Biotech's Market Cap Jumps 10% in October

Biotech, DJIA, and NASDAQ all post similar gains for the month

San Francisco, CA - November 01, 2002

On the heels of a disappointing third quarter, the biotech industry showed signs of a turnaround in October, despite escalating concerns about Iraq and the economy. The Burrill Large-Cap Biotech Index rose by nearly 9% in October--in line with the AMEX Biotech Index (BTK), which also was up 8%, and similar to increases in NASDAQ and DJIA, up 13% and 11% respectively. "There were some very impressive gains within the 'blue chip' biotech sector during October," noted G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. Shares of Genzyme (GENZ) shot up 35%; Biogen's (BGEN) shares rose 25%; the value of Affymetrix' (AFFY) shares increased 25%, and shares of Amgen (AMGN) were up 12%.

"Amgen had a slew of good news in October, beating the Street's estimates on third quarter earnings with pro forma net profits up 13% to $437 million. Total product sales rose 53% and total revenue was $1.5 billion. Amgen announced on October 28, that it expects to double output next year for its arthritis drug, Enbrel when a new plant comes on line, underscoring its bullish outlook for the year ahead. Although Biogen reported a sharp drop in profits for the third quarter, the company nonetheless beat expectations and also stated that its full-year profit would come in at the high end of forecasts. Genzyme also had a great month with a profitable third quarter and a boost from Transkaryotic Therapies' (TKTX) setback. Genzyme's stock gained 7% on the day that Transkaryotic disclosed regulatory difficulties for its Fabry disease treatment.

Transkaryotic's stock tanked (down 64% for the month) when the company announced that the FDA had rejected data on the primary endpoint that it had planned to use in support of its marketing application. "That one loss mitigated the gains that the Burrill Biotech Select Index would otherwise have had. Indeed, without this decrease, the index would have been up 6%. As it was, the index slipped during October, but only by 0.1%," he explained. "Nonetheless, in October, we saw the market cap for the industry jump from $199 billion (as of September 30, 2002) to $220 billion. That's a 10% increase and although it's a far cry from where the industry was at the end of 2001 ($382 billion in market cap as of December 30, 2001), it's still a turn for the better."

The Burrill Mid-Cap Biotech Index was off by less than 1% and the Burrill Small-Cap Biotech Index was up 5%. "The vast majority of small-cap firms are still struggling," noted Burrill. "The Burrill Small-Cap Biotech Index is down 54% year to date. The marginalization of the biotech industry has never been this bad," he said. "Many of the small cap companies have stocks trading for less than a cup of coffee. For the most part, investors are electing to keep up the caffeine levels and leave biotech alone," continued Burrill. "The biotech industry, is, perhaps, the world's least capital efficient marketplace and neither the technologies nor the companies themselves are well understood. In the last 52 weeks, 239 out of 353 (67%) biotech companies have traded below $5 and most brokerage firms do not provide coverage at that level," he explained.

"Regardless of biotech's burgeoning popularity, its intrinsic health and numerous successes, many in the industry are expecting the current bear market to continue for the next several quarters and it's going to be a matter of survival of the fittest," said Burrill. "We're going to see more retrenchment, reorganization, restructuring, and refinancing in the next 12 months-not to mention a few delistings," predicted Burrill. Indeed, at the end of March 2002, there were more than 60 public biotech companies with less than one year of cash, based on trailing 12-month operating losses. "But even that news isn't all bad. When the going gets tough, companies get focused and are far more creative at forging solutions. There are a number of strategies for survival," he said. "For example, a company can turn down the volume on research activities, cut non mission critical projects, spin off parts of the business, license out technology and products, find synergistic partners, leverage hidden assets like real estate, and finance on less than attractive terms. The point is to stay alive until the next era of receptive financial markets comes about…and it will," Burrill said.

"First, though, the general economy and market trends will need to improve, and the wild card-Iraq-has yet to be played," commented Burrill. "Still, there's reason for optimism in this fourth quarter. The deal between GlaxoSmithKline (GSK) and Exelixis (EXEL) is very significant. Glaxo is set to pay nearly double Exelixis' current stock price to acquire about a 3% stake in the company. It is this kind of premium-to-market transaction that underscores biotech's intrinsic value," stated Burrill.

"There's lots of cash on the sidelines and biotech offers tremendous upside, particularly now," Burrill noted. "Valuations are very reasonable and companies are more mature and more focused," he said. "There currently are so many biotech medicines in Phase III trials that we can expect to see as many new products within the next decade as we have in the entire history of this industry," he emphasized.

"We're also seeing some positive momentum at the FDA," observed Burrill. "The Senate's speedy approval of Dr. Mark McClellan as the new commissioner is certainly a plus. His background as a professor of medicine and economics brings an important perspective to the position. The installation of a commissioner coupled with the recently announced restructuring plans for the agency bodes well for biotech," he added.

The Burrill Agbio Index also showed signs of recovery, moving up 6% in October. Monsanto (MON) posted an 8% gain and Scott Company's shares (SMG) 14%, while shares of DuPont (DD) were up 14% in October. DuPont just announced that, as part of a science-based consortium, it will receive $19 million in matching funds form the U.S. Department of Energy (DOE) for research leading to a biorefinery for producing ethanol fuel and other chemicals from corn. "We're on the brink of some very important breakthroughs in the area of bioenergy as well as in the discovery of biocatalysts for industrial use-advancements that will reduce the impact on the environment," stated Burrill. "Unfortunately, though, there is still resistance to most GMOs in Europe, despite the new EU rules which effectively ended the three-year moratorium on genetically modified crops earlier this month. But several countries including France, Austria, Italy, Denmark, and Belgium are maintaining a ban on GMO foods until labeling rules have been clearly established," he noted.

Another company within the Burrill Agbio Index that experienced a long-awaited turn for the better was Paradigm Genetics (PDGM), which was up 47% in October. The company was awarded a five-year toxicogenomics contract of up to $23.8 million by the National Institute of Environmental Health Sciences. The contract targets research on how toxicants work and cause damage at the cellular level. "Wall Street liked this deal, and with good reason," said Burrill. "The contract validates the work that Paradigm has been doing in human health."

The Burrill Genomics Index rose a little more than 1% during October, bolstered in great measure by the 25% gain value for shares of Affymetrix. The company announced on October 23 that it had gone to a profit from a loss in the third quarter, citing rising demand for its gene chips as the key accelerator. Revenue rose to $62.9 million from $47.2 million. Product revenue rose 33% to $69 million, according to company sources. The only other companies that posted gains during October were Celera (CRA) up 4%, Incyte (INCY) up 6%, and Nanogen (NGEN) up 13%.

Invitrogen (IVGN) was the other biotech company that managed to trade in losses for a profit in Q3 02. The company posted a net profit of $14.9 million, or 28 cents a share, compared with a net loss of $37.4 million, or 71 cents a share, one year earlier. Nonetheless, Invitrogen's shares took a beating in October shedding 18%. Earlier in the month (October 15), the company announced its intent to acquire the floundering scientific software firm, InforMax (INMX) for about $42 million-just about what InforMax has on hand. "This is a deal that will dilute Invitrogen's earnings next year and that's scaring investors away," explained Burrill. "But this move should not come as a great surprise. The informatics platform companies have been crucified this year," he said. "This deal is a clear move towards integration of tools and scientific strengths and we see it as a positive one."

A review of the Burrill Life Sciences Indices for October 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. We have completed more than 20 strategic partnerships with a value in excess of $1 billion.

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.

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