Biotech's Blues Continue in June

Investors aren't buying

San Francisco, CA - July 01, 2002

There were more biotech losers than winners in June with The Burrill Biotech Select Index falling 11% during the month compared with the NASDAQ, down 9%, and the DJIA, which dipped by nearly 7% in June. "We're seeing a massive decline in value for both biotechnology and pharmaceutical companies on Wall Street," said G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. "The majority of biotech companies are trading at a small premium to their cash values…and even with that, there are no buyers," he said.

"Biotech has had one bad month after another on Wall Street this year… and the cloud of misconduct surrounding the ImClone (IMCL) debacle, which resurfaced in June, has done nothing to restore investor confidence," Burrill continued. "The market has hit bottom but investors are still waiting for signs of life. But the tide will turn," he said. "We'll see investor enthusiasm return to the segment when a compilation of good news coincides with the recovery of the capital markets in general. But right now the industry is feeling the impact of the developments surrounding ImClone, the $500 million judgment against Genentech over a contract dispute with the City of Hope National Medical Center, and the disappointing news from Genzyme General (GENZ) that its earnings would be hurt by slower-than-expected sales of its kidney disease drug, Renagel. With the WorldCom scandal unfolding on Wall Street and talk of more accounting frauds yet to come to light, the capital markets are definitely spooked," Burrill added, "and biotech has suffered with the general market conditions."

"Where will it end?" asked Burrill. "Biotech has seen hard times before," he noted. "We've seen some major slumps-in 1984-1985, 1988, 1994, 1997-1998, and 2001. As grim as the picture looks right now on the Street, biotech's long-term destiny looks more promising than ever," he said. "The 'omic'ization of biotech may not be collapsing drug discovery timetables at the rate we'd like to see, but there is no question about the enormous potential this revolution will deliver…at least not within the industry."

Indeed, BIO 2002 drew record crowds in Toronto, Canada in mid-June, making it the largest conference in the history of the biotechnology industry. With 15,565 registrants in total, there were 4,300 people from outside North America, 4,400 from Canada, and 7,400 in the United States. "Globalization of the industry is in full swing and all of the 28 nations represented at BIO 2002 recognize biotech's potential-not only in terms of its contribution to human healthcare, diagnostics, agriculture, and nutrition, but also as a means of stimulating local economies," noted Burrill. "While the industry is facing its share of challenges, biotech's product pipeline has never been more robust, the science has never been more exciting, collaborations have never been more plentiful…and there is still money flowing into the industry."

"But the problems that biotech is poised to solve-illness, hunger, energy shortages and bioterrorism-are not going to go away," commented Burrill. "We've invested more than $200 billion in this industry to date and we've come along way. I predict that within the next several years, we're going to see our investment pay off-and not just for the momentum investors who hit the market just right," he said. "Biotech is progressing at an impressive clip and we'll continue to see many innovative applications of technology. While the industry's batting average with the FDA may not improve substantially until a commissioner is installed and PDUFA-driven changes have had a chance to take hold, better days will come," he noted. "In the meantime, enormous strides are being made in the development of more efficacious therapeutics, diagnostics, vaccines, biomaterials, biofuels, modified crop strains, and nutraceuticals."

That progress, however, has not been reflected on Wall Street. In June, every one of the Burrill Indices took a hit. The Burrill Genomics Index fell 10%, ending the quarter down 36% and off 51% since the start of the year. Shares of Millennium (MLNM) fell 19% during June, despite the fact that the FDA granted fast-track status for the company's MLN341 compound for treating multiple myeloma, a deadly blood cancer that strikes some 14,400 patients in the US each year. In the best case scenario, the compound could receive approval as soon as 2005. As such, MLN341 would be the first drug that the company has been able to bring to market entirely on its own steam. Shares of Human Genome Sciences (HGSI) and Curagen (CRGN) also took a tumble, falling by 22% and 32%, respectively. Now all three companies are trading near their all time lows. "While there was no specific incident that brought down the value of these companies' shares, investors are waiting to see if Millennium, Human Genome Sciences and CuraGen can deliver on the promises of genomics-based drug discovery," said Burrill. "Obviously, investors are looking for profits, not promises."

