Biotech Slips Again in February as War Preparations Intensify

The Burrill Small Cap Index takes the biggest hit...

San Francisco, CA - March 03, 2003

"With the nation on the brink of war and the capital markets held hostage to the concerns surrounding the invasion and the aftermath, investors remained stand-offish in February…and even though biotech had a pretty good month, Wall Street wasn't interested," commented G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. The Burrill Biotech Select Index was down 1.5%, in line with the DJIA (down 2%), but slightly underperforming NASDAQ which was up a little over 1% at the month's end. "Nonetheless, February was a busy month for biotech-a flurry of mergers, including Johnson & Johnson's (JNJ) $2.4 billion bid for Scios (SCIO), were announced; products such as Dendreon's (DNDN) Provenge prostate cancer drug advanced through clinical trials, and the FDA gave its blessing to several new drugs and indications, including Xoma's (XOMA) Raptiva for psoriasis and Biovail's (BVF:TO) Cardizem for hypertension," said Burrill.

"There were several M&A transactions of interest announced in February-most notably, Johnson & Johnson's intent to purchase Scios for an estimated $2.4 billion in cash and the NPS Pharmaceuticals (NPSP)/Enzon Pharmaceuticals (ENZN) $1.6 billion merger of equals," explained Burrill . The Johnson & Johnson/Scios deal would give J&J Natrecor, Scios' two-year-old treatment for congestive heart failure that could generate peak annual sales of $500 million. Scios also offers J&J access to an arthritis drug in mid-stage clinical trials. If the deal goes through, Scios shareholders will receive $45.00 per share, a 30% premium over the closing price on February 6, 2003. While shares of Scios jumped a total of 26% days following a leak of the announcement, shares of Johnson & Johnson rose less than 1% on the news.

The NPS/Enzon deal would give NPS much needed cash to further the development of its osteoporosis and hormone condition drug candidates. Another merger announced in February-Dendreon's (DNDN) $73 million stock bid for Corvas (CVAS)-would provide the former with several cancer drugs in early development, but, more importantly, it would give Dendreon money to help fund its own drug programs.

"We will continue to see more of these somewhat distressed combinations," predicted Burrill. "The capital markets, whether public or private, are demanding companies find a level of sustainability. There are likely to be other mergers similar to the NPS/Enzon and the Dendreon /Corvas deals-where 1 plus 1 equals 1.2 or 1.8 (and, in extreme eases, 1+1=0.8), where the combined company, while strengthened, doesn't entirely add up to the sum of the parts," he said.

"There was some good news on the earnings side in February with Cephalon (CEPH) and Invitrogen (IVGN) both swinging to profit in the fourth quarter," Burrill noted. "Amgen (AMGN) also came out with bullish predictions regarding annual sales of its anemia, infection-fighting, and arthritis drugs stating that worldwide sales between now and 2005 are expected to increase at a compound annual growth rate in the 30% to 32% range and that adjusted earnings per share were expected to be in the 25% to 27% range," he said. "Amgen has certainly had a stellar year with three major product launches and the integration of what used to be Immunex into the company's ranks," he continued. "The company has blockbuster products, a promising pipeline and plans to double its R&D over the next couple of years. Amgen is now larger than all but a handful of big pharma companies…just goes to show what a mature and well-managed biopharmaceutical company can do," Burrill said.

But, there were disappointments in the biotech sector as well. Two of the most dramatic were associated with product failures. On February 24 VaxGen's (VXGN) long awaited AIDS vaccine trail results failed to show a statistical significance in cutting down HIV infection rates in the general population participating in the trials. VaxGen's share's, which opened the month at $14.34, lost nearly three quarters of their value on the news, closing the month down 74% at $3.76 a share. "Even though the vaccine did not produce the 35% reduction in infection rates that the company was hoping for, the vaccine appeared to work well in the small groups of blacks and Asians that the trial studied-results that could one day have an impact on the AIDS epidemic in Africa and parts of Asia," noted Burrill. "Still, in today's jittery investment climate, people couldn't dump these shares fast enough," he said.

Earlier in the month, on February 18, La Jolla Pharmaceuticals (LJPC) announced that preliminary findings from a late-stage clinical trial of Riquent, its lupus kidney disease drug, showed that the drug didn't meet its primary objective to delay renal flare, treatment with immunosuppressive drugs, hospitalization or death. Shares of the company's stock went into free fall, shearing off more than three quarters of its value (down 78%) in a single day and ending the month down 84%.

Other small cap biotech companies were also wounded in February with the Burrill Small Cap Biotech Index down 15% for the month and nearly 19% year to date. Five small cap companies in the index lost about one third of their value in February. AVI BioPharma's (AVII) shares slipped 34%, although on February 26 the company reported final study results confirming the safety of its Neugene antisense drug in adult patients with autocomal dominant polycystic kidney disease. Transgenomic Inc. (TBIO) saw its shares plunge 33% after the company announced that its fourth quarter revenues had decreased 14% to $9.2 million in 2002 from $10.7 million in 2001. Pain Therapeutics (PTIE) also reported its year end 2002 financial results-a net loss for the year of $15.9 million compared to a net loss of $14.3 million for the same period in 2001-and the company's shares slid 30% in February. Rigel Pharmaceutical's (RIGL) announcement at the end of January 2003 to cut its workforce also took its toll. Shares of Rigel's stock slipped 30% in February. And although Aradigm Corporation (ARDM) announced $15 million in private placement financing on February 11, its shares were down 31% for the month.

