Biotech Dips in December

A sluggish economy and the threat of war dampen investors' spirits

San Francisco, CA - January 02, 2003

Although December was predominantly a "good news" month for the biotech industry with numerous key product approvals moving forward and several sizeable deals announced, The Burrill Biotech Select Index nonetheless slipped 9% during the month-in line with the NASDAQ (down nearly 10%) and but not as stable as the DJIA (down 6%). "The publicly traded biotech companies got creamed in 2002, sustaining one major blow after another," noted G. Steven Burrill, CEO of Burrill & Company, a San-Francisco-based life sciences merchant bank. The Burrill Biotech Select Index lost nearly half its value in 2002 (down 49%) while both the DJIA and NASDAQ held up a bit better losing nearly 17% and 32% YTD, respectively. "A lot of investors got spooked in 2002. Biotech is a risky business, but there is more upside potential in the biotech market right now than there has ever been in the past," Burrill explained. "And it is encouraging that the Burrill Biotech Select Index has bounded back about 10% from its low last summer on July 10th," he said.

"Biotech depends heavily on the capital markets which were very tough in 2002. This had a devastating effect on just about everybody," said Burrill. "Five biotech companies fell out of the NASDAQ 100 Index as a result of the re-ranking of the index: Abgenix (ABGX); Andrx (ADRX); ImClone (IMCL); Protein Design Labs (PDLI) and Sepracor (SEPR). There were delistings and even a few bankruptcies, which in the history of biotech were so rare you could count them on one hand…not so this year," continued Burrill. "Revaluation and restructuring was the name of the game in 2002, especially during the second half of the year as companies scrambled to secure a better financial footing. Since the start of the fourth quarter, we've seen dozens upon dozens of staff cuts and many changes at the top. both in large companies like Monsanto (MON)-veteran CEO Hendrik Verfailllie stepped down on December 18-and smaller operations like Orchid (ORCH), which announced the resignation of CEO Dale Pfost on December 9," he noted.

"At this point in time, with the continuing threat of war and concerns about the flat economy, no news is sufficient to restore confidence for any length of time," said Burrill. "Take December… we entered the month with a new FDA Commissioner who mustered widespread support and pledged to accelerate drug approvals. Agency panels recommended approval for two very important biotech medicines -- Medimmune's (MEDI) FluMist intranasal influenza virus vaccine and Corixa's (CRXA) Bexxar, a radioimmunotherapy for non-Hodgkin's lymphoma. Both companies gained on the news with Medimmune's shares rising 11% to $27.70 and shares of Corixa adding 6.6% to reach $7.73. However, by month's end, both stocks had slipped back to where they started," he said. "The FDA also gave Celera Diagnostics (CRA) marketing approval for its ViroSeq HIV-1 genotyping system, but by month end, shares of Celera had slipped 15%," Burrill added.

"Then, too, it is the end of the year... with tax loss selling defining the month," said Burrill. "Many of these shares are worth more as a tax loss than an 'asset'," he noted. "But the biggest culprit in this whole scenario is fear…about war, about wages, about what's going to happen with the economy," Burrill continued. "Uncertainty is the enemy of the capital markets and, at least in the short term, this bear market is likely to continue," he said.

"We do, however, see plenty of reason for longer term optimism with more biotech products than ever before advancing successfully through clinical trials," he said. "But such underlying strength and progress is not necessarily being rewarded on Wall Street these days," Burrill pointed out.

In December, IDEC Pharmaceuticals (IDPH) reported that IDEC-114, the company's drug for follicular non-Hodgkin's lymphoma, was well tolerated and successful at reducing tumors in patients in a Phase I/II clinical trial. IDEC and Genentech (DNA) also announced that an investigational study of their extended Rituxan product had demonstrated a 55% reduced risk of disease progression or relapse in patients with indolent non-Hodgkins lymphoma…but IDEC's stock rose a mere 2% on the news that day, closing at $33.32 and ended the month at $33.17, up 1% from the previous month. Genentech also submitted to the FDA its amended BLA for the experimental asthma drug, Xolair (along with partner Novartis (NOVZn.VX). In addition, Genentech and XOMA submitted their BLA for Raptiva as a treatment for moderate to severe psoriasis, but shares of the company's stock ended the month just where they began.

