April 1, 2012 (Vol. 32, No. 7)

Clinical Data, Regulatory Decisions, and M&A Activity Fuel Positive Market Sentiment

Numerous biotechs are set to turn the card on clinical trial data readouts that should drive significant value inflection for their shareholders. A number of key regulatory decisions that will likely impact investor sentiment are also on the calendar for 2012. Partnering and acquisition activity has intensified as large biotech and pharma companies execute strategic initiatives with a view beyond their respective patent cliffs.

Leading industry players will be jockeying for position in hot therapeutic areas, as seen in the hepatitis C virus (HCV) infection space, looking to capture market share and revenue that will provide a much needed boost to their bottom line.

Although investor confidence is moving in the right direction, lingering issues with the U.S. economy and European debt hanging over the global economy could dampen the market’s enthusiasm over pending clinical data, FDA outcomes, and M&A activity.

In 2012, the decision of when and how to raise capital will be influenced by macroeconomic issues as well as company-specific factors. If capital markets continue their volatile ways, making it more difficult to raise funds through the public markets, more licensing deals will be necessary to fund programs and M&A may emerge as the go-to exit strategy for private biotechs.

The 2012 presidential elections may impact sentiment and performance of the broader markets and of the healthcare sector. While an election year may bring with it the potential for increased volatility, biotechs have outperformed the S&P in three of the last four election years—beating the S&P by 72% and 21%, in 2000 and 2008, respectively.

Eugene Rozelman

Strong Signs that Confidence Is Returning to the Biotech Capital Markets

As 2011 came to a close, there were several indications that the biotech sector could see a meaningful up-tick in both capital markets and M&A activity. Several companies acted nimbly to take advantage of windows of opportunity to complete sizable equity raises, ending the year with strengthened balance sheets and enhanced strategic positions.

Idenix Pharmaceuticals raised over $70 million to fund its drug development effort in HCV, which includes lead drug candidate IDX184. Ariad Pharmaceuticals raised over $250 million in mid-December to prepare for the commercial launch of its lead compound, ponatinib, in the U.S. and Europe, and­, if approved, to sell, market, and distribute ponatinib in these and other markets, allowing Ariad to retain the potentially substantial commercial value of ponatinib.

Financing momentum continued into 2012, as Amarin completed a $150 million Notes deal in early January.

Last year’s biotech M&A activity was punctuated by Gilead’s late November bid of approximately $11 billion for Pharmasset, a clinical-stage pharmaceutical company focused on the development of oral therapeutics for the treatment of HCV. Gilead’s offer represented nearly a 100% premium to Pharmasset’s stock price prior to the announcement of the deal and fueled speculation over which other HCV developers could be in the crosshairs of large biotech and pharma companies vying for a slice of the massive HCV therapeutic market opportunity.

Earlier that fall, Roche acquired Anadys Pharmaceuticals, another HCV drug developer, for approximately $230 million, translating to a premium of about 250%. The string of deals in the HCV space continued, as Bristol-Myers Squibb announced its intention to acquire Inhibitex for approximately $2.5 billion, during the first week of January.

The M&A Train Is Moving and Will Likely Pick Up Steam

Global economic concerns and volatility in the broader markets has translated into a shortage of limited partners willing to put money into venture funds. With the initial public offering window still tenuous and the feared retraction of some biotech VC firms starting to play out, private biotech companies are under increased pressure to consider strategic options. Limited access to capital for private companies will be a driver of increased M&A activity.

A smaller pool of capital available for early-stage development activity creates a greater need for VCs and private companies to consider and implement new models for risk sharing. Examples include nonexclusive licensing options, multistep acquisitions, options around geographic rights, project financing, and reverse mergers. Luckily, large pharma companies are becoming more aggressive in terms of M&A and partnerships, as pipeline gaps have not been sufficiently filled.

We are likely to see momentum for deal-making accelerate in large, lucrative therapeutic areas including anti-infectives, oncology, cardiovascular, CNS, and other areas where large pharma has a commercial presence, and there remains a significant clinical need for new treatments.

For example, last fall Quanticel Pharmaceuticals struck a deal with Celgene to discover and develop first-in-class cancer drugs. As part of the deal, Celgene retained an exclusive option to acquire the start-up.

Additionally, the stocks of the majority of biotechs that recently launched products underperformed in 2011. Those companies with viable products whose market values have been depressed by disappointing product launches could prove to be enticing targets for pharma companies looking to leverage their existing commercial infrastructure by adding marketed products.

