Biotech Treads Water in September

Small cap companies saw big gains while large cap companies hit the ceiling

San Francisco, CA - October 01, 2003

Although the news within the biotech sector was largely positive in September, the Burrill Biotech Select Index slipped a fraction of a percent during the month, slightly outperforming both the DJIA and the NASDAQ each down a shade over 1%. “Investors were cautious in September with the more tentative general market trends setting the tone,” noted G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. “What’s more, Genentech’s (DNA) meteoric rise to nearly $88 per share on September 19 up 165% year-to-date, prompted some analysts to believe that the big biotech’s stocks had reached a peak. As a consequence, shares of Genentech dropped 10% by the end the month to $80 per share and many of the other large cap companies saw share values level off and even slip during the later part of September,” added Burrill.

“Yet the IPOs are continuing to line up with two more filed in September, bringing the total number of companies expecting to complete their IPOs before year end to 12,” said Burrill. “The fourth quarter of ‘03 will clearly be the determinant of whether biotech’s IPO window is going to open or not. We’re sticking with our prediction (made over a year ago) that more than a dozen IPOs will be completed before the year ends. The table is set. This industry’s fundamentals have never been stronger. Our FDA commissioner is determined to speed drug and device approvals. There is plenty of investment money on the sidelines and the companies that are lining up have good product stories to tell. Still, we’ve had no IPOs for five consecutive quarters and everyone is reluctant to be the first out of the chute…and, not withstanding all the company and banker expectations, we have no evidence the buyside is really this enthusiastic,” he concluded.

“Nonetheless, it’s important to note that the industry managed to raise a total of $8 billion in Q3 03, including nearly $5.5 billion in financings and $2.6 billion in partnering transactions. That’s the largest fundraising since Q4 00 when biotech garnered $11 billion…and that was with a significant portion of that sum generated by IPOs,” Burrill said.

September was also a good month for deal making. Aventis (AVE) announced on September 8 that it had purchased rights to an experimental cancer drug from Regeneron Pharmaceuticals (REGN) known as Vascular Endothelial Growth Factor (VEGF) Trap. “The compound is one of a new class of drugs called anti-angiogenesis drugs—one of which is Genentech’s much ballyhooed Avastin—that starve cancer tumors by inhibiting the growth of new blood vessels,” explained Burrill. “Including up front and subsequent milestone payments, the deal could be worth as much as $510 million,” he said. On the day of the news, shares of Regeneron shot up 32% and the company ended September up 16%, closing at $17.67 per share.

On September 8, Amgen and Biovitrum also inked a $522 million multifaceted agreement under which Amgen receives exclusive rights to develop and commercialize Biovitrum’s small molecule 11Я-HSD1 enzyme inhibitors for the treatment of metabolic diseases. The most advanced compound included in the agreement is a treatment for Type 2 diabetes which is currently in Phase IIa clinical trials.

Another deal that closed in September was the sale of Roche’s Vitamins and Fine Chemicals business to DSM, a Netherlands-based company that is active worldwide in life science products, performance materials and industrial chemicals. “The deal signifies a new trend that we are likely to see more of—the migration of major chemical companies further into the biotech arena,” noted Burrill. “This is a good acquisition for DSM which is making a strong and growing commitment to life sciences,” he added.

There was only one biotech drug approval during the month. On September 18, the FDA approved Ganite ™ (gallium nitrate injection), Genta’s (GNTA) first product for the treatment of cancer-related hypercalcemia—a life-threatening elevation of blood calcium that can occur in up to half of all patients with advanced cancer. “Shares of Genta rose less than 3% on the news, despite that fact that one clinical trial showed that 75% of patients receiving the drug achieved normal blood calcium levels compared to 27% of patients on traditional treatment,” noted Burrill. Genta closed the month at $12.67, a decrease of 20% for the month.

