Biotech Marked Time in January While Wall Street Anticipated War

However, Burrill Large Cap and Genomics Indices posted slight gains...

San Francisco, CA - February 04, 2003

The rhetoric surrounding Iraq and a continued sense of economic insecurity squelched investor enthusiasm for biotech and other stocks, despite some relatively strong earnings reports, good news from the FDA for several key products, and a shot in the arm for a prescription drug benefit, a $15 billion emergency relief fund for AIDS in Africa, as well as a proposed $6 billion initiative to stimulate R&D for bioterrorism countermeasures coming from the White House. The Burrill Biotech Select Index was down 2% in January, pretty much in line with the NASDAQ, down 1% and the DJIA, down 3% for the month.

"The sound of war drums thundering through Wall Street derailed what might have been a pretty good month for biotech, particularly for the large cap companies. As it was, the Burrill Large Cap Biotech Index gained slightly less than 3%," noted G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. "Except for the FDA's rejection of Transkaryotic Therapies' (TKTX) experimental treatment for Fabry's disease, Replagal, the agency was quite bullish on biotech drugs. It gave the green light to Biogen (BGEN) for Amevive, its psoriasis medication, and FDA panels also recommended approval for Genzyme's (GENZ) Fabry's disease medication, Fabrazyme, and its treatment for mucopolysaccharidosis, Adlurazyme, developed in partnership with BioMarin (BMRN)," he continued. "Yet Biogen's stock slipped 5% in January and Genzyme's double win garnered only a 9% gain in value during the month," he said.

"Earnings reports were strong as well," noted Burrill. "Affymetrix (AFFX), Biogen, Gilead (GILD), Idec (IDPH), and MedImmune (MEDI) all beat analysts' expectations in January. Genentech's (DNA) fourth quarter net profits more than doubled. Affymetrix announced that it had shifted to a profit in the fourth quarter and Amgen (AMGN) matched analysts' expectations with its 4Q 02 results-a 58% increase in revenue," he stated. "Although Genentech's stock gained 11% on the news and Affymetrix' stock shot up 19%, (carrying the Burrill Genomics Index for January, up just over 1%), Amgen's share price increased by a modest 5%," he said. "Chiron (CHIR) is another example," explained Burrill. "The company announced a 49% gain in profits for 4Q 02 over the same quarter during the previous year, yet, perhaps because the results were in line with analysts' forecasts, there was zero change in the stock price for the month, and the value of Chiron's stock is about 10% down from what it was 12 months ago," he added.

"In 2002, we saw relatively meager rewards for progress and swift punishment for failures on the part of investors. This trend seems to be persisting in early 2003," he said. "Until the wild card with Iraq plays out, we'll see continued skittishness in the publicly traded markets which will dampen enthusiasm both for biotech and pharmaceutical stocks. But when the tide turns, and it will, biotech may well be sitting pretty with more compounds moving through to FDA approval than ever before. But for now, and for some time to come, the name of the game for many biotechs will be revaluation and restructuring," he predicted.

Indeed, since the end of 2Q 02, some 93 biotech firms have lowered their operating costs, cut staff, refocused resources, and, in some cases, changed top management. In January alone, 15 public companies including Geron (GERN), Onyx (ONXX), Lynx (LYNX), and Deltagen (DGEN) tightened the reins and let go of personnel. One company that has struggled to regain its footing since its stock went into free fall last July is Elan Corporation (ELN). On January 30, the company announced an update of its recovery plan and the settlement of its lawsuit with Pharma Operating. Part of the plan included the sale of its primary care franchise to King Pharmaceuticals, for gross consideration of $850 million. "Investors liked Elan's bold strokes," noted Burrill. "Shares of the company's stock gained 61% during January to close at $4.58 a share," he said.

"But Elan's gain was not enough to compensate for the poor performances of Cerus (CERS) and Transkaryotic which saw shares fall 62% and 51%, respectively, during January," explained Burrill. The Burrill Mid-Cap Biotech Index was down nearly 14%. "Shares of Cerus, which had been losing value all month, fell more than 40% following the news that additional clinical trials might be required for its Intercept blood cleansing system. At month's end, shares of Cerus were $8.36-down 86% from the company's high of nearly $60 a share in April 2002," he said.

Transkaryotic Therapies, meanwhile, had a month of solid disappointment. Not only did the FDA panel vote that the company's Fabry disease medication failed to measure adequate benefit, but Transkaryotic also got hammered when a court upheld two Amgen patents on an anemia drug-patents which are necessary to launch Transkaryotic's anemia drug, Dynepo. "By the end of the month, the securities fraud lawsuits were mounting up and Transkaryotic's beleaguered shares closed the month at $4.90, down 89% from its high of nearly $47 last April," noted Burrill.

"Transkaryotic's troubles weighed heavily on the Burrill Biotech Select Index performance for the month as well," Burrill commented. "Approximately 1.5% of the 2.06% decline in the index can be attributed to Transkaryotics' pull, but Transkaryotic was hardly alone in its misery," he said. "Geron's (GERN) shares slipped a hefty 42%, based in large measure on its announcement to cut nearly 40% of its staff in order to devote its resources to developing an anti-cancer drug and stem-cell based medicine products. Geron's stock, meanwhile, is trading at one seventieth of its all time high," added Burrill.

The Burrill Small Cap Index was down 4% for the month. While 28 of the 50 companies within the index continued on their losing streak and three companies had absolutely no change in their stock values, the remaining companies saw improvements, some slight and some significant double digit gains. "Leading the pack was 3-Dimensional Pharmaceuticals (DDDP) which posted an 80% increase in share value during January on the news that Johnson & Johnson (JNJ) had agreed to acquire the firm for about $88 million to help the pharma giant develop medicines that can be taken in tablet form," noted Burrill. The big loser of the bunch was Essential Therapeutics (ETRX) which experienced a huge blow on January 6 when its Phase I trial for ETRX 101 had disappointing results. By the end of the month, the company had received a NASDAQ Staff determination letter indicating that delisting would take place as of February 10, 2003.

In January, the Burrill Diagnostics Index slipped nearly 3% with Exact Sciences (EXAS) and Orchid Biosciences (ORCH) shedding 17% and 20%, respectively. On January 15, Orchid announced that it was seeking shareholder approval for a reverse stock split to avoid NASDAQ delisting, but the shareholder meeting has yet to be scheduled. Third Wave Technologies posted the biggest gain, up 14%, having successfully refocused it business on higher margin molecular diagnostic market opportunities. Curiously, Biosite (BSTE), which announced on January 27 that its 4Q 02 profit more than quadrupled and earnings would be higher than expected in 2003, only saw its shares gain of 5% during January.

"With the threat of war literally hanging over our heads and many mission-critical issues impacting the biotech industry yet to be resolved including a new Medicare and drug reimbursement plan, a policy on stem cell and therapeutic cloning, and a coordinated program to address the threat of bioterrorism, 2003 is bound to be a challenging year for the industry," stated Burrill. "Although the jitters on Wall Street may appear to be never ending, we will see investor confidence return, most likely in the latter half of the year, and with it a flurry of IPOs, secondaries, and, perhaps most importantly, the return of investor interest in biotech's life blood-the start up," he concluded.

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

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