Biotech Wilts in August

After five months of stock market gains, biotech takes a summer pause...but 11 companies have filed for IPOs

San Francisco, CA - September 02, 2003

Although the economy held its own in August, news of a federal budget deficit of $480 billion hit the headlines and cast a shadow on Wall Street. The DJIA gained just 2% in August and NASDAQ's value rose a mere 4%. The Burrill Biotech Select Index lost a little over 2% of its value, although industry-specific news was generally favourable. "Despite the August slowdown, the biotech rally is far from over," said G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank.

"Biotech is in excellent shape with an impressive number of companies gaining 50% or more in value over the last twelve months. Science is advancing, technologies are becoming more efficient, and—most importantly—products are getting approved," explained Burrill "August is typically a slow month and the rumblings on Capitol Hill have given some investors pause. In addition to the enormous deficit, the reimbursement policies that are being proposed under the new Medicare legislation and the current activities of CMS are less than favourable to biotech," he added. "Nonetheless, the fundamentals are still in place and we are anticipating a very strong 4Q 03," he said. "The finance "window" has been opened…secondaries and convertible debt deals have found receptive investors…now we'll test the IPO market."

"So, the big story this month is about the potential reopening of the IPO market," noted Burrill. "Ten biotech firms filed IPOs in August…and we're still predicting that 10-12 firms will go public before the year ends," he said. The 11 companies lined up on the IPO runway include: Acusphere (July 1 IPO registration) Aderis, Advancis, Genitope, CancerVax, Myogen, NitroMed, Neurochem, Pharmion, TolerRx, and X-cel Pharmaceuticals (see chart below). "Quite a few companies have matured to the point where they want to go public and the capital markets are enticing," said Burrill. "This first group of companies all have one important thing in common—products in the clinics and/or the marketplace. Indeed, there's not a single platform company in the bunch. The bar has been raised much higher," he noted. "What remains to be seen is how this first group will fare on Wall Street. If they do go public and maintain their values or move to premiums, we'll see more companies follow suit. But if the investment community is unable to absorb these new shares with unfavourable often issue performance, we'll see the IPO window close again," he said.

Recently Filed Biotech IPOs:

Company	Business Focus	Date Filed	Bankers	Proposed Offering ($M)
Acusphere	Drug-delivery technology	Jul. 1	SG Cowen, Thomas Weisel Partners, US Bancorp Piper Jaffray and Friedman Billings Ramsey	$65
Advancis	Anti-infectives	Aug. 1	Lehman Brothers and Pacific Growth Equities	$86
Genitope	Cancer vaccines	Aug. 6	WR Hambrecht + Co and Punk, Ziegel & Company, L.P.	$69
CancerVax	Cancer vaccines	Aug. 14	Lehman Brothers, Thomas Weisel Partners and U.S. Bancorp Piper Jaffray	$115
NitroMed	Cardiovascular and inflammatory disease	Aug. 20	Deutsche Bank Securities and J.P. Morgan	$100
Neurochem	Neurological disease	Aug. 20	UBS Investment Bank	$52
Pharmion	Blood diseases and cancer	Aug. 21	Morgan Stanley, J.P. Morgan, Pacific Growth Equities and U.S. Bancorp Piper Jaffray	$86
Xcel Pharmaceuticals	Marketed products targetingneurological conditions	Aug. 22	SG Cowan, CIBC World Markets, Thomas Weisel Partners LLC and U.S. Bancorp Piper Jaffray	$75
TolerRx	Autoimmune disease	Aug. 26	JP Morgan, SG Cowan and Leerink Swann & Co.	$75
Aderis Pharmacueticals	Cardiovascular, renal, and neurological diseases	Aug. 27	Lehman Brothers, CIBC World Markets and U.S. Bancorp Piper Jaffray	$75
Myogen	Chronic heart failure and other cardiovascular diseases	Aug. 28	Credit Suisse First Boston and J.P. Morgan, with the assistance of CIBC World Markets and Lazard	$75

