Dark Cloud Over Biotech in April

Still wary, investors are waiting…and selling

San Francisco, CA - May 01, 2002

The government's announcement that the gross domestic product (GDP) grew a hefty 5.8% during the first quarter of the year was not enough to restore investor confidence in April. Indeed, every major stock index took a hit during the month, with the Burrill Biotech Select Index losing 16%, compared to NASDAQ and the DJIA, which lost 8% and 4% respectively. "Wall Street has not seen lows like this since last September," remarked G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank…"and the general malaise pervading Wall Street has taken a considerable toll on biotech which has been under scrutiny since the Enron scandal, the Elan accounting issue disclosures, and the ImClone debacle."

Despite the fact that seven out of eight profitable biotech companies met or beat their respective EPS estimates in April, every single one of them suffered. Together the group lost nearly $9 billion during the week of the earnings announcements. Indeed, Amgen's (AMGN) positive first-quarter earnings report and expectations of better than anticipated sales growth in 2002 failed to kindle investor enthusiasm. In fact, the company saw its stock drop 2.5% on the day following the announcement, ending the month down 11%. And Amgen's performance was stellar in comparison to most. Genentech (DNA) lost 30% of its value in April and Human Genome Sciences (HGSI) lost 28%. Incyte (INCY) and Curagen (CRGN) fared worse, down 31% and 46% respectively. "The market is still haunted by eroding faith in accounting practices, not to mention mounting concerns about global stability," said Burrill. "The dollar is losing ground against the euro and the yen and, quite frankly, recovery is sluggish with no real economic catalyst in sight. In short, the markets are treading water," explained Burrill.

Biotech's concomitant weak performance during April dampened the hopes of several companies poised to go public. DOV Pharmaceuticals (DOVP), the only biotech to squeeze through the barely cracked open IPO window, hemorrhaged, losing one third of its value on the day of its debut on April 25, closing at $8.70 a share-way off from its $13 offering price. Within three days of trading, both CIBC World Markets (Toronto: CM.TO) and Lehman Brothers Holdings Inc. (LEH), which jointly managed the $65 million IPO for DOV, were hit with class action suits claiming that the companies had violated Sections 11 and 12 of the Securities Act of 1933 by failing to inform investors of a revision to DOV's 1999 financial results and neglecting to properly include a Joint Venture in Bermuda with Elan Corporation. "DOV filed three amendments to its S-1 filing just one day previous to the IPO," explained Burrill. "With the stock tanking on the first day, it's hardly surprising that investors rushed to find a scapegoat…but it's troubling to see how quickly the tide turned and how deeply it affected the next IPO in the chute-Alderis Pharmaceuticals-which is now the second biotech deal to be placed on 'day-to-day' status this year."

"Investors aren't in the mood to take risks, and right now, everything looks risky. Even the solid bets like Amgen, Genentech, Chiron (CHIR), Biogen (BGEN), Genzyme (GENZ), and Idec Pharmaceuticals (IDPH) are under fire," Burrill noted. "The fact that big pharma is having a rough time with patent issues, clinical delays or disappointments, and competition from generic drug makers doesn't help, nor do big pharma's empty pipelines" he continued. Bristol-Myers Squibb (BMY) reported a 56% decline in net earnings to $585 million from $1.3 billion one year earlier due to excess wholesaler inventory and generic competition for its cancer drug, Taxol, the anti-anxiety drug, BuSpar, and the diabetes treatment, Glucophage. These three drugs generated sales of $87 million in the first quarter of this year after totaling $888 million in the first quarter of 2001. "And Bristol's troubles with ImClone and Erbitux aren't going away either," noted Burrill. Merck KGaA (ImClone's European partner) decided to delay filing for European approval of Cetuximab (Erbitux) until the first half of 2003, instead of later this year. This news came on the heels of a CNBC report that suggested doctors were casting doubt about Erbitux's ability to shrink head and neck cancer tumors.

