December 1, 2011 (Vol. 31, No. 21)

Debt Worries and Political Dysfunction Take Their Toll on Financing Activity in Sector

The fight in the U.S. over the raising of the debt ceiling and the sovereign debt crisis in Europe fueled turmoil in the stock market that has taken a toll on the performance of biotech stocks, slamming the brakes on what had been a solid year of financing for the sector.

Public financing in the third quarter fell to just under $3.1 billion compared to $9.1 billion in the previous quarter. The amount raised through IPOs fell 72%, follow-ons fell 79.8%, and PIPEs fell 53%. Seven life sciences companies filed to go public in the third quarter in the U.S., but ultimately only one company went public. Horizon Pharma completed its offering at the end of July, just before the markets turned volatile.

While there continue to be encouraging developments within the sector with companies reporting positive clinical results, the market remains jittery as concerns remain about the sovereign debt crisis in Europe and worries grow about the ability of the Congressional super committee in the U.S. to reach agreement on a plan to reduce the deficit.

These broader economic and political worries have thwarted access to the capital companies will need to grow.

Early indications for the fourth quarter have not been encouraging. Though the medical device maker Zeltiq Aesthetics managed to complete a $91 million IPO, the first life science IPO since the end of July, no biotech companies went public in October.

In fact, public financing for the biotech sector in October totaled less than $1.2 billion, down more than a 60% from the same period a year ago. Companies were unable to raise any money through public offerings and there were sharp declines in PIPEs and debt offerings.

Investors were quick to punish companies for bad news. Dendreon was the hardest hit in the sector, falling nearly 77.1% during the third quarter as investors dumped its shares in the face of disappointing sales of its cancer vaccine Provenge.

The next-generation sequencing companies Pacific Biosciences (down 72.6%) and Complete Genomics (down 61.6%) also fell sharply during the quarter as concern grew about the effects of shrinking research budgets on adoption of their products.

Venture funding in the third quarter fell slightly from the previous quarter and the same period a year ago. With $1.3 billion raised, it was a solid period for private financing. But an analysis of private financing in October raises some questions about the ability of early-stage companies to raise capital.

While first funding accounted for about half of the $547 million total raised through venture capital and private equity funding in October, the numbers alone don’t tell the story. Six companies completed initial rounds that accounted for 44% of the month’s total venture funding as they raised a combined $237.5 between them.

Partnering in Emerging Markets

On the partnering front, a number of deals in the third quarter pointed to a growing trend: the creation of joint ventures in Russia as global companies such as GE, Celtic Pharma, and Aurobindo entered into agreements with Russian partners to capitalize on the rising demand for healthcare products and services as the country seeks to build its life science sector.

Russia is also investing in Western companies with preclinical molecules of interest that can first be developed and commercialized in Russia. Life science companies are leveraging demand in emerging markets such as Russia to gain access to new sources of capital that can lower the risk of developing new products. Once developed, these products can then be brought to new markets around the world.

But, as with public financing activity, early indications pointed to weaker activity in the fourth quarter. Partnering activity in October fell by 48% to just less than $2 billion in disclosed deal values compared to the same period a year ago.

Legislative Issues

In September, President Obama signed The Leahy-Smith America Invents Act, hailed as the most significant reform to the Patent Act since 1952. It has been welcomed by the biotech industry because it should help harmonize the U.S. system with other patent systems around the globe, speed the pace of patent reviews, and reduce litigation.

Concerns remain about the new law’s implementation and its effect on the value of fledgling biotech companies, however. There is also some concern that the new first-to-file system could benefit large biopharmaceutical companies at the expense of individual inventors.

With the patent fight behind it, the industry will now turn its attention to the FDA’s expected release this month of details on how it will review and approve biosimilars, new versions of innovative biologics that have lost their patent protection.

The rules will lead to a new market for lower-priced biologics. But because of the high level of investment that will be needed to develop and manufacture these complex therapeutics, the new market will be slower to develop than what was seen for generic drugs, provide less savings than generic drugs do, and attract the participation of only sophisticated companies.

The issue of value continues to put pressure on life science companies as payers seek to cut waste by not paying for therapies and diagnostics that don’t work. In response to the changing environment, Roche has proposed pay-for-performance pricing in Germany for its cancer drug Avastin. Under the plan, the company would refund payers when the drug doesn’t work.

Molecular diagnostic makers in the U.S. may also soon be facing greater demands in order to get reimbursement from the Centers for Medicare & Medicaid Services. Draft guidelines from the West Coast administrator for CMS, if enacted, would deny reimbursement unless the test has demonstrated validity and usefulness.

G. Steven Burrill ([email protected]) is the CEO of Burrill & Company.

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