Biotech Continues to Show Strength in June

Despite a general market slowdown, biotech continued to gain ground

San Francisco, CA - July 02, 2003

"Although investor enthusiasm levelled off in June with little investor reaction to yet another 0.25% cut in interest rates and continuing predictions of a slow global recovery, the biotech market nonetheless outperformed both the NASDAQ and the DJIA in June with gains based on solid achievements with high-visibility product approvals, clinical successes, capital infusions, and progress on key political issues," noted G. Steven Burrill, CEO of Burrill & Company, a San-Francisco-based life sciences merchant bank. The Burrill Biotech Select Index rose 3% in June, up 37% year to date. In comparison, the DJIA and NASDAQ each gained less than 2% for the month and were up 8% and 22%, respectively, year to date.

"The biotech industry had a great June, in fact it's the best month to date for product approvals," he noted. "On June 17, the FDA approved MedImmune's (MEDI) FluMist internasal flu vaccine and on June 20, the agency approved Xolair, the antibody-based treatment for asthma from Genentech/Novartis/Tanox. Then, on June 30, regulators approved Bexxar, a cancer treatment for non-Hodgkin's lymphoma developed by Corixa (CRXA). The agency also granted 'fast track' status for Genentech's (DNA) much heralded cancer drug, Avastin and also gave that status to Cell Therapeutics (CTIC) for its experimental treatment for severe lung cancer, Xyotax," he said.

"FDA commissioner Mark McClellan is getting high marks…and deservedly so," noted Burrill. "He's done much to accelerate the drug approval process and he recently announced new initiatives aimed at cutting the cost of drug development by further reducing agency review times," noted Burrill. "He's been very public in his support of biotech and, in particular, the industry's innovation. While speaking before an audience of thousands of attendees at Biotech Industry Organization's tenth annual conference, he emphasized the agency's commitment to produce a more efficient and effective review program for human drugs and biologics.

"The commissioner's encouraging words come at a good time," said Burrill. "The Tufts Center for the Study of Drug Development just released their newest analysis on drug development costs-an average of $897 million, including the cost of post-approval research. This is more than double what it was ten years ago," Burrill noted. "On the other hand, the industry has matured to a point where many of us believe the hit rate for approvals is destined to improve radically, particularly with the FDA's current penchant for 'efficient risk management' which favors 'fast-track status' for therapies addressing unmet medical needs," said Burrill.

The Burrill Large Cap Biotech Index was up 2% in June with Genentech leading the pack. "Genentech shares closed the month at $72.12-up 15% for the month and 117% from where they were at the end of last year ($33.16 per share as of 12/31/02)", Burrill added. In addition to garnering FDA approval for Xolair and obtaining 'fast-track' status for Avastin, Genentech announced several important collaborations including a joint effort with Biogen for the joint development of Biogen's BR3 protein therapeutic to treat disorders associated with abnormal B-lympocyte activity such as rheumatoid arthritis and lupus. Genentech also announced plans to develop one or more new humanized anti-CD20 antibodies targeting B-cell disorders with IDEC. Both companies intend to file an investigational new drug application (IND) on their first humanized anti-CD20 antibody by the end of this year.

Large cap biotech firms Idec (IDEC) and Biogen (BGEN) took Wall Street by surprise with the announcement on June 24 of their intended merger. Calling it a "merger of equals", it is Idec that will end up with a slight majority control of the new entity (50.5%), which would be called Biogen Idec Inc., if the deal passes muster. "The $6.4 billion stock swap was viewed by some as a move of necessity since both companies were seeing a slow down of sales for their flagship drugs and also had a shortage of early stage drugs in their respective portfolios," noted Burrill. "The deal is expected to close in the third quarter or early fourth quarter of the year and the combined company will rank number three behind Amgen (AMGN) and Genentech (DNA) in terms of market cap," Burrill added. "But investors don't seem to be too enthusiastic-shares of Biogen were off by 10% in June and shares of Idec were down 11%", said Burrill.

The Burrill Mid Cap Biotech Index lost a little over 1% of its value in June with more than half of the companies experiencing double-digit losses and the rest posting only modest gains. The notable exception was Transkaryotic Therapies (TKTX) which saw shares rise 55% during the month. "The stock's value took a nose dive in October 2002 when the company disclosed disappointing data for its Fabry disease treatment, Replagal. Shares bottomed out at $3.74 in January 2003 when an FDA panel turned the drug down," explained Burrill. "Then, on April 24, 2003, rival drug, Fabrazyme from Genzyme General (GENZ) received the FDA's approval and Transkaryotic became the focus of an SEC probe," he added. "The only good news that the company has generated was the announcement in mid-May that research collaborators at two European universities successfully identified an enzyme, C alpha-formylglycine generating enzyme (FGE), which is essential for catalytic activity of sulfatases. Holding the exclusive rights to the IP resulting from the research, Transkaryotic expects to use it in efforts to develop treatments for sulfatase-based disorders such as Hunter, Sanfillippo, and Morquio syndrome," said Burrill.