Nor did investors maintain their enthusiasm for Amgen (AMGN) which gained nearly 7% in value after announcing on December 12 that it expects 2003 profits to exceed Wall Street estimates, driven by a 40% increase in drug sales. The company projected 2002 earnings of between $1.37 and $1.39 a share, up from $1.18 in 2001. Amgen also received FDA approval for its Enbrel manufacturing facility in Rhode Island providing the company with a significant supply of the much-in-demand arthritis drug. But Amgen also lost a round in district court when its complaint against the government regarding Medicare reimbursement policy was dismissed. By the end of the month, shares of Amgen had increased by only a modest 2%.

Gleevec, Novartis' novel cancer drug received a major endorsement from the FDA on December 20. The agency announced that Gleevec is now approved for all stages of chronic myeloid leukemia-an affliction that is affecting about 40,000 people in the US and which can only be cured by a bone marrow transplant. Gleevec is a pill that has demonstrated significantly fewer cancerous cells in patients' blood and bone marrow while causing less damage and fewer side effects. Novartis' Clozaril also received approval from the FDA as the first and only drug to cut the risk of suicidal behavior in people with schizophrenia.

Regulators gave the green light to Pfizer's Relpax for the acute treatment of migraine headaches on December 27. Relpax is the newest product in the class of anti-migraine medications called triptans. About 28 million Americans (three times as many men as women) experience migraines during their most productive work years. On the last day of the year, the FDA also cleared Abbott Labs' (ABT) Humira, a once-a-week injectable drug for rheumatoid arthritis, a treatment that is expected to compete with Amgen's Enbrel. Although the approval came about two months earlier than expected, shares of Abbott Labs rose only 5% on the news to $39.20 and ended the month at $40 per share, down 9% from the start of the month ($44 per share).

"As busy as the FDA was in December, only 16 new drugs passed muster in 2002, compared with 24 last year," said Burrill. "When you consider that R&D expenditures for big pharma topped $30.3 billion-nearly 18% of domestic sales and triple what the industry what the industry invested ten years ago-this seems like a pretty lousy return," he continued. "More than one third of all the applications received were for orphan diseases which bodes well for those biotech's catering to smaller, underserved populations… but not so well for blockbusterology," Burrill added.

Indeed, two drugs received orphan drug status in December--SuperGen's (SUPG) Partaject-delivered busulfan for the preparative therapy of pediatric patients undergoing bone marrow transplants and Nabi Biopharmaceuticals' (NABI) treatment for hepatitis C infection in liver transplant recipients-Nabi-HB intravenous immune globulin therapy. Shares of both companies' stocks rose on the day of the news with SuperGen's shares trading at a high of $4.68 but ending the month down 22% from that high to close at $3.63. Likewise, Nabi's shares popped to $7.61 a share but closed at $6.20.

Another biotech company receiving attention from the FDA in December was Inhale Therapeutic (INHL). The company's PEGylated interferon technology is used in the newly approved (December 4) combination therapy from Roche, Pegasys ® and Copegus™, for the treatment of adults with chronic hepatitis C. Inhale also reported in December that Pharmacia Corporation (PHA) had initiated a large Phase III clinical development program with a rheumatoid arthritis therapy-CDP 870-that uses Inhale's technology. Amgen's Neulasta, approved in the US earlier this year, and Pharmacia's SOMAVERT®, approved for marketing Europe for the treatment of certain patients with acomegaly, also use PEGylated technology. "Still, Inhale's stock which peaked at over $60 a share in March 2000 and split in August of that year, closed at $8.08 per share on December 31, 2002," commented Burrill.

"If you compare what's going on in biotech today with what was happening at the height of the genomics bubble, there's no question that the industry has advanced remarkably, despite the fall off of investor enthusiasm," said Burrill. "Biotech has more products, more revenues, more clinical successes, more whiz-bang technologies, more proof of concept, more streamlining, more focus, and more experience…what's been lacking in 2002 is more money and investor enthusiasm," he noted.

"Big pharma has lost about one third of its value during 2002, due in great measure to the huge gap between R&D investment and the successful development of new products. This has had a devastating effect on the plethora of genomics plays that materialized in 2000 as well as the mainstays," explained Burrill. The Burrill Genomics Index lost a whopping 17% of its value in December and was off 67% from the beginning of the year. Large cap genomics companies like Affymetrix (AFFY), Human Genome Sciences (HGSI), and Millennium (MLNM), were down 16%, 17%, and 21%, respectively while Lynx (LYNX) slid another 48% in December closing at 41 cents per share.