New light will shine on Erbitux (ImClone, Bristol-Myers Squibb, and Merck KgaA) , Genentech's Avastin for cancer, Millennium's MLN341 for multiple myeloma, and many other promising experimental cancer drugs at the annual meeting of the American Society of Clinical Oncology (ASCO) which takes place in mid May. This year, though, summaries of presentations that were made available to ASCO's 18,000 members, found their way into the hands of the media, causing both losses and gains based on a pittance of information. Genentech's investors, for example, lost nearly $3 billion when an abstract for Avastin suggested possible safety concerns. "When an abstract of a presentation sends a major biotech company's stock spiraling, we're talking investor jitters," said Burrill.

There was more bad news for Genentech in April. Early in the month, Genentech and partner, Xoma (XOMA), announced a delay in filing for approval of its anti-psoriasis drug, Xanelim. Xoma's shares plunged 42% on the day of the news and ended the month off by 57%, while Genentech's stock slipped 9% ending the month down 30%.

Though few and far between, there were some bright spots during the month. Genta (GNTA) signed a deal valued at up to $480 million with pharmaceutical giant, Aventis (AVE) to jointly finish testing and ultimately marketing Genta's experimental drug, Genasense. According to Aventis, Genasense makes Taxotere-its own drug for advanced breast cancer and non-small cell lung cancer-more effective. Shares of Genta rose more than 9% on the news and gained an additional 6% the following day.

Another small company, Onyx Pharmaceuticals (ONXX), enjoyed a particularly strong month, gaining 74% during April, based largely on preclinical and clinical data supporting the company's use of therapeutic viruses as a promising treatment for cancer. The company's lead product Onyx-015, is in late-stage trials. In addition to Onyx, three other companies posted modest gains. After reporting a net profit of $14.5 million, compared with a net loss of $39.6 million one year earlier, the value of Invitrogen's (IVGN) shares increased by 1%. Protein Design Laboratories (PDLI) gained 5% and Geron's (GERN) stock saw a 4% rise.

"Despite the reticence surrounding the genomics and biopharmaceutical plays, investors continue to like the diagnostics space," said Burrill. More than half the companies in the Burrill Diagnostics Index showed gains in April. "It's also interesting that Craig Ventor's replacement as president of Celera is to be Kathy Ordonez, current CEO of Celera Diagnostics and former head of the molecular diagnostics unit for Roche," noted Burrill. "That's an indicator that diagnostics and their role in disease intervention and therapy selection is the first step in harvesting value from all the sequencing data. We're going to see continued interest (and investor enthusiasm) in this segment throughout the year," he predicted.

The Burrill Biotech Select Index was down 16% during April with losses of 30% or more posted for shares of Genentech (-30%), Incyte (-31%), and Curagen (-46%) and ICOS (-44%). Although Genentech reported first-quarter profits that exceeded Wall Street estimates (pro forma net income rose 30% to $118.6 million), sales for both Rituxan and Herceptin came in at the low end of the analysts' forecast. Other concerns, including delays for asthma drug, Xolair, and psoriasis treatment, Xanelim, have cast some doubt on the company's ability to deliver on its goal of achieving 25% earnings growth through 2005. The biggest loser of the bunch, Curagen, watched its value slip down to a 52-week low of $8.43, a decrease of 48% over the previous month.

The Burrill Genomics Index saw nearly 23% of its value evaporate during April with all companies within the index sustaining significant double-digit losses. Lynx Therapeutics (LYNX), entering 2002 with only $5.5 million, got a reprieve in April when it successfully arranged for $22.6 million in private equity financing. Nonetheless, Lynx ended the month down 34%. Celera also was hard hit, losing 27% during the month. On April 24, the company announced that its net loss in the quarter ended March 31 widened to $49 million from a loss of $29 million a year ago. Nanogen (NGEN), which experienced a steep rise in value after the 9/11 attacks, hit a new low in April, trading at $3 per share despite that product revenues for the first quarter were more than three times the total for the same time one year earlier. Affymetrix (AFFX), which reported its second consecutive quarter of pro forma profitability, nonetheless lost 16% for the month.

