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Wall Street BioBeat : Jan 1, 2010 (Vol. 30, No. 1)

Renewed Vigor Could Be Hallmark of 2010

Year of the Tiger Predicted to Bring Fresh Energy and Stamina to Biotech Sector
  • Robert Dellenbach

Last year at this time we celebrated the end of 2008, the Year of the Rat, and looked forward to change for the better in 2009, the Year of the Ox. For a Westerner curious about Eastern tradition, the rat and the ox descriptions fit: 2008 was a year happily escaped and 2009 was going to require a lot of hard work. Now, facing 2010, the Year of the Tiger, what is in store for biotech entrepreneurs?

A handful of 2009 events provides some insight into what lies ahead.

  • The value of publicly traded biotech stocks has solidly recovered, indicated, among other things, by the Amex Biotechnology Index reaching the highest point in the Index’ history in the second half of 2009.
  • The combinations of Johnson & Johnson (JNJ) and Wyeth; Merck and Schering-Plough; and Roche and Genentech early in 2009 foreshadowed active merger and acquisition activity.
  • Two biotech companies, private equity backed Talecris Biotherapeutics and venture-backed Omeros, went public in the fourth quarter of 2009, the first significant biotech IPOs since November 2007.
  • Biotechnology remains a favored sector for private investors.

Energized Public Market

Publicly traded biotechnology stocks rebounded in mid-2009 from the correction of late 2008 and early 2009 and have remained solid, at or above historic levels through the beginning of December. The Amex Biotechnology Index shows year over year increases from 2003 (lowest closing price, $321.00) through early December (closing price of $909.45 on December 4, 2009).

The Index price reached $800 in July 2009 and hit $925 in the third quarter of 2009, the highest point in the Index’ history. To put this in context, the Index traded between $650 and $840 in 2006 and 2007 and between $596 and $864 in 2008. The Index has been more volatile in the past two years than in previous years, but since July, it has remained above $820. It has consistently outperformed the Nasdaq, Dow, and S&P 500 since mid-2005. While not predicting the outcome for a particular company or industry segment, the strength of this Index reflects regained energy and stamina that are likely to provide opportunities for innovation and growth in 2010.

Harbingers

Last year was an active year for biotech mergers and acquisitions. The data is not yet available to make a close comparison, but data available through the third quarter and into early December shows vigorous merger and acquisition activity. Combined with what appears to be some opening in the IPO window, investor outlook is positive, though still cautious.

Development of biotechnological therapeutics has, historically, remained the domain of independent biotechnology companies. Roche’s $48 billion acquisition earlier this year of the remaining stake that it did not previously own in Genentech, following shortly on the heels of major industry combinations between JNJ and Wyeth ($68 billion) and Merck and Schering-Plough ($48 billion), foreshadowed a spate of mergers and acquisitions activity targeted primarily at increasing the therapeutic pipelines of larger biotech and pharmaceutical companies and secondarily on related services and diagnostics.

There were a fair number of private-equity and venture-backed mergers and acquisitions in 2009.

  • In December 2009, Onyx Pharmaceuticals, which develops and manufactures virus technology based anticancer therapeutics, acquired Proteolix, founded in 2003, for $276 million in cash and up to $575 million of earn-out consideration. Proteolix develops products that employ proteasome to target protein degradation in cells for the treatment of cancer and immunological conditions.
  • In October 2009 Biomet, which manufactures-orthopedic reconstructive-surgical implants, medical-supports and ultrasonic-medical equipment, acquired Cartilix, a developer of cartilage-repair technology founded in 2004.
  • In August, Bayer CropScience purchased eight-year-old agriculture and industrial products developer Athenix for $365 million in cash. An additional $35 million can be earned according to post-acquisition performance.
  • Sanofi-aventis agreed to pay up to $500 million for BiPar Sciences, which develops tumor-selective anticancer therapies. The actual amount of consideration paid will depend on the profitability of the acquired entity.
  • In April, Pharmaceutical Product Development, a research and development services provider founded in 1985, acquired Magen BioSciences for $14.5 million. Started in 2006, Magen develops pharmaceutical products to improve the health and appearance of human skin.
  • In March, Enzo Biochem acquired Assay Designs for $12.2 million in cash. Founded in 1992, Assay holds the patents of Stressgen Bioreagents and develops and manufactures immunoassay kits. The patents complement the more than 230 patents owned by Enzo, which specializes in gene identification and immunological regulation technologies for diagnostic and therapeutic applications.
  • In March, Seahorse Bioscience, which manufactures infrared-based-imaging systems for small-animal studies, acquired BioProcessors, which develops biomanufacturing workflow-methods and technologies.
  • In February, Millipore paid $22.6 million for Guava Technologies, which manufactures cellular analysis systems.