There was positive news on the product front in August as well, though primarily for non-US companies. Celltech Group PLC (CLL) announced on August 1 that its drug for Gaucher's disease had been cleared for sale by the US Food and Drug Administration (FDA). Then, on August 4, the FDA approved Axcan Pharma's (AXP.TO) Photofrin photodynamic therapy to destroy abnormal cells in the oesophagus that can become cancerous. Other compounds continued to progress through the pipeline including several that address the most common cause of age-related blindness—macular degeneration (AMD). Genaera's (GENR) stock jumped 24% on August 4, the day it announced successful clinical trial results for its drug, squalamine, which treats the "wet version" of AMD—some 10-15% of all cases. Other compounds in later stage trials for AMD include Macugen, developed by Pfizer and privately held Eyetech Pharmaceuticals and Genentech's (DNA) Lucentis. The AMD treatment market is valued as a $2 billion market opportunity and there are currently some 30 million people affected with the disease worldwide.

"Countering all the excitement about new biotech treatments moving closer to market was the news coming from the Centers for Medicare and Medicaid Services (CMS)," noted Burrill. In addition to the agency's decision to continue to consider Amgen's (AMGN) Aranesp and Johnson & Johnson's (JNJ) Procrit "functionally equivalent"—a judgement that has been criticized by the industry—CMS also said in August that it would lower its outlays for so-called Part B drugs which are administered in a doctor's office. The treatments include: injectable cancer drugs and drugs used in conjunction with cancer treatment, certain self-administered oral cancer drugs, and anti-nausea drugs. Included on the list are Amgen's Neupogen and Epogen, Genentech's Rituxan, and Genzyme's (GENZ) Synvisc.

Approximately 1.33 million Americans are diagnosed with cancer every year and some 80% of them depend on community practices that would be devastated by the proposed cuts in Medicare. According to a survey of 900 private practice oncologists in the US, severe cuts to cancer care in the Medicare bills would force more than half of cancer physicians to limit the number of Medicare patients they treat. Conducted by the Amercian Society of Clinical Oncology earlier this year, the survey found that if the current Medicare legislation passes:

• 73% of physicians would send chemotherapy patients to a hospital instead of treating them in an office setting
• 53% would limit the number of Medicare patients they treat, and 19% would stop treating Medicare patients entirely
• 42% would stop conducting clinical trials in their offices
• 44% would retire from practicing medicine earlier than they had originally planned
• Over half of the respondents said that Medicare beneficiaries comprise a major portion (41-60%) of their practice

Another study, conducted by the Institute of Medicine, revealed that more than 40 million people in the US, including 10 million children, have no health insurance. The study found that cancer patients lacking insurance were far more likely to die. For example, women with breast cancer have a 30-50% higher risk of death, in part because those women are less likely to be diagnosed early or receive life-preserving surgery.

"The jury is still out on Capitol Hill in regards to Medicare but the Biotechnology Industry Organization (BIO) is working with Congress to strike the functional equivalence, radiopharmaceuticals and orphan drug provisions of the new rule and to develop a more acceptable payment methodology," said Burrill. "Such actions would serve not only patients and physicians, but also the innovative companies that we are depending on to find tomorrow's cures," he noted.

The Burrill Biotech Select Index lost 2% of its value in August. "Most of the companies in the index experienced double digit losses due more to a market correction than to a spate of bad news," explained Burrill. The biggest loser in the index was Incyte (INCY), down 25% for the month. ICOS Pharmaceuticals (ICOS), Maxygen (MAXY), and Vertex (VRTX) posted losses of 10%, 16%, and 13% respectively. Gilead (GILD), which received its second FDA warning regarding the promotion of its AIDS drug, Viread, lost 2% of its value in June. Amgen and Genentech, which finally settled their patent dispute surrounding Neupogen, nonetheless shed 5% and 2%, respectively. Onyx Pharmaceuticals (ONXX), up 14% for the month, has been gaining on Wall Street for the last several months. The company has a novel anticancer compound expected to enter Phase III clinical testing later this year—BAY 43-9006. Thus far, clinical trails have gone well and Onyx, along with partner Bayer Pharmaceuticals (BAY), are pursuing multiple clinical paths for the compound.

