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Biotech Turns in Mixed Q1 Performance

By G. Steven Burrill

May 12, 2006 | Biotech closed out a rough month of March, but this did not take the shine off the exceptional performance of the mid- and small-cap biotech companies. Although the Burrill Mid-Cap Biotech Index dropped almost 5 percent in March, it still closed out the quarter up 24.5 percent. Topping this was the Burrill Small-Cap Biotech Index, up 2.5 percent in March and an impressive 26.6 percent for Q1 2006. This is in stark contrast to the Burrill Biotech Select Index, down 4.5 percent for the month and 0.5 percent for the quarter. The Nasdaq finished March up 2.5 percent and a healthy 6 percent for the quarter, and the Dow was also up 1 percent for the month and 3.6 percent for the quarter.

Q1 2006There were some impressive gains in the emerging and growing biotech sector during the quarter — with renewed investor interest in these companies, which seems to be, for the present time, at the expense of biotech’s blue-chip companies. These bell-weather, large-cap biotech stocks did not carry over their momentum from a stellar 2005 into the first quarter of 2006 even in the wake of a late March market rally thanks to a general optimism about U.S. economic growth and business spending.

Contributing to the large cap biotech companies’ sluggishness on the markets were several product disappointments. Cephalon, for example, had its Sparlon drug, an experimental treatment for attention deficit hyperactivity disorder in children, rejected by the FDA. The agency also pushed the action date on Biogen Idec and Elan’s multiple sclerosis drug Tysabri back by three months to late June to have more time to review the companies’ drug risk-management plans.

Q1 2006 Capital Markets
Fundraising netted biotech companies an incredible $9.1 billion in Q1 2006, representing more than 50 percent of the total financings raised during the whole 2005, in part driven by Amgen’s $5 billion debt offering this quarter. The only time a larger amount was raised in a single quarter was in Q4 2000 at the height of the “-omics” boom, when every investor wanted to “own” biotechs.

While the capital markets were still a little choppy for biotechs, particularly in March, investors were showing their continued interest. PIPES were a hot commodity in Q1 2006, reinforcing the fact that private investors believe that biotech companies are substantially undervalued. The $1 billion raised from approximately 50 deals in the quarter was up 100 percent from the previous quarter.

Biotech raised $303 million in six U.S. IPOs this quarter, versus $168 million in Q4 2005 by four companies. In February, SGX Pharmaceuticals priced its offering at $6, well below its initial estimated price of $11 to $13 per share, raising only $25 million. SGX’s share price closed the quarter up 58 percent on the strength of its announced partnership with Novartis to develop and commercialize BCR-ABL inhibitors for the treatment of drug-resistant chronic myelogenous leukemia.

Although there were approximately 41 venture financings, averaging $16 million per transaction in Q1 2006, the $734 million raised was 23 percent lower that the total raised in Q4 2005. However the total was only 6 percent below the $781 million raised in Q1 2005. Topping the list of transactions was Microbia, with two drug candidates in clinical trials, raising $75 million.

Deal Making Continues Torrid Pace
If the first quarter of 2006 is anything to go by, biotech is on pace to beat the record-setting $17 billion raised through partnering in 2005. Big Pharma’s enthusiasm for doing deals with biotechs continued in the first quarter with strategic transactions announced at almost $6.5 billion, up from the $2.1 billion posted in the first quarter of 2005.

Novartis was an active deal maker in Q1 2006, forging alliances with Infinity Pharmaceuticals, Idenix Pharmaceuticals, and SGX Pharmaceuticals. With Infinity they are going after the Bcl-2 protein family members for the treatment of a broad range of cancer indications. Novartis also exercised its option to license valopicitabine (NM283), Idenix’s lead compound in development for the treatment of hepatitis C.

There were two blockbuster M&A transactions announced in Q1 2006 in the Big Pharma space. On the closing day of the quarter, shareholders of Boston Scientific and Guidant approved the merger of both companies — a deal valued at about $27 billion. Also in March, Bayer AG’s $19.6 billion offer for Schering AG trumped Merck KGaA’s $17.9 billion hostile earlier offer. Other deals include Becton Dickinson acquiring GeneOhm Sciences, and AstraZeneca acquiring KuDOS Pharmaceuticals.

G. Steven Burrill ( is CEO of Burrill & Co.

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