The Burrill Small Cap Biotech Index rose nearly 10% in June and 49% for the quarter with several companies seeing significant gains in share value. Shares of Dyax (DYAX) were up 83% for the month driven in part by the June 24 announcement that Genzyme had decided to exercise its option to acquire a 50% stake in the DX-88 program for the potential treatment of hereditary angioedema and other chronic inflammatory indications. Pharmos Corporation (PARS) saw its shares gain 75% on news that it had received a Notice of Allowance from the US Patent and Trademark Office for a patent application relating to its novel non-psychotropic cannabinoid platform technology. Introgen (INGN) saw shares rise 63% based on good news surrounding its cancer drug INGN 241 at the American Society of Gene Therapy on June 11. Geron (GERN) also saw a gain of 43% in share value during June when company announced that it had received a patent covering a technology used to eliminate undifferentiated stem cells. Geron also announced in June that the Human Fertilization and Embryology Authority of the UK had authorized the Roslin Institute to derive new human embryonic stem cells from donated excess embryos created as a result of in vitro fertilization. The company reported that the Institute's research, funded by and conducted in collaboration with Geron, seeks to establish new hES cell lines as well as to improve the technology to produce and maintain these cells in culture.

The Burrill Genomics Index swung in the opposite direction in June, shedding 10% in value in June (yet it's still up over 20% YTD). Only one company, Millennium (MLNM) posted a modest gain of 1%. "Although trading volumes jumped dramatically in May on the day that the FDA announced approval for the company's cancer therapy, Velcade, shares of Millennium are nearly $3 short of the 52-week high," noted Burrill. "We're still experiencing some volatility in this sector as investors try to understand the value of these companies," he explained. "Human Genome Sciences (HGSI), for example, received permission to begin human trials for its experimental drug to combat anthrax-Abthrax. Nonetheless, shares of HGSI were off by 14%," he noted.

The Burrill Diagnostics Index was up less than 1% in June with several companies experiencing little or no change in value for the month. Third Wave Technologies (TWTI) and Biosite (BSTE) both saw share prices jump 15%. "Investors are rewarding Third Wave for their restructuring efforts and streamlined focus on clinical molecular diagnostics," noted Burrill. "And Biosite signed a deal with Beckman Coulter (BEC) to market a BNP (B-type natiuretic paptide) test for congestive heart failure that will run on Beckman Coulter's immunoassay systems," he said.

There was other news to note on the diagnostics front in June. Swiss firm Roche Diagnostics launched its first microarray product to identify variations (polymorphisms) in two genes: CYP2D6 and CYP2C19 which play a big role in drug metabolism. "Using this test will help physicians select the right medication and dosage levels to suit the individual patient. Roche is embracing personalized medicine in a big way and the company sees the microarray as an enhancement to its PCR technology," said Burrill. "The AmpliChip CYP450 assay is expected to generate more than $100 million in annual revenues by 2008 and it is the first of several products expected to evolve out of the Roche and Affymetrix (AFFX) partnership," he added. Roche reported that it plans to develop additional microarray-based diagnostic tools in the areas of HIV-1 resistance genotyping, p53 cancer resequencing, colorectal cancer risk prediction, cystic fibrosis, and human papilla virus genotyping.

The Burrill Nutraceuticals Index had the best performance of all the indices in June rising 15% for the month and 40% for the quarter. "This segment of the biotech industry has been doing remarkably well," commented Burrill. "Unlike the rest of the biotech industry which saw values plunge in 2002, the Burrill Nutraceuticals Index ended 2002 up 6%. Today, that index has gained an additional 41% year to date," he noted. "And there is still excellent potential upside to this growing industry," he added. "Going forward, nutraceuticals and the entire 'wellness' movement will gain in momentum as the focus shifts from treating disease to preventing it in the first place," said Burrill. The big gainers this month were Nutraceutical International (NUTR), up 24%; NBTY, Inc. (NBTY), up 36%; Natrol Inc., up 22%; Carrington Labs, up 47%; and PacificHealth Laboratories (PHLI), up 38%.

Nutraceutical International, with growing sales, rising margins, and plenty of cash, completed its acquisition of the Nature's Life ® brand of nutritional supplements for approximately $10.8 million in cash on June 16. On June 19, the company announced that it had entered into a purchase and sale agreement to acquire the operating assets of Arizona Health Foods, through its subsidiary, Fresh Vitamins, Inc. Nutritional supplements manufacturer, NBTY announced on June 10 that it would be purchasing Rexall Sundown from Dutch food group Numico NV for $250 million. Natrol reported that sales of its Complete Balance AM/PM Formula for menopause increased approximately 90% during the last 12 months, from $82,000 during the 12 months ended May 31, 2002 to $1.6 million for the 12 months ended May 31, 2003. PacificHealth Laboratories secured a $750,000 credit facility to be used as working capital to help expand its ACCELERADE® brand supplement market share and to fund research on new products. Shares of Carrington Labs have been on a steady rise since the company announced an 85% jump in revenue for the first quarter of 2003.

Summary
"Faith in biotech has returned," said Burrill. "We're seeing momentum in every sector, particularly those that have a direct impact on human health. The concept of 'personalized medicine' has taken off with both industry and the regulators embracing pharmacogenomics. So, too, has the Dx/Rx link (i.e. theranostics)-the powerful connection between diagnostics and therapeutic treatment. While there is less movement going on in the agbio and biomaterials segments year to date, that, too, will improve as consumers and governments recognize the value of pest and drought resistant crops, renewable energy resources, transgenic plants and animals, as well as the many other biotechnology-based techniques that are destined to improve our day-to-day lives," he added.

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

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