The Burrill Small-Cap Biotech Index shed 9% of its value in December ending the year down 52%. "Of the 70 companies that we have listed in this index, 16 ended the year with shares trading below $1," stated Burrill. "Of those, nine companies have seen their shares trading at below $1 for several months' running…it's a pretty ugly scene," he said. The Burrill Large-Cap Biotech Index lost 8% of its value during December and ended the year down 37%. Only two companies in the index posted gains in December-Amgen (up 2%) and Invitrogen (IVGN), a company whose shares took off mid month gaining nearly 10% on the day after Deutsche Banc Securities raised its rating from "hold" to "buy" based partly on signs that the company is heading in a new direction with founder, chairman and CEO Lyle Turner announcing his imminent retirement.

The Burrill Mid-Cap Biotech Index slipped 7% in December, down nearly 48% YTD. Several companies took a very severe beating including Neose Technologies (NTEC), down 37%, EntreMed (ENMD) down 41% and CV Therapeutics (CVTX), down 21%. "The big mystery here is CV Therapeutics," said Burrill. "The company just filed a new drug application for Ranexa for the treatment of chronic angina. If the FDA accepts the drug it will be the first new class angina treatment to come to market in more than two decades," he noted. The only real winner in the category was Lexicon Genetics (LEXG), which in mid-December announced a three-year alliance with Genentech to discover new therapeutic proteins and antibody targets. Shares of Lexicon closed the year up 18%.

The Burrill Agbio Index was off by 3% for the month and just 9% for the year. Although Monsanto, a leader in the industry had a particularly bad year with their stock way off its high of $34 per share early in the year, the company nonetheless managed to gain 9% during the month of December with shares closing at $19.25. Investors seem to approve of the CEO's departure and also the news of approval for the company's insect-protected corn to be grown in the Philippines. At the other end of the spectrum, Large Scale Biology and Paradigm Genetics lost considerable investor support, shedding 31% and 47% of their values respectively during December.

The Burrill Nutraceuticals Index outperformed all the other indices gaining 5% for the month and ending the year up 6%. "This segment has held up well as consumers are converting to healthier lifestyles in ever greater numbers," said Burrill. Sales for Nutraceutical International Corporation (NUTR) were way up this quarter with net income at $2.8 million compared to $1.9 million for the same quarter of fiscal 2001. The company also reported net sales of $110.9 million in fiscal year ended September 30, compared to $103.6 million for fiscal 2001. Hain Celestial (HAIN) also had a good month ending December up 11%. The company announced on December 2 that it had acquired privately-held Imagine Foods, a beverage company specializing in aseptic and refrigerated rice and soy milks, soups, and broths as well as organic frozen deserts.

"As we look back over 2002, it's clear to see that biotech has what it takes to survive," Burrill remarked. "No other year in the history of biotech has been so relentlessly challenging," he said. "But the industry has endured. Companies have been revaluated, hard decisions about restructuring have been made. The upcoming year is sure to hold new challenges, but it will also deliver improved opportunities for investors, particularly as economic stability returns and the issues around Iraq are resolved by the second part of 2003," he said.

A review of the Burrill Life Sciences Indices for December 2002 is as 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, agricultural technologies, nutraceuticals, and biomaterials/bioprocesses.

Venture Capital
The Burrill family of venture capital funds, with over $400 million under management, includes the Burrill Biotechnology Capital Fund and its successor- the Burrill Biotechnology Capital Fund II (under development), the Burrill Diagnostics Fund, the Burrill Agbio Capital Fund and its successor-the Burrill Agbio Capital Fund II, the Burrill Nutraceuticals Capital Fund, the Burrill Biomaterials/Bioprocess Capital Fund and the Burrill Life Sciences Capital Fund.

Strategic Partnering
Burrill & Company assists life science companies to identify, negotiate and close strategic partnerships providing access to resources, technologies or collaborations essential for executing their business plans.

Spin-outs/Spin-ins
Burrill & Company works with major life science companies to spin-out internal assets and capitalize on their value, ranging from the outright sale of products or businesses to creation of new companies to exploit these assets. We also use our extensive network to help companies identify, assess and capture ("spin-in") products and companies strategic to building their businesses.

BioStreet™
Burrill & Company's BioStreet™ is an internet-based life sciences transaction service which enhances dealmaking capabilities by offering a broad range of services designed to streamline and facilitate deals. BioStreet combines the efficient distribution power of the worldwide web with the scientific skills and strategic relationships necessary for concluding successful transactions.

We have completed more than 25 strategic partnerships with a value in excess of $1.5 billion.

For more information, please visit Burrill & Company's website at www.burrillandco.com.