Another Slow Month for Biotech in August

Trading volumes reach new lows as the waiting game continues

San Francisco, CA - September 03, 2002

Although the biotech industry has had its toughest year ever on Wall Street (losing almost half its value already this year), from mid July to mid August, the Amex Biotechnology Index (BTK) increased by a whopping 39%-but by August's end, the industry had lost all the ground it had gained during the month, and then some. The Burrill Biotech Select Index slid 5% during August, trailing both the DJIA (down nearly 1%) and the NASDAQ (down just over 1%). "A lackluster performance on Wall Street is pretty typical for the dog days of August," stated G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based private merchant bank focused exclusively on life sciences. "Investors are continuing to wait it out and no one is buying," he said. Trading volumes for the Burrill Biotech Select Index are at new lows for the year-$1.23 billion daily average during August, down 21% from July which had a daily average of $1.55 billion and off 32% from the daily average of $1.88 billion in January, 2002.

"There have been intermittent rallies, but the gains have been fleeting," commented Burrill. "For example, when Gilead Sciences got a unanimous positive recommendation for approval of Adefovir, its experimental treatment for hepatitis B from the FDA's Antiviral Drugs Advisory Committee, Gilead's share value increased steadily for several days reaching a peak of about $37 a share (up 22% from the beginning of the month). But by the end of the month, the excitement had worn thin with shares of Gilead trading at $32 and change-an increase of a mere 5% since the start of August," he said.

"Conversely, while the good news faded fast, the bad news appears to have had a lasting effect," noted Burrill. "A disappointing clinical report on AstraZeneca's (AZN) cancer drug, Iressa-released on August 19, had a reverberating negative effect on shares of several biotech companies-OSI Pharmaceuticals (OSIP), Genentech (DNA), Abgenix (ABGX), and ImClone (IMCL)-all of which have similar drugs in clinical trials," he continued. "Iressa belongs to a class of drugs called epidermal growth factor (EGF) inhibitors," he said. "Bad news about Iressa translated into bad news for all similar compounds in clinical testing," explained Burrill. Shares of OSI Pharmaceuticals which is developing an EGF inhibitor dropped 57%. Abgenix which also has an EGF inhibitor called ABX-EGF in development with Amgen (AMGN) saw its stock drop 20% on the announcement. ImClone also suffered with shares slipping 11% on the news since its lead candidate, Erbitux, also is an EGF inhibitor. "The severity of the loss is due in part to the enormity of the promise that this particular class of drugs is thought to hold-the power to inhibit the growth of cancer cells while enhancing the efficacy of the attendant chemotherapy. When Iressa failed to deliver on the combination therapy front, the value of the other EGF inhibitor drugs was brought into question," said Burrill.

While the large-cap companies held steady during the month-the Burrill Large-Cap Biotech Index lost less than 1%-the small-cap companies enjoyed a slight gain of just over 1%, but the mid-cap companies took more of a beating. The Burrill Mid-Cap Biotech Index was off by 8% for the month. "Investors these days are looking for predictability and profitability and many investors are still unconvinced that the worst is over. This 'on the fence' behavior can't last forever and we're still predicting that the long-awaited turnaround is near at hand," noted Burrill. Over the last dozen years, biotech stocks have risen an average of 15% in the fourth quarter.

The announcement on August 23 that Trimeris, Inc. (TRMS) filed for a follow-on offering of 2 million shares of common stock in an effort to raise more than $100 million, gives credence to the notion of a Q4 02 recovery. "This particular deal is being led by Morgan Stanley and Goldman Sachs with Lehman Brothers and Banc of America Securities as the co-managers," explained Burrill. "Follow-ons have been few and far between in 2002, so an offering of this size backed by a blue-ribbon team of bankers signifies the hopeful return of investor appetite and might mean a reopening of the financing window," added Burrill.

The genomics sector continued its downward spiral in August, however. The Burrill Genomics Index shed nearly 7% of its value during August and is down by nearly 61% year to date. Shares of Celera (CRA), which sold for about $250 per share in February 2000, were off by another 10% in August, ending the month at $9.45 per share. Human Genome Sciences (HGSI) which has also seen the value of its shares diminish greatly over the last two years was off another 13% at the end of August to close at $15.06 per share…investors are unconvinced Celera and HGSI can convert their knowledge of genomics into profitable drugs. However, the company to shed the highest percentage of its value during August was the much beleaguered Lynx Therapeutics. Trading at nearly $100 per share in February 2000, Lynx' stock closed at 46 cents a share at the end of August-a 54% drop since the previous month.