The Burrill Genomics Index was off by just under 1% in August, although up 23% for the year. Lynx Therapeutics (LYNX) was the only company in the index that had a double digit gain, up 22% for the month. Lynx has signed a pact with Pfizer (PFE) to provide genomics discovery services for cell samples provided by Pfizer. Shares of Incyte Corp. (INCY) plummeted 25% during the month and on August 22 the President and Chief Scientific Officer Dr. Robert Stein resigned. Gene Logic (GLGC) also lost ground with shares dropping 7% in August, even though the company announced a collaboration with the FDA in which the Center for Drug Evaluation and Research (CDER) will use Gene Logic's products to evaluate toxicogenomic standards.

The Burrill Large-Cap Index remained about the same during August, but is nonetheless up 57% year to date. Shares of Chiron Corp. (CHIR) rose 11% for the month. Chiron granted a nonexclusive license to Gilead Sciences Inc. (GILD) in August for the research, development and commercialization of small molecule therapeutics against certain hepatitis C virus drug targets. Shares of Millennium Pharmaceuticals Inc. (MLNM) only gained 11% due to its recent success with cancer drug, Velcade which started shipping in late July. Shares if ICOS Corp.(ICOS) took the sharpest decline, falling 16% after the company forecast a bigger than expected loss in 2004.

The Burrill Mid-Cap Index gained 4% in August and several companies posted impressive gains. ImClone Systems (IMCL) resubmitted its cancer drug, Erbitux for FDA approval. Company shares gained 19% on the announcement. Shares of Kos Pharmaceuticals (KOSP) also rose in August by nearly 11% due in part to the announcement of a marketing pact with Onyx Pharmaceuticals giving the former exclusive rights to market Onyx' cholesterol disorder drugs, Niaspan and Advicor in exchange for a significant share of Canadian-derived revenue. Antigenics Inc. shares were up 6% for the month with the success of its ongoing trials for its personalized cancer vaccine Oncophage. Shares of Exelixis, Inc. (EXEL) dropped 12% in August when the company released its quarterly report showing a slightly higher net loss compared to the 2nd quarter 2002. Protein Design Labs Inc. (PDLI) also saw share value fall by 4% due in great measure to its faltering battle with Genentech over the rights to a recently approved asthma drug, Xolair.

The Burrill Small-Cap Index gained 2% during the month and up 37% year to date. Shares of SangStat Medical Corp (SANG) surged 44% at the beginning of August with the announcement of a cash tender offer by Genzyme(GENZ) for all of its outstanding shares (their share price was up 40% at the end of August). Neurobiological Technologies, Inc. (NTII) saw its shares rise 56% during the month on reports of improved results for the fourth quarter and fiscal year ended 6/30/03. DOV Pharmaceutical, Inc.'s (DOVP) shares rose 22% for the month. The company currently has six product candidates in clinical trials and expects results from the first Phase III trial of bicifadine, a novel pain medication, by the end of the third quarter. Shares of Transgenomic Inc. (TBIO) fell 26% when the company reported lower revenues.

The Burrill Diagnostics Index held its ground in August, falling less than 1% and up 27% since the start of 2003. Shares of Orchid Biosciences (ORCH) fell 11% for the month, despite reported narrowing of a second quarter loss to $9.5 million from $12.2 million in 2nd quarter 2002. Orchid Cellmark, its division for private forensic DNA testing, was awarded a three year contract by the Houston Police Department to conduct testing for all new cases as well as retesting for prior cases. Cepheid (CPHD) shares also dropped sharply ending the month down 19%. Cepheid announced a $10 million common stock offering mid August helping to stabilize its share price. Myriad Genetics Inc.'s (MYGN) shares also dropped 18% in August on the announcement of a larger 4th quarter loss despite an 11% increase in revenue. On the bright side, Digene Corp (DIGE) shares rose 16% with the announcement of its first ever profit in its recently ended 4th quarter.

