December 1, 2006 (Vol. 26, No. 21)

Financings in 2006 Have Already Raised More than 2005

After biotech enjoyed its best quarter of the year, the Burrill Biotech Select Index recovered most of its value lost in the first two quarters and finished down just 9% from its 3Q 2005 value. Heading into the final quarter, momentum for biotech companies and stocks continued to build with October turning out to be biotech’s best monthly performances of 2006.

Biotech rode a wave of heightened investor enthusiasm driven by an increase in M&A activity, significant clinical data reported broadly, and excellent third quarter financial reports. Historically, the fourth quarter has always been good for biotech, and so there is every reason to believe that it is now on target to make up for the beating suffered during the first two quarters of 2006. The biotech industry’s aggregate market cap at the end of October was just over $488 billion and by the end of the year it could reach a new record high.

Fanning the flames of positive investor sentiment was the Dow finally breaking through the psychological 12,000 barrier, closing the month up almost 3.5%. While it is biotech’s elite companies, such as Amgen( and Genentech(, that continue to impress the market, it was the Burrill mid-cap biotech index that captured the headlines in October with a huge 10% jump in value. The Index is now up 15% year-to-date and set to lead all indicators in much the same way as the Burrill Biotech Select Index did in 2005.

It looks as though biotech has emerged from its rough patch and the final quarter should see a further improvement. The only damper on an otherwise excellent third quarter was that fund raising among biotech’s companies was down considerably. Looking at the bigger picture, biotech has already raised 20% more and M&A’s continue to accelerate driven by big pharma’s need not only to improve pipelines but to add technologies as well. Biotech is well on its way to a record setting $40-billion year from financing and partnerships.

Deal-making Gets Hot Again

Deal-making woke up in Q3 06 after taking a breather in Q2 06. In fact, during the quarter, partnering activity was the major driver of financing activity in what was a generally lackluster quarter for raising capital.

Headlining the over 30 deals was GlaxoSmithKline’s( strategic alliance with ChemoCentryx ( discover, develop, and market medicines targeting four chemokine and chemoattractant receptors for the treatment of a variety of inflammatory disorders, including Traficet-EN in late-stage development for inflammatory bowel disease. ChemoCentryx received an upfront payment of $63.5 million. In addition, the company will receive research funding and will be eligible to earn milestone payments up to, potentially, $1.5 billion, assuming successful development and commercialization of the products under development.

After a brief lull, mergers and acquisition activity picked up in October. Eli Lilly( said it was acquiring Icos( for $2.1 billion, a move that gives the company full ownership of the erectile-dysfunction drug Cialis. Merck & Co. enhanced its interest in RNAi technologies with its $1.1-billion acquisition of Sirna Therapeutics.

Pharma acquiring biotechs has been the norm; now biotechs themselves are getting into the act. Millenium Pharmaceuticals( lost out in its offer to acquire Canadian-based AnorMED;Genzyme( won the bidding war with a price of $580 million. Amgen completed its acquisition of Avidia(, paying $290 million for the privately held company developing a new type of treatment called Avimer proteins. The transaction provides Amgen with Avidia’s lead product candidate, an inhibitor of interleukin 6 for the treatment of inflammation and autoimmune diseases.

Amgen’s increase in share price in October was enough to edge it back over Genentech for the ongoing title to be the world’s largest biotech company by market cap. For several months, Genentech had held off Amgen. By the end of October, however, Amgen’s market cap was $88.1 billion, with Genentech’s standing at $87.3 billion.

It was another billion-dollar quarter for biotech venture capital. Although the $1.1 billion raised was 18% down from the previous Q2 06 period, the total raised in 2006 so far is already close to that raised in all of 2005.

Leading the over 40 venture capital deals in the third quarter was Esprit Pharma(, which completed a Series B round, raising $90,790,000. Amicus Therapeutics( closed a $60-million Series D financing. Zogenix( also raised $60 million in a Series A round. Proceeds from the financing were used to fund the acquisition of the Intraject technology assets from Aradigm(

Still Tough Sledding for Biotech IPOs

The $49 million raised from IPO transactions was down 72% from the Q2 06 total. Recent IPO graduate Acorda Therapeutics( saw its shares take off in September after it announced that its Phase III trial on Fampridine-SR, its multiple sclerosis treatment, improved patients’ walking ability. The company’s shares closed the quarter up 107%.

Acorda’s home run and the improving market conditions created improved environments for companies on the IPO runway. Three IPOs were completed, although all had to modify their original filing prices ranges. On the positive side, 65% of the companies closed October above their issue price. Achillion Pharmaceuticals( priced its IPO of 4,500,000 shares of its common stock at $11.50 per share, down from its $14–$16 filing range. The infectious disease company’s shares closed October at $14, up 21%.

Cadence Pharmaceuticals( priced six million shares at $9 each, also below its $11–$13 filing range in its IPO. The company’s shares closed October at $9.6 up 6%. Trubion Pharmaceuticals( priced its offering of 4,000,000 shares at $13 per share. At the close of the month its shares were valued at $14, up 7%. On the other side of the ledger, BioVex( and Asthmatx( withdrew their planned IPOs.

Investors are obviously wondering whether the fourth quarter will be a robust one for the IPO market and are selectively looking at individual company portfolios. While those that did get out benefited from the positive environment, valuation of offerings remain soft.

The desire from biotechs to test the market will continue especially when potential investors see that biotech stocks that have debuted this year are up an average 16%. After two exceptional quarters, debt financing took a breather in the third quarter with New River Pharmaceuticals( ($135 million) and Incyte( ($132 million) making up the bulk of the $373 million raised. PIPES, however, were up a whopping 62% over the Q2 06 total, while follow-ons were softer, dropping 62% over the Q2 06 total.

G. Steven Burrill is CEO of Burrill & Company.

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