The Burrill Select Index was down 5% for the month and down 44% year to date. Although Amgen received approval for both Aranesp (to treat anemia in adult chemotherapy patients) and Neulasta (to reduce neutropenia, a side effect of chemotherapy) from the European Commission in August, the company's stock price slid by 1% in August to close at $45.03 per share. Geron (GERN), which this month received a U.S. patent for its telomerase-based cancer immunotherapy, also lost value this month dropping 19% to close at $4.20. Although the company stated that telomerase immunotherapy could be effective against a very wide range of cancer types which might allow the company to produce a universal cancer vaccine one day, investors weren't buying. Shares of Protein Design Labs (PDLI), which traded at about $90 per share in February 2000 closed at $10.38, a decline of 24% over the previous month. The company reported a second-quarter net loss due to higher research costs and lower interest income.

The Burrill Diagnostics Index was down nearly 2% for the month and off by nearly 24% year to date. There were two big winners in the segment-Cepheid (CPHD) which was up 29% for the month, and Digene (DIGE) which also saw its share price rise 23% in August. Cepheid received a $376,000 one-year grant from the National Institutes of Health to develop rapid diagnostic tests for mycobacteria tuberculosis. Digene, which reported a $4.5 million net loss for the fiscal fourth quarter due to spending on its aborted merger with Cytyc, is nonetheless being rewarded for abandoning that particular mission. The big loser in the diagnostic segment this month was Myriad Genetics (MYGN) dropping 26% during August, due primarily to a wider quarterly loss of $6.8 million (compared with a loss of $2.2 million one year earlier).

The Burrill Large-Cap Biotech Index was down slightly less than 1% during August and off by 39% year to date. Chiron led the pack with the value of its shares rising by 12%. Several other companies posted slight gains including Gilead, up 5%, Invitrogen (IVGN), up 2%, and Affymetrix (AFFX), also up 2%. But on the negative side, Biogen (BGEN) and Genentech (DNA) posted decreases of -7% and -6%, respectively.

The Burrill Mid-Cap Biotech Index lost more ground than any other index this month, shedding nearly 8% and off by 47% to date. The big loser in the category was Cerus (CERS) with share prices dropping by 40% since the start of August. Even though the company reported that its net loss had narrowed on higher revenue at the end of July, the company has seen its value decline steadily throughout the month. Only two companies in the segment posted gains. Shares of Orchid (ORCH) gained 1% in August while shares of Pharmacopeia (PCOP) gained 19% on news of restructuring.

The Burrill Small-Cap Biotech Index lost just over 1% in value during August and has shed nearly 51% of its value year to date. At this point, most of these companies are trading at or below cash value and many are finding it difficult to garner any investor attention. Nonetheless, there were three companies that did particularly well this month: VaxGen (VXGN), Transgenomic Inc., (TBIO) and Essential Therapeutics (ETRX) which saw stock values rise by 82%, 67%, and 49%, respectively.

The Burrill Agbio Index was up 3% during the month of August, down 8% year to date. On the heels of its 33% drop in value during July 2002, Paradigm Genetics (PDGM) shed an additional 41% during August to close at 55 cents a share…all amid management changes and restructuring. The only other significant loser in the segment was Seminis (SMNS) which saw its stock price decline by 20%. The big winner in the segment was Montsanto (MON) which experienced a 21% increase in value during August, as investors return to an almost independent company again, and a pure-play on agbiotech.

The Burrill Nutraceuticals Index outperformed all the other indices during August ending the month up 5%. Nutraceutical International (NUTR) and Martek Bioscience (MATK) both posted sizeable gains of 33% and 25%, respectively. On August 2, Nutraceutical International reported net sales of $29.5 million for the fiscal 2002 third quarter, compared to $26.7 million for the same quarter one year earlier. Martek announced at the end of the month (August 19) that the US FDA had approved two new infant formula products from Mead Johnson Nutritionals that contained a blend of Martek's docosahexaenoic acid (DHA) and arachidonic acid (ARA)-nutriends that are key building blocks for an infant's brain and vision system.

A review of the Burrill Life Sciences Indices for August 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.

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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.

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