Clinical Data and Regulatory Decisions to Impact Biotech Market Sentiment

In a market environment of heightened volatility, regulatory decisions and pipeline successes or failures have a high potential to produce excessive stock price swing in a respective company’s stock, and may have collateral impact on companies in the same or related therapeutic area. A big focus will be on data coming out on Gilead/Pharmasset’s PSI-7977 for HCV. Other important data includes Biogen Idec’s Phase III readout for dexpramipexole for ALS, data from several of Celgene’s Apremilast trials, and Amgen’s complete Oncovex Phase III data in melanoma.

Highly anticipated FDA decisions tend to be a source of high anxiety for investors. Key regulatory decisions that will demand the market’s attention include Vertex’ Kalydeco for cystic fibrosis, Ariad’s ridaforolimus for sarcoma, Ironwood’s linaclotide for irritable bowel syndrome, and Amarin’s AMR101 for patients with very high triglycerides.

A theme that has been gaining momentum with investors is payors pushing back on prices of new therapies where there is no clear step forward over current treatments.

Dendreon’s Provenge (for advanced prostate cancer) and Human Genome Sciences’ Benlysta (for the treatment of lupus) are examples where the demand for significant incremental efficacy to justify price may have impacted stock market valuations for these companies. However, developers of drugs that are seen as significant advancements in treatment are rewarded, such as the innovations in melanoma, hepatitis C, and atrial fibrillation.

Seeking Alternatives to a Tepid U.S. IPO Market

While 2011 saw several biopharma IPO success stories—including NewLink Genetics and Clovis Oncology, both late-stage cancer companies with promising programs that priced late in the year—the number of biopharma IPOs priced in 2011 (seven) was down 46% from 2010.

The appetite for risk taking in IPOs continued to be low, with a focus on de-risked stories in Phase III development or those with marketed products. Heightened market volatility in 2H11 contributed to this muted activity.

A challenging global economic environment is prompting some companies and investors to explore additional financing and public listing options, including alternatives to the traditional U.S. IPO.

U.S. based GI Dynamics, a developer of non-surgical approaches for treating type 2 diabetes and obesity, successfully completed an IPO in Australia during the summer of 2011 and now trades on the Australian Securities Exchange (ASX).

Trimel Pharmaceuticals listed on the Toronto Stock Exchange and completed a concurrent private placement through a reverse merger with a capital pool company, a commonly used method of going public in Canada utilizing a clean public shell company created for the purpose of identifying and merging with a promising private company.

Options to list on the ASX through reverse merger also exist and these reverse merger options, in both Australia and Canada, can be quicker that the traditional IPO route, often taking about three or four months to complete.

Several private companies attempted reverse mergers with public companies traded on major U.S. exchanges. But, the U.S. reverse merger process can take significantly longer to complete, sometimes taking nine months or more.

Synageva BioPharma, a clinical-stage biopharmaceutical company focused on treatments for rare diseases, successfully completed a reverse merger with Trimeris and traded up nearly 50% in its first month of trading. However, Allozyme could not consummate its proposed merger with Poniard Pharmaceuticals, indicating the common stock of the company resulting from the proposed merger would not qualify for listing on the Nasdaq Capital Market.

Although changing, public perception of reverse mergers into public shells can be negative as investors weigh the fear of the “pump and dump” scenario against success stories like Cougar Biotechnology, acquired by J&J for over $1 billion.

Decisive Actions Will Garner the Greatest Rewards

By now, we all know that the Eurozone debt crisis and U.S. election-year politics may fuel volatility in financial markets. Those companies that take decisive action when presented with pockets of opportunity to strengthen balance sheets or to consummate strategic deals will be better positioned to develop promising therapies for patients and to create value for shareholders.

Eugene Rozelman ([email protected]) is a principal in the life sciences investment banking sector at Canaccord Genuity (CGI). CGI has received compensation from Amarin, Trimel Pharmaceuticals, and Inhibitex for investment banking activity in the past 12 months.

This report was created by members of the investment banking department of Canaccord Genuity (“Canaccord” or “Canaccord Genuity”) and has not been reviewed by or discussed with any members of the Canaccord Genuity research department. This report is not intended to be, and in no way, constitutes a “research report,” as such term is defined by Rule 137 promulgated under the Securities Act of 1933, as amended. Canaccord Genuity’s investment banking department has done, and may continue to do, business with companies included in this report.

This document is provided for informational purposes only and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such offer or solicitation would be prohibited. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. This material is prepared for general circulation to corporate and institutional clients and does not have regard for the investment objectives, financial situation, or particular needs of any particular person. Investors should obtain advice based on their own individual circumstances before making an investment decision. To the fullest extent permitted by law, neither Canaccord Genuity, its affiliates, nor any other person accepts liability whatsoever for any direct or consequential loss arising from any use of the information contained in this report. Past performance is not indicative of future results.

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