Biotech Slips Again in September

Biotech suffers right along with the DJIA and NASDAQ

San Francisco, CA - October 01, 2002

While September 11, 2002 came and went without a catastrophic reprise, the biotech market was beaten and bloodied again this month with still more clinical setbacks and not enough positive news to generate a sustained upswing. The Burrill Biotech Select Index slid another 7% during September (down 48% YTD), but it outperformed both the DJIA and the NASDAQ, down 12% and 11% for the month, respectively. "There is an inordinate amount of uncertainty right now…and it shows on Wall Street," noted G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. "Only a hand full of biotech companies posted gains of any significance this month," he said. "and those were unique to a significant corporate event. Investors held their collective breath before September 11 only to hold it again as the President rattled the saber over Iraq."

Although there were some major product disappointments during September-most notably setbacks for Avastin, Genentech's (DNA) drug for breast cancer, Theratope vaccine from Biomira (BIOM), and MLN02, Millennium's (MLNM) Phase II drug for Crohn's disease-there was good news as well. On September 24, 2002, the Oncology Drugs Advisory Committee voted 11 to 3 for accelerated approval for AstraZeneca's experimental cancer drug, Iressa, for the treatment of advanced non-small-cell lung cancer as a third line treatment following at least two chemotherapy treatments. Iressa is from a novel class of cancer fighting drugs known as selective epidermal growth factor receptor-tyrosine kinase (EGFR-TK) inhibitors that target specific cell signaling pathways responsible for abetting the growth of cancer cells. Although some FDA staff members expressed concern about some of the data that AstraZeneca presented, the panel concluded that the results were "reasonably likely to predict clinical benefit" to help some very sick patients.

"The FDA's viewpoint regarding Iressa is positive not only for AstraZeneca, but for other companies that have EGFR-TK inhibitors in development," said Burrill. "When the news hit, shares of OSI Pharmaceuticals (OSIP) went up 14% (a few days earlier, OSI announced that the FDA had designated its cancer drug Tarceva a Fast Track product as well). Likewise shares of Abgenix (ABGX) rose 12%, and even shares of the beleaguered ImClone (IMCL) shot up 11%. All of the companies have compounds in late stage trails that are similar to Iressa," he explained. "But beyond the boost that the decision lends to this new class of cancer therapy, the FDA's decision may also be signaling a more enlightened approach to the assessment of cancer treatments, particularly those targeted to satisfy as yet unmet needs within patient populations. Although in clinical trials Iressa significantly reduced tumors in just 10% of the patients, those survivors had a compelling story to tell…and the FDA listened," noted Burrill.

The FDA also granted approval for Gilead's (GILD) antiviral agent, Hepsera, for the treatment of chronic hepatitis B on September 20. The drug is the first neucleotide analogue to receive agency approval. Interestingly, several years ago, Gilead submitted this same compound to the FDA as an AIDS therapy but an agency panel recommended against approval because of associated kidney problems. On September 12, Andrx (ADRX) announced that the FDA had granted final approval for us of Altocor for the primary prevention of coronary heart disease in patients without symptomatic cardiovascular disease who have average to moderately elevated total cholesterol and LDL-cholesterol, as well as, below average HDL-cholesterol. The drug is already indicated to reduce the risk of heart attack, unstable angina and coronary revascularization procedures. This is the second FDA approval for Andrx within three months and the new indication opens a potentially vast new market for Altocor.

But the FDA didn't listen to Genzyme (GENZ) or Transkaryotic (TKTX) regarding their compounds for Fabry disease, both of which are marketed in Europe. On September 20, the agency postponed its meetings of the Endocrinologic and Metabolic Drugs Advisory Committee to review Genzyme's Fabrazyme and Replagal from Transkaryotic. The BLA's for both drugs have been under consideration by the FDA for more than two years. Even though the FDA indicated that the meeting would take place before the end of the year, shares of Transkaryotic lost $2.69 and shares of Genzyme shed $.34 on the day the news was announced.

