Biotech Manages to Stay Ahead of the NASDAQ During a Volatile February

The market remains cautious in light of Enron, ImClone and Elan-and questions about accounting practices-but Amgen shows strength with a whopping $2.5 billion convertible bond deal

San Francisco, CA - March 01, 2002

On the heels of a disappointing start to the year, biotech stocks were on a roller coaster for much of February yet the sector managed to outperform the NASDAQ and perform nearly as well as the DOW. The Burrill Select Index fell 6% in February, while NASDAQ lost 10% and the DOW gained 2%. "February was a month full of headlines for biotech-some positive and some negative-and the market's performance appeared to reflect them all," noted G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank.

"The Enron situation had already fueled enormous skepticism on Wall Street when the ImClone debacle got out of hand," explained Burrill, "then, there were the questions regarding the accounting practices used by Elan Pharmaceuticals and Cephalon...all of this took it's toll," he said. "Perhaps the worst was the effect it had on the IPO market," remarked Burrill. NeoGenesis Pharmaceuticals, for example, had planned to sell 6.2 million shares at a price of $12 to $14, but put the deal-perhaps for as long as six months-on hold due to poor market conditions. "We seemed to be on a roll coming out of 2001, but these confidence-shaking events have made investors wary. While we were predicting as many as 30 IPOs in 2002 at the very start of the year, we're revising that estimate to reflect the current climate. Now, we'll be lucky to see half that number," Burrill said.

But there was positive news as well—not the least of which was what appears to be good news for the beleaguered approval of Erbitux. Indeed, following a meeting with the FDA on February 26, intimating that ImClone and its partner, Bristol-Myers Squibb, might be able to win clearance for Erbitux based on clinical trials underway in Europe, shares of ImClone (IMCL) rose 32% in a single day to $20.53 while Bristol-Myers (BMY) shares rose 4% to $47.49. Although there has been no official word from the FDA, investors are hopeful that that the two companies will be able to avoid launching a whole new round of patient testing. "Things are certainly looking up from where they were earlier in the month when Bristol-Myers was calling for the removal of the Waksal brothers," Burrill commented. "However, it's important to remember that ImClone's stock is still 70% off from its high of $75 …and the drug isn't approved yet."

Amgen's sale of $2.5 billion in convertible bonds, one of the largest sales of its kind ever and the biggest in biotech's history, was another harbinger of strength in the sector. Amgen's bonds were rated "A" on Standard & Poor's with a possibly higher rating to come. Amgen has little debt and about $2.5 billion in cash while Immunex, its recent acquisition, is debt-free.

There was other good news, particularly on the product front. Idec Pharmaceuticals, on February 19, announced that it had received marketing clearance for Zevalin-its therapeutic for non-Hodgkin's lymphoma. Although Idec already has one cancer drug, Rituxan, on the market, it shares a significant portion of the revenues with Genentech. "Zevalin is another story," noted Burrill, "Idec is expected to retain sole rights to the drug in the U.S…that's a sign of the company's maturity."

Earlier in the month, on February 11, United Therapeutics received an "approvable" letter from the FDA for its drug, Remodulin-a treatment for pulmonary arterial hypertension. The drug's approval is contingent on discussions with regulators at the agency over the drug's labeling. The company may also be required to conduct a post approval study of Remodulin to verify its effectiveness. United Therapeutics stock was up 29% by month's end.

"While this month started off under a very big cloud, the worst of the fallout from Enron, Elan and ImClone may be behind us," noted Burrill. "This is not to say that Wall Street won't continue to demand more disclosure...they will. But, now that the dust is settling, a slightly more favorable perspective is bound to set in," he continued. "This industry still has its fundamentals in place, its drugs in the pipeline, and money in the bank."

Following a decline of 15% in January, the Burrill Select Index fell another 6% in the month of February. The largest decliner in the group was Protein Design Labs (PDLI), down 27% when analyst Bill Tanner at SG Cowen raised concerns that Protein Design's psoriasis drug, Zenapax, might be shown to be ineffective. Zenapax is currently in a Phase II clinical trials whose results are blinded, hence such speculation may be premature. Incyte also weighed down the index, falling 25% after releasing earnings and forecasting a wider-than-expected loss for this year.

