head of the Centers for Medicare & Medicaid Services (CMS) . . . a process which will take Congressional confirmation. “Investors feared that without Mark McClellan, the FDA would move more slowly in approving of new drugs and biologics,” said G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. Reflecting strong industry support for McClellan’s inspired leadership at the FDA, the Burrill Biotech Select Index slipped most of the month, rallying on the last day to post growth of 1.7% in February. The biotech index again outperformed both the DJIA (up 1%) and the NASDAQ (down nearly 2%). “McClellan, however, has already laid the foundation for an FDA based on swift approvals, economic efficiency and consumer benefit. He created a culture that understands how barriers, excessive cost and time added to the approval process can ultimately impede new medicines from reaching patients.”

McClellan, however, may yet prove to be an equally valuable ally in his new position at CMS. “He will now take on the issue of reimbursement–an issue of paramount importance to biotech,” said Burrill. McClellan will continue the efforts he began at the FDA while at CMS, including encouraging generics, removing barriers and price restrictions on new medications and addressing the growing problems of drug re-importation. Potentially taking over for McClellan, at the FDA is Lester Crawford, a veterinarian and pharmacist that served as acting commissioner before McClellan’s appointment and subsequent confirmation. Joining Crawford as deputy commissioner would be FDA veteran Janet Woodcock. “Biotech will not miss a beat,” said Burrill. “Structurally, all of the pieces are falling into place to make 2004 an excellent year.”

The month may well be remembered for the approval of two key cancer therapeutics. The long-awaited approval of ImClone’s Erbitux for advanced colorectal cancer on February 12 brings to a welcome close an ugly chapter in biotech’s history. Erbitux, a chimerized antibody targets the Epidermal Growth Factor and its receptor.

Genentech’s Avastin was also approved by the FDA for the treatment of metastatic colon cancer on February 27. Avastin inhibits angiogenesis, the means by which cancer cells secure more blood flow to tumors, by targeting the Vascular Endothelial Growth Factor (VEGF), a protein believed to stimulate blood vessel growth. Avastin improved survival in trials by itself and with other chemotherapy agents. The two antibody therapies embody biotechnology’s promise for fighting disease.

The IPO market continued to show good appetite for new biotech companies. Four IPOs GTx (GTXI), Renovis (RNVS), Corgentech (CGTK) and DynaVax Technologies (DVAX) hit Wall Street in February, netting $78 million, $66 million, $96 million and $45 million respectively. Three of the four, Corgentech, Renovis, and DynaVax were all up by twenty or more percent in their first trading day, and each retained their swell several weeks later. GTx, bolstered by the robust January EyeTech offering, priced at the high end of the range, but did not provide the same pop for investors. The DynaVax IPO is a story of perseverance by both the company and Bear Sterns. DynaVax had filed for an IPO in December, 2000 but withdrew that deal the following April. This time around, DynaVax priced itself in October in the range of $12-14, but ultimately dropped to $7.50. DVAX closed its first day up, at $9.40 per share, up 25%. GTx, the only one of the four to drop in price was brought out at the high end of estimate, and was, perhaps, too optimistic. Nonetheless, the success of these IPOs bodes well for those waiting to come out to market. “We are seeing companies in the IPO market with high quality product stories,” said Burrill. And investors continue to show an appetite. Three more companies filed for IPOs in February, Metabasis Pharma, Barrier Therapeutics and Corcept Therapeutics. Tercica re-filed for its IPO, an offering which was cancelled in November.

February was a month with light US deal activity, but one large international deal. Nanogen (NGEN) acquired Canadian SYN X Pharma for $12.3 million, to extend its reach into diagnostics. On February 23, Merck announced its acquisition of privately-held Aton Pharma. The deal, whose terms were not disclosed, gives Merck new drug candidates and extends the company’s commitment to build its cancer portfolio. Aton’s lead compound, SAHA, has an orphan drug designation to treat multiple myeloma from the FDA. Then, on February 25, Japanese drug maker Yamanouchi Pharmaceutical Co. announced that it would purchase Fujisawa Pharmaceuticals for $7.8 billion US. The deal would be the first Japanese pharmaceutical merger, and creates the second-largest pharmaceutical company in Japan. Also during the month, lots of dialogue about the Aventis/Sanofi-Synthelabo deal occurred, with Novartis emerging as a potential “white knight” for Aventis. Closing out the month was another oncology-driven deal, Genzyme’s $1 billion acquisition of ILEX Oncology Inc. ILEX, maker of Campath for leukemia, fills Genzyme’s oncology sales and its development pipeline with promising drug candidates.

The Burrill Biotech Select Index closed the month up 1.8%, and was up 8.2% for the year-to-date. Raising the index was Vertex Pharmaceuticals (VRTX), which gained 14% as the company reported cancer tumor stoppage in animal testing by successfully targeting Aurora kinase enzymes with VX-680. The small molecule drug, VX-680, will move into human clinical trials before the end of 2004. The drug posted robust results, averaging 56% colon cancer tumor shrinkage in ten days of treatment in animals. Shares of Genentech (DNA) also posted a strong finish for the month up 13%, bolstered by the FDA approval of Avastin for metastatic colon cancer. Protein Design Labs (PDLI) continued to post gains in February. Protein Design Labs settled its patent disputes with Genentech over antibodies related to three key drugs – Xolair, Raptiva and Avastin on December 22, Since December, Protein Design Labs shares have jumped, appreciating 27% in December, 9.4% in January and another 19% in February.