Learning economic lessons from the recent past and looking at the aging population, capital constraints, and the challenge of continuous innovation going into the future, much has been said recently about big pharma’s need to revamp development strategies. In-house development and development by acquisition each involve risk and reward. Pharmaceutical companies now pursue development on both fronts by encouraging entrepreneurial practices within their companies and through careful acquisition.

In addition to gearing up for the growth of the older and wealthier segments of the population, patents on staple money-making drugs are expiring. Large drug manufacturers, uncomfortably exposed to competition from nimble and aggressive generic drug and branded generic manufacturers, are innovating aggressively on an internal level, through increased collaboration and by continuing to acquire promising companies. How well they do impacts private equity and venture capital investors, who need opportunities to grow and exit companies so they can reinvest in new development.

IPO Window Opens a Crack

Talecris Biotherapeutics and Omeros came to the public markets from two very different places. Talecris develops and produces critical care treatments for people with life-threatening disorders, including immune globulin deficiency, Alpha1-antitrypsin deficiency, and hemophilia. Talecris’ revenues exceeded $1.4 billion in 2008. Talecris was formed in 2005 and raised more than $550 million of pre-IPO private funding and sold shares for $950 million in its public offering.

Omeros, founded in 1994, develops therapies for inflammation and CNS disorders. It has four ongoing clinical development programs, including a product in Phase III trials for use during arthroscopic surgery to improve postoperative joint function and reduce postoperative pain.

Prior to its public offering in October, Omeros announced results of a Phase I/Phase II trial of an ophthalmologic product candidate. Omeros raised $68 million in its public offering. Previously, Omeros raised approximately $73 million from venture capital investors.

In addition to the Talecris and Omeros offerings, at least 24 private equity and venture-backed companies in other industries sold stock for the first time to the public in 2009, including Cumberland Pharmaceuticals and Addus Healthcare. This compares to a total of 12 private equity and venture-backed IPOs in all of 2008.

There are several additional biotech companies in the process of IPO registration. Pent-up demand for opportunities to employ capital in the public markets is likely to push and keep the window open through the first quarter. With the Dow now over 10,000, as long as the general economic conditions continue to improve, the public markets may well prove irresistible to this demand.

Private Equity Investment

Biotechnology remains a favored sector for private investors. Over the past five years, biotechnology investments consistently have ranked among the top two investment categories for venture capital firms, except in 2008 when investors put slightly more funding into cleantech.

In the third quarter of 2009, biotechnology ranked first among the various venture capital investment sectors tracked by the PriceWaterhouseCoopers National Venture Capital Association Money Tree™ Report at 18.8% of total venture capital funding for the quarter. Over the past ten years, biotech companies have generally received between 17% and 20% of this allocation. The number of biotechnology investments and the aggregate investment amounts remained consistent at approximately 160 and $1.1 billion per quarter, respectively, since the third quarter of 2008.

The largest venture capital investment in biotechnology of 2009 was the $145 million startup funding of Clovis Oncology, which develops anticancer therapeutics. 

Other significant private equity and venture capital investments in the second half of 2009 included:

  • Pacific Biosciences raised $68 million to fund development of its platform for single-molecule DNA sequencing.
  • Complete Genomics raised $45 million in August from investors to fund its DNA sequencing development and operations.
  • Also in August, Kolltan Pharmaceuticals raised $40 million to fund development of monoclonal antibody oncology therapeutics.
  • In September, Amyris Biotechnologies sold $42 million of preferred stock to finance development of microorganisms capable of producing compounds from renewable hydrocarbon biofuels to pharmaceuticals.
  • Roka Bioscience raised $37 million in September to focus on molecular assays for biopharmaceutical production, water and food safety, veterinary and environmental applications, and bioterrorism testing.
  • In November, GlycoMimetics sold $39 million of equity to support its glycobiology research and development of small molecule drugs that mimic the actions of carbohydrates. The company’s initial focus is on therapeutics that treat inflammatory and infectious diseases. 

During 2009, more than half of the number of biotech investments were made, and 60% of the available funds were invested, in companies developing therapeutics; 30% of the investments and 20% of the funds were allocated to diagnostics, probes, and genetic engineering, and the remaining investments were focused on the development of equipment, industrial applications, research, animal biotech, and biosensors.

Business and financial activity in the biotechnology sector, particularly in the months leading up to 2010, show renewed vigor. Recent IPO shares are currently trading below their offering prices, but within range of recovering. The market is responding positively to the industry generally, and acquisition and financing deals are getting done.