The Burrill Genomics Index also suffered, down 12% for the month and 30% for 2002. Human Genome Sciences (HGSI) disappointed investors and analysts alike when it reported that its fourth-quarter loss widened as revenue plunged and costs increased sharply. It's stock was off 20% for the month. HGS reported a net loss of $55.2 million in the fourth quarter, up from a loss of $6 million in the same quarter one year ago. HGS blamed its fall in revenue on expiration of exclusive aspects of the company's Human Genome Consortium, under which HGS had received payments from its partners. Other significant losers on a percentage basis were Lynx (LYNX) and Caliper (CALP) down 32% and 21%, respectively, without any negative news to warrant such a fall.

The Burrill Large Cap Index lost 2% percent in February. Together, Amgen and Gilead led advancers, up 4% and 6% respectively. During February, Amgen received approval to sell Neulasta, used to decrease the incidence of infection in patients undergoing cancer chemotherapy. Neulasta, the successor to Amgen's Neupogen, is taken every two weeks compared to the daily administration that's required for Neupogen. Gilead announced that its fourth-quarter revenue increased 42 percent to $74 million, bolstered by strong sales of its AIDS drug, Viread.

The Burrill Mid Cap Index fell 8% by month's end, decliners led advancers 3 to 1. Bio-Technology General (BTGC) suffered the largest decline, falling 35% for the month after announcing a net loss of $5.6 million in the fourth quarter, in comparison to a profit of $4.8 million during the same quarter a year ago. Likewise, Orchid BioSciences fell 35% for the month, leading up to an earnings announcement on the final day of the month. Notably, Orchid was able to complete a PIPE in February, raising $23 million to fund new products and ongoing projects such as the commercialization of Orchid GeneShield's personalized medicine business.

The Burrill Small Cap Index was off 3% for the month. As was the case for biotech in general, release of earnings depicting continuing, and in some cases increasing losses, plagued many of the companies in the Burrill Small Cap Index. Organogenesis (ORG), down 42%, announced a corporate restructuring, cutting its workforce 16% and narrowing its focus to living skin substitutes and bioengineered surgical products. Compugen (CGEN), down 16%, reported widening losses in the fourth quarter and forecasted a flat 2002.

The Burrill Agbio Index remained remarkably steady, losing only 1%, despite holding two of biotech's worst performing companies in February, EDEN Biosciences (EDEN) and Paradigm Genetics (PDGM). EDEN Biosciences continued a fall that began in early January when the company announced there were no fourth-quarter sales of Messenger, its sole source of revenue. EDEN was down 31% percent for the month and 64% for the year. Paradigm ended the month down 45%.

The Burrill Diagnostic Fund managed a 2% gain for the month, despite the downward pull of poorly performing DNA-based diagnostics and SNP focused companies. Orchid Biosciences (ORCH, down 38%), Third Wave Technologies (TWTI, down 42%), Sequenom (SQNM, down 14%) and Exact Sciences (EXAS, down 22%) all performed miserably. Countering the effect was an announcement from Biosite (BSTE, up 50%), developer of diagnostic and drug-discovery tests, that it would no longer need to license antibody technology from Xoma. Biosite has developed its own antibody expression technology that it believes is fundamentally different from that of Xoma.

The Burrill Nutraceuticals Index fell 8% on very little news. Notably, Natrol (NTOL), a California-based manufacturer of vitamins, minerals and herbs, announced it would write down $20 million in 2001 for good will associated with its acquisition of Prolab Nutrition in 1999. Natrol was down 27% by the end of the month.

The Burrill Biomaterials Index remained steady in February, down a fraction of a percent, lifted by specialty chemical manufacturer, Hercules Incorporated (HPC, up 33%), which received a boost when it sold its water treatment business to General Electric (GE).

A review of the Burrill Life Sciences Indices for February 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 BioStreetTM 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.