The Burrill Large-Cap Index closed the month up 1.6% and was up 5% for the year-to-date. Driving growth in the large-caps was Biogen IDEC (BIIB). The company’s stock surged 20% immediately after the release of news that Elan (ELN), its partner for the multiple sclerosis drug, Antegren, will file for approval this year, one year earlier than expected. Biogen IDEC already sells a leading MS drug, Avonex. Shares of ICOS (ICOS) dropped 13% in the month on news that the costs of marketing Cialis would grow, and only then would sales growth for the drug follow. Human Genome Sciences Inc. (HGSI) saw its shares jump and fall wildly, rising 7% on news of narrowing losses and growing revenue, then falling during and after Chairman and CEO William Haseltine’s sale and transfer of 772,000 shares of company stock. Affymetrix ended the month up 9%, guided by strong 4Q news that net income had increased five-fold, and product sales would grow between 18-20%. Affymetrix added array deals with the Center for Disease Control for smallpox and with Translational Genomics Research Institute.

The Burrill Mid-Cap Index fell 2.5% in February, but closed up 2.8% for the year-to-date. Pushing the index downward were shares of KOS Pharmaceuticals (KOSP). KOS slumped 10% on 4Q despite posting strong earnings. The company’s fourth quarter profit more than tripled on sales strength of cholesterol drugs Niaspan and Advicor. The drop marked the first in nearly a year of impressive run, rising from $15.51 one year ago to close in February at $44.01. Digene (DIGE) filed a shelf registration to sell $90 million in common and restricted stock, and ended the month down 9% to $38. The FDA granted Adolor (ADLR) Entereg Fast-Track status for the drug, the first to treat post-operative ileus, and shares of the stock responded in February with a 15% return. The drug’s Fast-Track status is a bit of a surprise, as Adolor announced in January Entereg’s failure to statistically prove treatment post-operative ileus. ADLR promptly lost 30% in one day on the news. Exelixis (EXEL) was up 16% for the month of February after filing an IND for its anti-cancer compound XL647, which targets multiple receptor tyrosine kinases implicated in tumor proliferation.

The Burrill Small-Cap Index closed February down 4.4%, but was up 11.9% year-to-date. Losers outnumbered price gainers by 2 to 1. Holding up the index were shares of Vivius (VVUS). Vivius had a banner month, up 43% to $6.43. The company gained exclusive rights to license drug delivery via spray for its Testosterone and Estraidol MDTS for women. Vivius’ Alista was mentioned in a news program “20/20,” bringing significant visibility to the company. Genome Therapeutics (GENE) received Fast-Track designation for its Phase II drug Ramoplanin, and finished the month up 19% to $6.49. Northfield Laboratories’ shares rose 64% for the month, due in part to a successful direct offering of stock and subsequent over-allotment purchase of 237,000 by investors. The SG Cowen Securities offering netted Northfield $16.4 million total. Among those weighing down the index was Rigel Pharmaceuticals (RIGL). Losing 20% for the month, Rigel finished a secondary stock offering of 3.2 million shares, which diluted the price of existing shares.

The Burrill Agbio Index rose 2.5% in February, and has climbed 6.7% so far in 2004. Archer Daniels Midland’s (ADM) swelling value grew 10% to $17.20 as soybean futures hit a 15-year high and it cited strong and growing demand for soy and soy products.

The Burrill Genomics Index, up sharply in January, dipped 4.9% in February, but remains up 9.4% for 2004. Weighing down the index was Curagen (CRGN), which dropped 27% on news that the company issued $100 million in convertible debt. Curagen rebounded slightly as its oral mucositis drug was given an orphan drug designation by the FDA. Nanogen (NGEN) also dropped 34% when the company announced that it would acquire cardiac diagnostic test maker SYN X for $12.3 million.

The Burrill Biomaterials/Bioprocess Index was up slightly for the month 0.3%, and closed up 3.1% for the first two months of 2004. Among the factors weighing the Index down were Synthetech’s (NZYM) problems with one of its major customers and shares of Synthetech dropped 21% for the month, ending at $1.97. Synthetech announced early in February that a prime customer had reduced aggregate orders, and pushed back delivery dates for $2.2 million in remaining orders to the second half of 2005.

The Burrill Diagnostic Index was down in February 1.8%, but closed up 2.3% year-to-date. Driving the Index down was Sequenom (SQNM), whose stock dropped 19% on news of a $50 million stock shelf offering. Orchid Biosciences shares ended the month up 17%, buoyed by expectations of a 20% jump in annual revenue.

The Burrill Nutraceuticals Index was essentially flat for the month, off .9%, but closed up 7.6% for the first two months of 2004. Holding up the Index was Nature’s Sunshine Products, Inc. (NATR), which ended the month of February up 51% on tremendous growth in sales in Europe. Nature’s Sunshine doubled its net income in 4Q 2003, primarily on the strength of sales in Japan, Thailand and Taiwan, where the company has tripled its sales from $1.6 million in FY2002 to $7.9 million.

A review of the Burrill Life Sciences Indices for February 2004 follows:

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 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 capitalize on their value, ranging from the outright sale 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.

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. 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 Burrill & Company’s website at www.burrillandco.com or call (415) 591-5400.