Burrill & Company Release: Debt Worries, Political Dysfunction Take a Toll on Biotech in Third Quarter

Published: Oct 03, 2011

SAN FRANCISCO, CA--(Marketwire - October 03, 2011) -

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The fight in the United States over the raising of the debt ceiling and the debt crisis in Europe have fueled turmoil in the stock market that has taken a toll on the performance of biotech stocks, slamming the brakes on a solid year of financing for the sector, Burrill & Company reported.

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 percent, follow-ons fell 79.8 percent, and PIPEs fell 53 percent. Five life sciences companies filed in September to go public in the United States, but it was the first month this year that no life sciences IPOs were completed.

"While 2011 remains on track to be a year of solid performance for biotech, global financial problems and dysfunction in Congress have turned investors away from risk," says G. Steven Burrill, CEO of San Francisco-based Burrill & Company, a diversified global financial services firm focused on the life sciences industry. "Despite what has been an upbeat year of developments for the sector, broader economic worries have thwarted access to the capital companies will need."

                                                                            
                                                                            
U.S. BIOTECH FINANCINGS IN USD MILLIONS (2010-2011)                         
                                                                            
                         Q4 2010    Q1 2011    Q2 2011    Q3 2011     TOTAL 
PUBLIC                                                                      
IPO                          424        510        540        151      1,625
Follow-on                  1,064      1,464      2,248        453      5,229
PIPEs                        389        403        450        211      1,453
Debt                       7,445      7,928      5,867      2,235     23,475
                                                                            
PRIVATE                                                                     
VC                           842      1,174      1,287        832      4,135
                                                                            
PARTNERING                 7,110      9,363      3,686      2,873     23,032
                                                                            
TOTAL                     17,274     20,842     14,078      6,755     58,949

One place life sciences companies did find money was the Biomedical Advanced Research and Development Authority. In September, BARDA awarded a total of $229 million in contracts. That brings the total issued by the agency so far this year to $1.3 billion.

M&A activity remained modest in September. Among the notable transactions, life sciences tools company Perkin Elmer said it will buy Caliper Life Sciences for $600 million to increase its offerings in molecular imaging. Jazz Pharmaceuticals said it will acquire Ireland-based Azur Pharma in a stock swap that values Azur at $525 million. Jazz shareholders will own 80 percent of the newly formed international specialty pharma.

On the partnering front, Roche's agreement with Evotec to develop its MAO-B inhibitor to treat Alzheimer's disease, worth up to $820 million, represented the largest disclosed deal of the month. September also saw an increase in 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 growing demand for healthcare products and services as the country seeks to build its life sciences sector. Russia is also investing in Western companies with preclinical molecules of interest that can first be developed and commercialized in Russia, bringing innovation to the country and reducing the cost of failure for biotech companies.

"Life sciences companies are leveraging demand in emerging markets such as Russia to gain access to new sources of capital that lowers the risk of developing new products," says Burrill. "Once developed, these products can then be brought to new markets around the world. This is a model we will see grow common in the years ahead."

Investors were quick to punish bad news. Dendreon was the hardest hit in the sector falling nearly 77.1 percent during the quarter as investors punished the company for disappointing sales of its cancer vaccine Provenge. Next generation sequencing companies Pacific Biosciences (down 72.6 percent) and Complete Genomics (down 61.6 percent) also fell sharply during the quarter as concerns grew about the effects that pressure on research budgets would have on adoption of their products.

There were winners in the quarter. Pharmasset* posted the top performance for the quarter among life sciences companies as it rose 46.8 percent on encouraging mid-stage clinical results and FDA Fast Track designation for its treatment for hepatitis C. Orexigen Therapeutics was among the best performers for the quarter as it rose 22 percent on news that it had reached an agreement with the FDA on advancing its experimental obesity drug toward approval.

                                                                            
                                                                            
BURRILL & COMPANY INDICES                                                   
                                                                            
                                              CHANGE  CHANGE  CHANGE  CHANGE
INDEX              12/31/10  6/30/11  9/30/11  WEEK   MONTH  QUARTER   YEAR 
Burrill Select       365.12   429.82   396.75 -0.34%  -0.38%  -7.69%   8.66%
Burrill Large Cap    526.55   586.07   476.25 -0.25%  -1.38% -18.74%  -9.55%
Burrill Mid-Cap      218.10   282.13   271.18 -1.76%  -3.87%  -3.88%  24.34%
Burrill Small Cap     94.97   103.77    82.31 -3.46% -11.44% -20.68% -13.33%
Burrill Diagnostics  158.05   189.49   162.56 -0.13%  -7.43% -14.21%   2.85%
Burrill                                                                     
 Personalized                                                               
 Medicine            106.26   110.22    97.40  2.57%  -6.18% -11.63%  -8.34%
Burrill                                                                     
 BioGreenTech        152.78   156.85   135.21 -0.16%  -9.46% -13.80% -11.50%
Canadian Biotech      55.68    66.33    52.99 -1.72%  -9.14% -20.11%  -4.83%
NASDAQ              2652.87  2773.52  2415.40 -2.73%  -6.36% -12.91%  -8.95%
DJIA               11577.51 12414.34 10913.38  1.32%  -6.03% -12.09%  -5.74%
Amex Biotech        1297.61  1460.63  1124.97 -0.34%  -5.80% -22.98% -13.30%
Amex Pharmaceutical  305.88   332.33   305.44  3.90%  -3.33%  -8.09%  -0.14%

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

The new law creates a post-grant review process of nine months to challenge newly issued patents. While this should help reduce litigation, it remains to be seen how this process will be used and whether it will change the way investors view the value of biotech patents when initially issued.

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," says Burrill. "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 significantly less savings than generic drugs do, and attract the participation of only well-heeled and sophisticated companies."

*Burrill & Company is an investor in Pharmasset.

About Burrill & Company
Founded in 1994, Burrill & Company is a diversified global financial services firm focused on the life sciences industry. With more than $1 billion in assets under management, the firm's businesses include venture capital, private equity, merchant banking, and media. By leveraging the scientific and business networks of its investment team, Burrill & Company has established unrivaled access and visibility in the life sciences industry. This unique combination of resources and capabilities enables the company to provide life sciences companies with capital, management expertise, insight, market intelligence, and analysis through its investments, conferences, and publications. Headquartered in San Francisco, the company oversees a global network of offices throughout the United States, Latin America, Europe, and Asia. For more information visit: www.burrillandco.com.