Much in the news during September, the FDA stunned the industry with its plan to consolidate reviews of all pharmaceutical products at the Center for Drug Evaluation and Research (CDER), leaving the Center for Biologics Evaluation and Research (CBER) to concentrate on gene therapy, vaccines, blood products, tissue-based therapies, and xenotransplantation. Therapeutic proteins, monoclonal antibodies, and cell growth factors will shift over to CDER's expanded authority. "In time, this move may well improve the situation between biotech and the regulators," observed Burrill. "In 2001, CBER took an average of 20 months to approve 16 BLA's. Conversely, CDER's median approval time for 66 NDA's was six months. Of course it isn't as simple as all that," he continued. "In the short run there will be inconsistencies in policies to be worked out and relationships to be realigned. That could be sticky," he said. "Will this make a better FDA?," he questioned. "Some say 'nay' noting that we've been down this path before-in 1982-and to no avail. The two divisions were separated again in 1988. Still, the FDA is anticipating improved approval rates, BIO has praised the move, and the Burrill Select Index rose 2% on the news," he said.

Another piece of potentially good news for the FDA and biotechnology was President George W. Bush's nomination of his health policy advisor, Mark McClellan M.D., Ph.D. to fill the post of FDA Commissioner. McClellan, whose previous experience includes a stint as deputy assistant treasury secretary for economic policy in the Clinton administration and the post of associate professor of medicine and economics at Stanford University, has also received endorsement from both BIO and the Pharmaceutical Manufacturers of America (PhRMA). "Everyone is pretty excited about the nomination, even Ted Kennedy," said Burrill. "But Congressional approval may still be some months off, and that's a worry. Still, this is the first real momentum we've seen on this vacancy since the president took office, so we've all got our fingers crossed."

Meanwhile, the biotech industry continued to feel the pinch in September. The Burrill Large-Cap, Mid-Cap, and Small-Cap Indices all took a plunge, shedding 6%, 2%, and 10%, respectively. But there were some notable gainers. Affymetrix (AFFY), which announced a research collaboration with the Whitehead Institute Center for Genome Research on September 16, saw the value of its shares rise by 15%. Using the Affymetrix GeneChip® platform, researchers at the Institute plan to conduct cancer clinical studies and the strategy is to standardize experimental procedures. Standardization in this area is expected to facilitate analysis of DNA expression array data generated by different laboratories at various locations and accelerate efforts to diagnose and treat cancer.

Another collaborative effort, initiated in mid-September between GlaxoSmithKline (GSK) and privately-held Perlegen Sciences, takes advantage of high-density microarray DNA chips to enable whole genome SNP scanning for the identification of genetic markers indicating drug response. The goal of the effort is to find, within a relatively small population of patients, a pattern of genetic markers that may be associated with a pharmacogenetic response.

"Today's unfavorable market conditions are masking biotech's amazing progress," noted Burrill. "Genomics and its ancillary technologies are finally gaining traction. Proof of concept is rapidly matriculating into valuable applied technology and promising product candidates… yet the genomics sector is in the dumps," he said. "The content companies like Incyte (INCY), Celera (CRA) and Curagen (CRGN) that have attempted to morph into drug discovery companies are being crucified right along with Human Genome Sciences (HGSI) and Millennium (MLNM)-the very companies they're attempting to emulate," he continued. "Meanwhile GlaxoSmithKline, The Whitehead Institute and many others are not only embracing but also endorsing genomics, pharmacogenomics, and systems biology."

The Burrill Genomics Index lost 10% of its value during September, down 65% YTD. Incyte led the losers with shares dropping 24%. Shares of Curagen slid 27% and Celera's shares were down 16%. Human Genome Sciences and Millennium both saw the value of their shares slide by 24%.