The Burrill Nutraceuticals Index posted a gain in August, rising 5% for the month, up 54% for the year. Shares of Carrington Labs (CARN) rose 46% with results obtained from an animal study of its GelSite technology demonstrating that the polymer undergoes resorption from the site of injection, a key step in demonstrating the suitability of the technology as an injectable delivery platform for proteins and peptides. Shares of Hain Celestial (HAIN) also rose 20% for the month. The index was pulled down by news from Natrol, Inc(NTOL), down 18% in August, after a gain of 50% in July, with the announcement of a net loss of $550,000 for the second quarter on a sales increase of 6.4%.

The Burrill Agbio Index was up 2% in August. The biggest gainer was Paradigm Genetics (PDGM), up 15%, maintaining its momentum with the introduction of a mouse oligo microarray as part of a previously announced collaboration with Agilent Technologies Inc. Paradigm also announced that its researchers have successfully used global nutritional profiling techniques to discover the function of genes and chemical mode of action in filamentous fungi, an important class of organisms that are used in the production of antibiotics and foods (cheese, soy sauce) and can cause disease and food spoilage. A patent has been filed to cover methods described in the publication. Large Scale Biology Corporation (LSBC) shares fell 5%, after gaining 16% in July, even with the announcement the company will enter the research grade aprotinin, a protease inhibitor, market during the second quarter of 2004. LSBC recently demonstrated human safety in clinical trials of its vaccines for non-Hodgkins lymphoma, the world's first plant-produced cancer vaccines.

The Burrill Biomaterials/Bioprocess Index gained nearly 5% in August, up 16% year to date. Shares if Solutia Inc. (SOI) soared 212% with the $700 million settlement of claims over PCB pollution in Anniston, Alabama. Solutia shares responsibility with Monsanto (MON) and will pay $50 million over several years. Qiagen NV (QGENF) shares rose 41% on news that its 2nd quarter net profit more than doubled over last year, boosted by better than expected sales in its siRNA product line and the strong euro. The index was tempered by a big loss in Synthetech, Inc.'s (NZYM) value, down 25%, on with the announcement of a 38% decrease of revenue for the first quarter of fiscal 2004.

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

Index	12/31/02 Value	7/31/03 Value	8/31/03 Value	Percent Change For Month	Percent Change For Year
Burrill Biotech Select Index	159.52	247.81	242.18	-2.27%	51.82%
Burrill LARGE-CAP Biotech Index	198.68	312.35	311.73	-0.20%	56.90%
Burrill MID-CAP Biotech Index	121.39	156.86	162.61	3.66%	33.96%
Burrill SMALL-CAP Biotech Index	84.58	113.76	116.26	2.20%	37.46%
Burrill Agbio Index	68.57	76.31	77.98	2.19%	13.72%
Burrill Genomics Index	84.54	105.02	104.02	-0.96%	23.04%
Burrill Biomaterials/ Bioprocess Index	80.12	88.74	93.03	4.83%	16.11%
Burrill Diagnostic Index	65.31	82.83	83.02	0.24%	27.12%
Burrill Nutraceuticals Index	135.13	198.12	208.45	5.22%	54.26%
Burrill Life Science Composite Index	115.31	155.57	158.94	2.16%	37.84%

Index	12/31/02 Value	7/31/03 Value	8/31/03 Value	Percent Change For Month	Percent Change For Year
Burrill Biotech Select Index	159.52	247.81	242.18	-2.27%	51.82%
NASDAQ	1335.51	1735.02	1810.45	4.35%	35.56%
DJIA	8341.63	9233.80	9415.82	1.97%	12.88%
Russell 2000	383.09	477.52	497.43	4.17%	29.85%

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 biomaterials/bioprocesses.

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The Burrill family of venture capital funds, with over $450 million under management, includes the Burrill Life Sciences Capital Fund, the Burrill Biotechnology Capital Fund, the Burrill Diagnostics Fund, the Burrill Agbio Capital Fund and its successor—the Burrill Agbio Capital Fund II, the Burrill Nutraceuticals Capital Fund, and the Burrill Biomaterials/Bioprocess Capital Fund.

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