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Biotech Outperforms Market in Q2

By G. Steven Burrill

Editor’s Note: We welcome G. Steven Burrill as a regular Bio-IT World contributor. Burrill & Company, a life sciences merchant bank in San Francisco, founded in 1994, is a leading financial firm in the bioscience industry.

Aug 15, 2005 | Heading into the summer, biotech widely outperformed the Dow and Nasdaq on a year-to-date basis. For Q2 2005, the Burrill Biotech Select Index is up 15.68 percent, Dow is down 2.18 percent, and Nasdaq is up 2.89 percent. But this positive performance is attributable to a mere handful of companies driving the market.

Topping this list was Genentech. Thanks to excellent late-stage clinical results on Avastin and Herceptin cancer drugs and expectations for Lucentis, the company posted double-digit percent rises in April and May. Coupled with Amgen’s relatively flat performance, Genentech vaulted over Amgen and Merck for the top biotech market cap spot — a significant milestone for the industry. Genentech now ranks as the seventh-largest biopharmaceutical company by market cap — nearly $85 billion at quarter end.

BurrillQ2chart.gifAlthough Genentech only posted a 1-percent rise in June, it closed Q2 above $80 — up 42 percent for the quarter. Other companies picked up the slack in June, including Vertex Pharmaceuticals, rising 80 percent at $16.85. Transkaryotic Therapies rose 46 percent to $36.58, thanks largely to its acquisition by Shire Pharmaceuticals for $1.6 billion. Abgenix also had a big quarter, up 23 percent, after announcing that it was consolidating its research and preclinical activities into its British Columbia facility.

These gains helped drive the Burrill Biotech Select Index to one of its highest quarterly gains of 15.7 percent. However, June was fairly uninspiring for the biotech sector. Investors remained cautious about the impact of oil prices and interest rates. Not even a record-breaking attendance (more than 18,000) at BIO 2005 ignited investor enthusiasm.

Overall, Q2 was difficult to get a handle on. Despite a healthy $7.2 billion raised ($13.56 billion year-to-date), biotech investors are still tentative and risk-averse, only backing companies with mature products or in late-stage clinical trials.

Unfortunately, this skittish mood is translating into the capital markets. As in Q1, the pendulum swung away from IPOs more to mergers and acquisitions (M&As) and partnering. Investors have little interest currently in new biotech issues or follow-ons. Compared to 2004, financings are down 27 percent at $7.4 billion, while partnering deals are up 46 percent at $6.2 billion. The swing towards partnering is likely to continue. Strategic partnering and M&A activity will keep biotech on the radar screen.

Big Pharma Appetite for Biotechs
Financings raised from partnering deals in the first half of 2005 rose a substantial 46 percent over the comparable 2004 amount. Faced with patent expirations on blockbuster drugs, major pharmaceutical companies are turning to small biotechs to restock their product pipelines — and in some cases acquiring them as well, a trend likely to continue.

The swing to M&As is, in part, fueled by the American Jobs Creation Act, which allows U.S. companies to repatriate earnings from foreign subsidiaries at a reduced tax rate, leaving pharmaceutical companies with staggering amounts of cash for investment. Pfizer has already repatriated foreign income of $36 billion and is quite prepared to spend some of this cash on acquiring promising products and technology. In June, Pfizer acquired Vicuron Pharmaceuticals, a company focused on the development of novel anti-infectives with two products under FDA review, for $1.9 billion.

Biotech Indices
Contributing to a weak June was Chiron, which reported that it might not deliver as many flu shots this year as promised. Biogen Idec continued to suffer from the withdrawal of Tysabri, though it was unchanged for the quarter. By contrast, Illumina began shipment of its Sentrix Human-1 Genotyping BeadChip, which can interrogate more than 100,000 single nucleotide polymorphism loci per sample, delivering higher information value per locus than other whole-genome arrays. Illumina’s shares rose 49 percent for Q1.

The Burrill Genomics Index closed up 16 percent. Driving the positive movement were Affymetrix, Millennium Pharmaceuticals, and CuraGen. Millennium has a new CEO following the departure of cofounder and CEO Mark Levin after 12 years, replaced by physician Deborah Dunsire. Shares of Millennium closed the quarter at $9.27, up 11 percent on the quarter. Affymetrix had a great quarter, ending at $53.92, up 26 percent. Its new GeneChip Scanner 3000 7G enables analysis of microarrays with 500 percent more data than previous generations.

G. Steven Burrill is CEO of Burrill & Company in San Francisco. E-mail:

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