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Wall Street BioBeat : Dec 1, 2005 (Vol. 25, No. 21)

Biotech Posts Impressive Third Quarter Results

Financings Still on Record-Setting Pace Despite Sub-Par Performances in Fall

Despite the fact that the Burrill Biotech Select Index finished the month in negative territory, and biotech overall had a sub-par performance in September, the last month of the third quarter, and on into October, these disappointing numbers failed to take the shine off what was another excellent quarter for biotech.

Results from the third quarter of 2005 showed that the Burrill Biotech Select Index once again beat both the Nasdaq and the Dow, and is well ahead of both these market benchmarks on a year-to-date basis.

The downward shift in biotech's performance on Wall Street does happen periodically. This, however, is not because biotech's intrinsic value is flagging, but due to general market conditions.

The over 11% gain since the beginning of the year, with most of this occurring in the second and third quarters, is a signal to this fact.

Investors have been putting their faith in biotech stocks because they believe that these stocks are much less sensitive to the prevailing market forces, such as rising interest rates and sky-rocketing oil prices.

Biotech IPOs a Tough Sell

The market conditions did, however, hit planned biotech IPOs.

Predix Pharmaceuticals, which was looking to sell 5 million shares at $10$12, withdrew its IPO even though it is well under way with enrollment for a pivotal Phase III trial of PRX-00023 in general anxiety disorder.

Predix also expects to initiate a Phase Ib proof-of-concept study for PRX-08066 in pulmonary arterial hypertension later this year and a Phase II study of PRX-03140 in Alzheimer's disease in the first half of 2006.

SkinMedica, developer of products to treat dermatologic conditions and diseases, also withdrew its planned initial public offering of common stock due to market conditions. The company planned to sell 5.25 million shares for $11 13 per share.

Accentia Biopharmaceuticals, got out at the end of October, raising $19.2M through the sale of 2.4 million shares at $8. The price was at the low end of the company's $810 range. At month end Accentia closed down $1 at $7.

The six recent IPO graduates since August are considerably underwater. The combined group showed a 21.2% average decrease in share price. Given the current climate we can expect that the 14 companies on the IPO runway will remain in a holding pattern until conditions improve.

However, excluding these recent six companies, looking at the performance at the end of the third quarter of the biotech companies that completed IPOs since the "opening" of the window in 2003, the group is now collectively up 23% overall, even though over half are still trading well below their issue price.

Biotech Top Dog Watch

On the last day of trading in October, Genentech's shares surged 3% and closed the month at $90.60, up 8%. As a result, Genentech regained the top spot as the biotech company with the highest market cap at $96.42B.

Amgen's shares dropped 5% for the month, closing at $75.77 at the end of October. The company's market cap stood at $93.30B.

Total Biotech Financing Continues its Record-Setting Pace

Reinforcing the strong performance in the capital markets in the third quarter, biotech raised almost $10B in financings and partnering.

During each successive quarter in 2005 we have seen a consistent increase in the total amount of financings that biotechs have raised. Barring any unforeseen developments that derail the industry, we are on track to break the $30B barrier once again and perhaps even break the impressive total that was established last year.

Capital Markets Favorable to Biotech Issues

Public biotech companies were able to generate almost $5B in the third quarter, compared to $2.5B that was raised in the second quarter of 2005. The total for the third quarter of 2005 represents a whopping 131% increase over the $2.1B that was raised in the same quarter of 2004.

It certainly was a stellar quarter as far as public financings were concerned. In all financing categories, except for IPOs, the third quarter totals were considerably higher than both, the second quarter of 2005 and the comparable third quarter of 2004 totals. The market showed that it had an appetite for PIPEs, follow-on issues, and debt, with these instruments collectively generating $4.7B.

As far as the $1.3B in secondary issues are concerned you have to go back as far as the fourth quarter of 2000 to find a larger amount that was raised in a single period. The success of these follow-on financings represents a clear signal that the market sees a lot of upside in these public offerings. From the perspective of the companies themselves it is a vote of confidence and provides them with vital funding for on-going product development.

The $858M raised from PIPEs in the third quarter of 2005 was 122% higher than the of the second quarter of 2005 total of $386M and 300% greater than the total generated in the same period of 2004. There was also a 44% drop in the second quarter compared to the first quarter of 2005 total.

Venture Capital: Healthy Deal Flow

While the amount of venture capital generated by biotechs was down 11% compared to the amount raised in the second quarter of 2005, over 40 deals got done, averaging about $20M per investment.

Year-to-date, the $2.55B raised is down 14% on the 2004 three quarters total.

Biotechs Still Attractive for Big Pharma

Financings from partnering deals in the third quarter of 2005 were down approximately 10%, compared to the second quarter of 2005, but up 22% over the comparable 2004 amount. There has been no sign that big pharma is slowing down in the partnering and acquisition stakes.

Typical of this trend is GlaxoSmithKline's (GSK) acquisition of ID Biomedical, developer and manufacturer of innovative vaccine products, including influenza vaccines. In the past, we might have seen GSK forge a strong alliance with ID Biomedical, which has vaccine manufacturing facilities in Canada and in the U.S., but now the company sees itself as a major player in the flu vaccine market and hence, they were willing to pay $1.4B for ID Biomedical.

This transaction may have stirred Novartis into upping its bid to acquire the approximately 58% of Chiron shares it didn't own for $45 per share. The $5.1B cash deal on the last day of October gave momentum to biotech going into November, and we certainly haven't seen the last of these high profile pharma/biotech acquisitions.