The Burrill Biotech Select Index had a flat month but was still up 52% for the year. The downgrading of Genentech by several analysts when shares of DNA reached their mid month high (up 165% year to date, up 10% in the first two weeks in September) prompted some investors to sell. Shares of Genentech ended the month up a mere 1%. However, Geron Corp. (GERN) saw its shares soar over 50% in one day on positive early findings from a prostrate cancer vaccine study. Shares of Geron ended September up 72% and up 280% year to date. Also gaining during September were shares of Onyx Pharmaceuticals (ONXX) up 21%.

The Burrill Large-Cap Index fell 3% for the month, but nonetheless up nearly 53% year to date. Most stocks in the index maintained their values or slipped slightly-- especially after analysts downgraded Genentech. Shares of Gilead Sciences (GILD) took a tumble too losing 16% mid-month when JP Morgan rated the stock as "neutral" from "overweight".

The Burrill Mid-Cap Index stayed flat for the month, but has risen 34% since the start of the year. Elan’s (ELN) shares jumped 21% on news that it would file its U.S. accounts on time and avoid default. The company also submitted an application with the FDA to start testing its novel treatment for Alzheimer's. Cell Genesys (CEGE) saw shares rise 22% on news of positive results from a follow-up study of its anticancer vaccine but end-of-month jitters lowered share price to end September up a mere 5%. Shares of Abgenix (ABGX) also rose 21% on positive news regarding EGF inhibitors such as the company’s ABX-EGF cancer treatment but ended the month at just up 11%. Shares of Corixa (CRXA) were up 20% during the month due primarily to the issuance of reimbursement instructions by CMS to hospitals for the company’s anticancer drug, but ended the month up only 2%. The big loser in the index was Cerus (CERS) which saw shares plunge 39% after the company halted clinical trials of a system designed to make blood transfusions safer.

The Burrill Small-Cap Index surged 15% in September, up 58% year to date. “VaxGen (VXGN) led the charge gaining a whopping 196% in value in September,” Burrill said. “The company had a spectacular month with health authorities in the UK negotiating terms for VaxGen’s experimental anthrax vaccine and a research study suggesting that the company’s smallpox vaccination may also help to prevent HIV infection,” he continued. “Then, on September 23, shares rose again on the news that the company might well win a US government contract to research vaccines against biological weapons,” said Burrill. Rigel Pharaceuticals' (RIGL) shares rocketed 72% with the initiation of a multi-dose safety trial of R112, an experimental drug to treat allergic rhinitis. Applied Molecular Evolution (AMEV) saw its shares jump 44% after achieving two clinical milestones for Vitaxin, a monoclonal antibody being optimized by the company for anti-tumor and safety activity in metastatic melanoma and for disease activity and structural joint damage in rheumatoid arthritis. Shares of Introgen Therapeutics (INGN) rose 30% on news that the FDA granted fast track status for its lead anti cancer drug, Advexin. Shares of Ariad Pharmaceuticals (ARIA) experienced a steady rise in September, ending the month up 59%. “Small caps were where the action was in September with most of the other segments fairly flat,” said Burrill.

The Burrill Genomics Index also had a slight gain in September of 4%, up 28% year to date. Shares of Lynx Therapeutics (LYNX) rose 29% on the news that it had completed a $3 million private placement. Shares of Incyte (INCY) climbed 17% when the company announced a collaborative licensing agreement to develop and commercialize the antiretroviral drug Reverset ™ with Pharmasset, Ltd. The drug is currently in Phase IIa clinical development for the treatment of HIV infections. Shares of GeneLogic (GLGC), which had risen 26% by mid-September, also dropped at the end of the month to close down 9% when the company lowered its 2003 revenue estimate due to continued soft spending in pharmaceutical research and unexpected delays in biotechnology and government projects. Shares of Human Genome Sciences Inc. (HGSI) took a hit as well when the company announced that a Phase II clinical trial of topically administered repifermin in adults with chronic venous ulcers did not meet its targets, prompting the company to drop its development program and causing the stock to end the month down 4%. Shares of Affymetrix, Inc. (AFFX) dropped 9% at the end of the month when the stock was downgraded by analysts.