The Burrill Select Index was off by 11% for the month and down 43% year to date. Among the losers were ICOS (ICOS) with shares down 25% and Abgenix (ABGX) down 24%-neither of which received any negative news to note during June. In fact, Maxygen (MAXY) was the only company in the index to gain ground during the month with its share price increasing by 19%.

The Burrill Diagnostics Index which, until June, was up by slightly more than 1% since the start of 2002, also fell by 10% during the month. Only three companies within the index posted gains in share prices. Exact Sciences (EXAS), which signed a licensing partnership with Laboratory Corporation of America Holdings (LH) on June 27, saw its share price increase by 21% for the month. Shares of Bio-Rad (BIO) inched up another 3%, based in part on a "strong buy" assessment announced by Deutsche Securities mid-month. Cepheid (CPHD) also saw a slight gain of 9%. Shares of Digene (DIGE), however, took a big plunge in June (down 49%) after the FTC moved to block the company's proposed merger with Cytyc Corp (CYTC) citing that, once merged, the new entity would dominate the market for cervical cancer tests. On June 27, Cytyc announced that it had extended the expiration date of its offer to purchase Digene until July 12, however Digene said on the previous day that it was considering walking away from the proposed deal. Sequenom (SQNM) also saw its stock price fall by 29% during June, although the only company news was good-the announcement of a $7 million alliance with Samsung Group (SAGR.UL), the large Korean conglomerate, to discover genes that could be useful in drug development.

The Burrill Large-Cap Biotech Index slipped nearly 14% during June, down 40% year to date. Shares of Amgen (AMGN) slipped 12% during the month (it is completing its acquisition of Immunex and continues in its "quiet period") and Biogen's shares lost 17%, based in part on the slowing sales of its flagship multiple sclerosis treatment, Avonex. But it was Genzyme that took the biggest hit this month with stock prices plunging 40% as a result of the company's expectation of lower second quarter and full-year profits.

The Burrill Mid-Cap Biotech Index fell by nearly 7% in June with Cerus Corporation (CERS) and Lexicon Genetics (LEXG) shedding 22% and 20% of their shares' value, respectively. Oddly, both companies released positive news stories during the month. Lexicon announced on June 10 that it had identified and validated in vivo a new target for the development of potential drugs to treat obesity. Cerus and Baxter International (BAX) won European regulatory approval for a system that rids blood platelets of nearly all pathogens. Worldwide market potential for such a system is about $2 billion, according to one industry analyst. Shares of Scios (SCIO) jumped 21% in June. The company announced on June 25 that its ADHERE Heart Failure Registry meets the standard for the accreditation process of the Joint Commission on Accreditation of Healthcare Organizations (JCAHO).

The Burrill Small-Cap Index saw a drop in value of just under 9% in June, down 38% year to date. Many of the companies saw hefty double-digit losses. Shares of Neorx Corporation shed 55% of their value. One winner within the index in June was Immtech (IMMT) which saw stock prices soar 63%, based largely on the company's mid-month announcement of an advancement of its lead hepatitis C drug candidates towards clinical trials. Large Scale Biology Corporation (LSBC) also gained a whopping 66% in value during the month. The company announced two important partnerships in June-one with Phylogix, Inc. to produce a therapeutic plant protein which is native in hyacinth seeds, called FRIL. The other collaboration is with the National University of Singapore which will be using Large Scale Biology's PLURIGEN CM stem and progenitor cell cultivation product to enhance the proliferation of human peripheral blood stem cells, umbilical cord blood stem cells and mesenchymal stem cells.

Aside from Large Scale Biology's stellar performance, several other company within the Burrill Agbio Index posted a significant gain in stock prices. Shares of ConAgra (CAG) gained 12% and shares of Seminis (SMNS) gained 13%. However, the index shed 1% of its value during June and has lost less than 1% since the start of the year.

The Burrill Nutraceuticals Index fell nearly 4% in June, down nearly 8% for the quarter and 2% since the start of the year. There were several big losers in the category: Twinlab (TWLB) shed 44% of its value, based on no recent news whatsoever. Other losers were Cyanotech (CYAN), down 26% and also the recipient of a delisting letter from NASDAQ in mid-June, and Carrington Lab (CARN), down 25%.

A review of the Burrill Life Sciences Indices for June 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.

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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.

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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.