The Burrill Diagnostic Index outperformed all the other indices in April gaining nearly 2% during the month. Leading the pack were Bio-Rad Laboratories (BIO) and Biosite (BSTE), which gained 29% and 26% respectively. On April 23, Bio-Rad reported that revenues were $210.2 million, 4% higher than the previous year. Earlier in the month, the company announced that it had acquired Quantase Ltd., a company specializing in newborn screening diagnostic products. The move is expected to strengthen Bio-Rad's position as a market leader in newborn screening tests for Phenylketonuria, Galactosemia, and Glucose-6-Phosphate Dehydrogenase Deficiency. It also enhances the company's leading position in genetic disorders testing by adding to its portfolio of DNA, immunoassay and HPLC-based tests for sickle cell anemia, metabolic disorders, and thalassemia. Biosite exceeded analysts earning expectations with shares surging 31% on the day of the announcement (April 23). The company also raised its revenue projection for the year, hoisting it from 20% to at least 35% growth. Myriad Genetics (MYGN) and Digene (DIGE) were at the bottom of the heap posting losses of -29% and -36% respectively. Although the news was predominantly good for Myriad in April, the stock continued to tumble throughout the month. Neither the announcement of a $24 million research collaboration with DuPont to better understand the genetics of high-performing seed products nor its publication of the locus of an important predisposition gene for obesity could offset the losing streak. Shares of Digene were dragged down by the FTC's request for additional information and documentation with respect to Cytyc's proposed acquisition of Digene, which is now slated to expire at midnight on May 9, 2002.

The Burrill Large-Cap Biotech Index experienced a 16% dip in April due mostly to the heavy losses incurred by Genentech, Human Genome Sciences (HGSI) and Icos. Icos, off by 44%, is working with Eli Lilly on the development of a much-anticipated anti-impotence drug called Cailis. The company lost 34% in a single day (April 30) on the news that the FDA had called for more information about the potential competitor to Viagra. Human Genome Sciences, which has been on a downward slide since the beginning of the year, reported a first-quarter net loss of $38 million, compared to a loss of $13 million one year earlier. Moreover, the company's revenue shrank from $5.3 million to $600,000 due to the expiration of a revenue-generating gene research project.

But the bigger negative news for HGSI was the discontinuance of its work Miriostipen as a "stand alone" treatment for immune deficiency associated with cancer chemotherapy. This "gene-to-drug" program for HGSI was to be a validating event for the company. Instead, the company is now concentrating on the development of a novel anticancer drug called the TRAIL Receptor-1 human monoclonal antibody (TRAIL-R1 mAb) which HGSI formulated in collaboration with Cambridge Antibody Technology.

The Burrill Mid-Cap Biotech Index was also off by nearly 17% during the month. IDEXX Laboratories gained 6%, mostly on double-digit growth sales of poultry and livestock diagnostics and water testing products. Shares of Scios (SCIO) rose 7% despite the company's report that its net loss widened to $25.2 million from $4.2 million one year previous.

The Burrill Small-Cap Index slipped 11% in April, giving back nearly double of what it acquired during March (+6%). Only Onyx posted dramatic gains while several companies posted sizeable losses. Ribozyme Pharmaceuticals (RZYM) was down by 52%. Organogenesis (ORG) was off by 65% after auditors raised substantial doubt over whether it could continue as a going concern. Covas International (CVAS) ended the month off by 45% after announcing that its Phase II-b study of a stroke treatment product didn't support initiation of a Phase III study. Similarly, Cellegy (CLGY) lost 61% when the company decided to pull its marketing application for its Cellegesic pain medication after the FDA made it clear that they needed more information before considering approval.

The Burrill Nutraceuticals Index fell nearly 4% during the month with most companies posting only modest gains or losses. The big news in the sector was the announcement that Herbalife International Inc (HERBA) had agreed to be purchased by two private equity firms for $685 million after shareholders became upset by the company's downturn in business. Shares of the company's stock shot up 30% on the news.

The Burrill Agbio Index remained stable during April, gaining less than 1%. Several companies performed well including Bionova Holdings (BVA), which was up 45%, and Fresh Del Monte Produce, which gained 25%. But the big winner was Seminis (SMNS), the largest developer, producer and marketer of vegetable seeds. Shares of the company's stock rose by a whopping 114%, due in great measure to the company's tremendous gain in net income--$25.7 million in the quarter ending March 29, 2002, compared to $4.9 million during the same quarter one year earlier.

A review of the Burrill Life Sciences Indices for April 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.