The Burrill Diagnostic Index closed the month down 4 %, but up 22% year to date. Shares of Sequenom (SQNM) were up 6% for the month on the announcement of a patent assignment and license agreement with Nuvelo (NUVO). Nuvelo assigned Sequenom the entire chemical cleavage patent estate acquired through its merger with Variagenics, including 25 issued and pending patents as well as exclusive worldwide license to nine additional restriction enzyme patents. Sequenom also announced the launch of the MassARRAY Compact system which supports all MassARRAY applications. Digene (DIGE) saw its shares rise 7% in September on news that health insurer Aetna Inc will cover its HPV test along with a Pap smear as part of routine screening for cervical cancer in women 30 and older making it the only FDA approved HPV test. Biosite (BSTE) shares fell 39% on the announcement of a shortfall in sales of its Triage BNP test. Biosite also reduced its estimates for both revenue and earnings growth for the year. Shares of Exact Sciences Corp. (EXAS) fell 20% through the second half of the month after they filed with the SEC to periodically sell up to $100 million in debt securities, common and preferred stock, and warrants. Stock of Third Wave Technologies (TWTI) also dropped 22% for the month.

The Burrill Agbio Index fell 6% during September and is up only 7% year to date. Shares of Paradigm Genetics (PDGM) led the decline, dropping 17% and losing the value it gained in August, but falling on no news. The only big gainer was Large Scale Biology Corporation (LSBC) which saw its shares climb 9% with the award of a 2-year research grant by the National Institute of Allergy and Infectious Diseases (NIAID) to investigate the potential of LSBC's proprietary plant viral vector technology for producing preventative and therapeutic HIV-1 peptide vaccines. LSBC also received a grant by the National Institute on Alcohol Abuse and Alcoholism (NIAAA) for research leading to the discovery of biomarkers for alcohol related diseases to be conducted by LSBC's Proteomics Division.

The Burrill Biomaterials/Bioprocess Index fell 3% during September, but is up 12% since the start of the year. Qiagen N.V. (QGENF) was down 15% and Pall Corporation (PLL) was down 10% for the month. Both companies inked significant deals during September. Qiagen entered an alliance with instrument maker, Thermo Electron Corporation, and was granted a license to that company’s Kingfisher magnetic particle technologies and will have the rights to market existing Kingfisher products. Pall Corporation landed a multi-year, multimillion dollar supply and co-branding agreement with Nalge Nunc International Corporation giving Nalge Nunc exclusive rights to Pall's new Supor machV membranes for the bottle top filtration market. These losses were balanced by a 13% gain in share price for Synthetech (NZYM) and a 14% gain in share price for Corning Inc (GLW) for the month. Corning share prices rose on the announcement of an alliance with Promega Corporation to co-develop, manufacture, and market a fully optimized system of reagents for self-printing microarrays.

The Burrill Nutraceuticals Index gained 7% for the month, up an impressive 64% for the year. USANA Health Sciences Inc. (USNA) led the index with a 35% gain on the expectation of higher earnings per share for Q3 03. The company also announced plans to enter the Singapore market in Q4 03. Shares of PacificHealth Laboratories Inc (PHLI.OB) rose 25% due to a new study published in the International Journal of Sports Nutrition and Exercise Metabolism showing that its new ready-to-drink sports drink, ACCELERADE, improved endurance 36% over a conventional carbohydrate/electrolyte drink containing the same number of calories. The index was pulled down by a disappointing 2004 earnings forecast by Hain Celestial Group Inc (HAIN). Shares of the company slipped 8% even though it posted a profit in the fourth quarter versus a loss one year earlier.

A review of the Burrill Life Sciences Indices for September 2003 follows:

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).

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