November 1, 2009 (Vol. 29, No. 19)

Positive Reports Confirm that Investors Are Returning and Momentum Is Growing

For the second consecutive quarter we have seen positive gains for biotech, fueling the notion that the worst of the economic woes that have assailed the sector may finally be over. While biotech’s year-to-date performance still lags behind the general markets, there have been some encouraging signs that investors are coming back. These include the tremendous stock gains of Human Genome Sciences (share value up 555% in the quarter) and Targacept (share value up 783% in the quarter), driven by positive clinical data from their lead drug product candidates.

With the comparative stabilization of the capital markets, we are also seeing some encouraging signs of good things to come. For example, the total that U.S. biotechs raised through follow-on financings in the third quarter is up over 100% of the total raised in 2008. This type of financing is generally a harbinger of the opening of the IPO window. In August, one biotech IPO did get out the door when Cumberland Pharmaceuticals raised $94 million. The specialty pharmaceuticals company has products on the market, including a new injectable treatment for pain and fever, which is one of the reasons why the deal got done.

G. Steven Burrill

Biotechs Test IPO Waters

Following Cumberland’s lead, several biotech companies are planning to test or have already tested the IPO market:

  • Talecris Biotherapeutics closed a public offering in October. The firm sold 56 million shares at $19 per share, generating $1.06 billion. Like Cumberland, the company has products on the market, and its 2008 sales were $1.4 billion.
  • Anthera Pharmaceuticals filed to sell up to $70 million in stock to fund its drug-development programs. Anthera is focused on inflammatory diseases and has one drug ready for Phase III trials.
  • Omeros is offering 6.82 million shares of its common stock, priced at $10 to $12 per share, which could generate as much as $81.8 million. Omeros is focused on inflammation and CNS disorders.

U.S. Biotech Financings

Financings and partnering deals collectively brought in over $13 billion for U.S. companies in Q3 ’09, with over $4 billion through financings and $9 billion in partnering capital. This 147% increase in capital raised compared to the Q3 ’08 total clearly shows that the financial climate for biotechs is improving.

Venture capital raised year-to-date was up 5.6% over the same period in 2008. However, the average amount of capital raised per deal fell from $20 million in 2008 to $12 million in 2009.

Partnering Remains Robust

As a consequence of almost 12 months of tough financial conditions and the limited flow of capital to biotechs, companies have, increasingly, been turning to partnering as an alternate method of financing. The over $9 billion generated included two deals that could, if all milestones are met, generate over $1 billion. PTC Therapeutics’ exclusive research collaboration and licensing agreement with Roche for the development of orally bioavailable small molecules could realize approximately $1.9 billion. Roche will utilize PTC’s technology called gene-expression modulation by small molecules. The collaboration focuses initially on four CNS disease targets to be jointly selected.

Nektar Therapeutics signed a worldwide licensing agreement with AstraZeneca for two of its therapies: NKTR-118, in late-stage development for the treatment of opioid-induced constipation, and NKTR-119, in early-stage development to treat pain without constipating side effects. AstraZeneca will pay Nektar $125 million up front and assume responsibility for the continued development of both programs. Nektar is eligible for milestones that could total up to $1.4 billion if the products achieve considerable levels of success.

Biotech Industry Statistics

There are 328 biotechs that are publicly traded on major U.S. markets (down 7.8% year-to-date), and at the end of September the group of public biotech companies had an aggregate market cap of $352 billion (up 10.4% for the quarter). In addition, there are 51 companies that have market caps greater than $1 billion (up 4% year-to-date); 36 companies that have market caps between $500 and $999 million (up 38% year-to-date); and 136 public biotech companies (41%) that have a market cap below $100 million.

What Does the Future Hold?

While the data is encouraging, we don’t yet believe biotech is fully back on track, as many companies are still struggling to find the necessary funding to maintain their operations. Almost half of U.S. public biotechs have market caps below $100 million and we are seeing companies still consistently turning off their lights for the last time.

It is important to remind ourselves that the biotech industry is undergoing a major transition, a process that will likely continue for at least another two quarters. This is because we do not yet know how President Obama’s proposal for healthcare reform will fully impact the biotechnology industry, and the status of biosimiliars legislation (follow-on biologics) is also still unresolved. There are fears that these issues will drive the prices of innovative drugs lower and eat away at biotech company profits. Despite the market uncertainties, we will likely see the industry build on the momentum it has gained over the past several months.

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

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