The only segment of the biotech industry to post gains during the month was diagnostics. The Burrill Diagnostic Index rose by 4%, boosted in great measure by Biosite's (BSTE) 45% gain in value. One reason for the jump was the settlement of a patent dispute between Biosite and Xoma (XOMA). Shares of Biosite rose 25% on the news and shares of Xoma edged up 6%. "Diagnostics are being transformed by genomics and nucleic acid testing (NAT) is driving the highest growth (26% in 2001) and is predicted to continue to expand at a rate of 25-35%," explained Burrill. "Marker discovery is now considered to have the highest enterprise value of any area in diagnostics. Companies that can capture high value through proprietary tests and patented targets are going to return high margins and many of the development stage companies developing diagnostic kits and assays are approaching profitability," he said.

"What's more, pharmacogenomics is gaining favor with the FDA. The agency is encouraging tests linked to drugs to identify patients that might have an adverse reaction as well as those who would respond favorably to the drug," he noted. "The FDA's decision on Iressa, which favored the relatively small percentage of patients who benefited from the therapy, underscores the need for more genetic testing of cancer patients to achieve a better match. We've seen how such profiling has aided in the selection of patients for Herceptin and Gleevec," added Burrill. "Obviously, this is the wave of the future."

While the Burrill Agbio Index fell 8% during the month, one company, Large Scale Biology Corporation (LSBC) posted a 26% gain in share price. On September 17, the company filed an orphan drug application with the FDA related to its proprietary plant-produced human Alpha-Galactosidase A for enzyme replacement therapy. This molecule is thought to be potentially beneficial for the treatment of Fabry's disease. Last month, the company reported that the initial safety results of Phase I clinical trials for its personalized vaccines for non-Hodgkin's lymphoma were promising. The vaccines technically represent 16 different biotherapeutic proteins which are among the first to be made in living plants for use in humans. The vaccines are derived from Nicotiana plants with viral vectors for the expression of relevant proteins in the leaves of the plants which then are harvested, extracted and purified using Large Scale Biology's proprietary biomanufacturing process.

The company has the potential to produce a significant number of other drugs, enzymes, antibodies and other proteins using these plant-expression and bioprocessing technologies. At its Owensboro, Kentucky biomanufacturing facility, the company can produce several hundred doses of personalized vaccines in a year, thereby enabling the production of prescription therapeutic vaccines more quickly and economically than present industry procedures allow. After discussions with the Food and Drug Administration (FDA), Large Scale Biology anticipates evaluating its personalized single-chain NHL vaccines in an expanded, multi-center clinical trial beginning this October.

"We are making great headway in the molecular farming arena," noted Burrill. "First we were able to transform plants to resist disease and pests with the creation of Bt-corn and Bt-cotton. Then we concentrated on the creation of plants with favorable characteristics for increasing efficiency such as frost-tolerant strawberries and those with enhanced nutritional content such as high-lysine corn," he explained. "Now we're cultivating plants to serve as natural factories for producing therapeutic proteins. It's entirely possible that we will one day see fields of tobacco producing more human proteins that we could ever hope to soup up in vats using Chinese hamster ovary cells," he said.

"Incredibly, this industry held a dramatically higher value two years ago when it was merely on the cusp of the genomics era," noted Burrill. "Despite all the product disappointments of 2002, this industry has advanced considerably. What were little more than hypotheses a scant few years ago are becoming reality. We're seeing the promises of genomics and even systems biology being fulfilled on a regular basis in the pages of the scientific literature, in clinical trial results, in the development of diagnostics that can identify disease at the earliest stages, in the wider use of GMOs and transgenic crops, in the evolution of nutritionally enhanced foods, and in the creation and use of biofuels and bioplastics," he said. "Biotech is far better entrenched than Wall Street might indicate and we believe that the very real investment opportunities that exist will soon be recognized."

A review of the Burrill Life Sciences Indices for September 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 $350 million under management, includes the Burrill Biotechnology Capital Fund, 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 Science Capital Fund, currently under development.

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.