Shares of Geron (GERN) lost nearly 16% on the news that Dolly the cloned sheep was euthanized at age 6 after being diagnosed with a lung disease. Geron, which purchased the technology that created Dolly from the Roslin Institute in 1999 has since licensed it to several livestock breeding companies however most of Geron's research these days is focused on a potential cancer treatment targeting telomerase. Shares of Geron were down 20% for the month with shares selling for $1.69.

There was one shining star in the small cap group, however, Onyx Pharmaceuticals (ONXX). Investors apparently liked Onyx' recent restructuring plans to concentrate on the development of BAY 43-9006, an orally active small molecule raf kinase inhibitor that is being developed in partnership with Bayer Corporation. During February, the value of Onyx' shares increased by 44%.

The Burrill Mid Cap Biotech Index was down nearly 5% in February with more than half the companies posting double digit losses. The exception to the rule was ImClone (IMCL). After ImClone, along with partner Bristol-Myers Squibb (BMY), announced that it would make Erbitux available to terminally ill patients under the FDA's compassionate use program, the stock rose steadily throughout the month, ending up 44% in February. "Boosted in part by the expectation of a European filing in June of this year investors are hoping that analysts' predictions of sales being generated as early as 2004 will come true," noted Burrill. "Still, Erbitux has yet to pass muster with any regulatory agency in the world," he said.

The Burrill Large Cap Biotech Index slipped 2% in February with shares of ICOS (ICOS) losing 19% in February despite the successful launch of Cialis, the new erectile dysfunction drug that it co-developed with Eli Lilly (LLY). Except for Amgen, which gained 7%, and Invitrogen, which gained 5% due to its announcement of a profitable fourth quarter and increased revenues of $648 million in 2002 compared to $629 million one year earlier, all the other companies within the index posted slight single-digit losses.

The Burrill Genomics Index was down nearly 8% in February with shares of Nanogen(NGEN) hovering close to the dollar mark ($1.07 per share), down 29% for the month, due mostly to the company's overall decline in product revenues for the quarter. Incyte (INCY) and Gene Logic (GLGC) were both down 22% during the month. Gene Logic, with shares trading at $5 and change at the end of the month-its lowest price since October 1999-announced on February 25 that it intended to purchase privately held Therimmune Research Corporation for about $52 million in cash and stock. Gene Logic said that it expects the acquisition of the contract research organization to help it become a stronger player in the outsourced drug development market.

The Burrill Diagnostics Index was down less than 2% in February and off by nearly 5% year to date. Digene Corporation (DIGE) led the pack with shares gaining 45% in value during the month. The company announced record Fiscal 2003 second quarter results that reflected an increase of 25% in revenues to $14.5 million, compared to $11.6 million during the same period last year. Digene attributed the growth in part to a 79% increase in its HPV product revenue driven by recommendations from the American Society of Colposcopy and Cervical Pathology which suggested HPV testing for women with abnormal Pap smears. Cepheid (CEPH) and Myriad Genetics (MYGN) lost 25% and 23% of their value, respectively. Cepheid, which in the days following 9/11 saw its stock soar to $8 a share on excitement about its potential role in helping with the nation's defense against bioterrorism, closed at $3.98 a share at the month's end. Myriad's shares began their tumble after the company reported a fiscal second-quarter loss of $6.9 million, or 27 cents a share-more than the 23 cents a share that analysts had predicted.

The Burrill Agbio Index was down 6% for the month and down 7% year to date. Surprisingly, the only double-digit gainer of the bunch was the much beleaguered Paradigm Genetics (PDGM) which saw its stock increase by 29%-to a mere 36 cents a share. "After a very difficult year, Paradigm has made considerable progress towards the commercialization of its technology, with its agbio business now contributing incremental cash flow, and its predictive toxicology business emerging" said Burrill.

"The agbio sector is, however, under stress right now," explained Burrill. "Monsanto (MON) received EPA approval to market a new variety of corn genetically designed to resist rootworm-a product that could reduce farmers' reliance on insecticides now used on millions of acres of corn in the US-yet Monsanto's stock shed 7% of its value in February," he continued. "And Syngenta (SYT), another industry leader, saw the value of its shares tumble by 20% during the month. Agbio still has some challenges ahead," he said.

"Not surprisingly, we also saw some movement on the biodefense front," noted Burrill. "The US government announced contracts with Bavarian Nordic A/S (Copenhagen: BAVA.CO) and Acambis Inc., a subsidiary of the UK's Acambis Plc (London: ACM.L), to create a smallpox vaccine safe enough to include pregnant women and people with compromised immune systems. The US health department is spending $20 million on the effort," he said. "The FDA also approved a drug from ICN Pharmaceuticals (ICN) that is supposed to help troops survive attacks from nerve gas. Other companies, such as ViroPharma (VPHM) announced that they were seeking federal grant money to fund the development of treatments for viruses that might be used in a terrorist attack. Clearly these are difficult times and biotech has an exceedingly important role to play in our ability to survive," he said.

A review of the Burrill Life Sciences Indices for February 2003 is as follows:

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