2011 Review and Outlook for Biotechnology in 2012

In 2008, the Dow Jones Industrial average recorded its worst annual performance since 1931 and the NASDAQ Composite had its worst year since inception in 1971.

On the heels of such a miserable year, it may have seemed counterintuitive to provide a positive outlook for the speculative biotechnology industry in 2009, but that’s exactly what we did.  Our bullish thesis was reiterated for both 2010 and 2011.

The AMEX Biotechnology Index (BTK) ended 2008 at 647.17 and climbed to 1,091.42 by the end of 2011 for a gain of approximately 69% during this three-year period.  Comparing this performance with the general market, the NASDAQ Composite increased 65% from 1,577.03 to 2,605.15 during the same period.

Our favorable outlook for the biotechnology industry remains intact for 2012 and is based on the following key drivers, which build upon many of the catalysts we first proposed in 2009:

  • Sector’s defensive characteristics and impact on future economic growth
  • Improving number of annual new product approvals since the low set in 2007
  • Record number of products in clinical trials and annual industry R&D investment
  • Improving access to capital
  • Brisk pace of industry consolidation and licensing transactions
  • Many micro, small and mid-capitalization companies remain undervalued

Defensive Sector and Economic Driver

During periods of economic uncertainty, the biotechnology sector is often portrayed as defensive given that disease is relentless in both good economic times and bad.  Despite recent medical advances, there remains a need for quality, innovative products to diagnose and treat a broad variety of diseases such as cancer, central nervous system disorders, cardiovascular diseases, diabetes, respiratory and infectious diseases.

Beyond its defensive characteristics, the sector plays a critical role in the United States [US] economy.  Innovative new medicines developed by life science companies provide better patient outcomes, improved quality of care, increased life expectancy, and lead to economic gains and job creation.

While the strengths and weaknesses of the US healthcare system remain the subject of great debate, we believe new medicines should be viewed as investments in the future, not only in patient health – but also in economic recovery and growth.  For example, as indicated in our article “Innovative New Medicines are Key to Economic Growth,” a permanent 1% reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion and a cure would be worth about $50 trillion.

New Drug Approvals

As we highlighted in recent years, legislation passed in 2008 gave the FDA more money and resources, but hiring and training hundreds of new employees takes time.  With that process well underway, combined with increased familiarity of the risk evaluation and mitigation strategies [REMS] program, we expected the drug approval process to gradually improve.

Encouragingly, the total number of approvals for new molecular entities and biologic license applications by the US Food and Drug Administration’s [FDA] Center for Drug Evaluation and Research [CDER] in fiscal year 2011 was 35.  This is an improvement from 21 approvals in 2010 and 25 approvals in 2009.  In fact, according to a press announcement by the FDA, this is among the highest number of approvals in the past decade, surpassed only by 37 approvals in 2009.

However, an article in Nature Reviews by Asher Mullard listing the annual number of drug approvals going back to 1996 shows that 36 approvals in 2004 [not 2009] was the record for the past decade.  The same article also shows that new drug approvals peaked at a high of 56 in 1996.

Notable new drug approvals in 2011 include Johnson & Johnson’s (JNJ) Zytiga® [abiraterone] for late-stage prostate cancer, Roche’s Zelboraf® [vemurafenib] and Bristol-Myers Squibb’s (BMY) Yervoy™ [ipilimumab] both for melanoma, Human Genome Sciences’ (HGSI) Benlysta® [belimumab] – the first new drug for lupus in 50 years, and Seattle Genetics’ Adcetris™ [brentuximab vedotin] for a rare lymphoma known as systemic anaplastic large cell lymphoma [ALCL].

Record Pipeline and Investment

According to the latest report by the Pharmaceutical Research and Manufacturers of America [PhRMA], there are a record number of biotechnology product candidates currently in development.  In the US alone, there are more than 900 biotechnology products in development, including 300 monoclonal antibodies, 298 vaccines, 78 recombinant proteins, 50 gene therapy products, 64 cell therapy products, and 23 antisense products.  More than one-third of these product candidates are targeting cancer and related conditions and more than 20% are targeting infectious diseases.

Annual research and development expenditures by PhRMA member companies for 2009 was an estimated $45.8 billion, more than tripling the $15.2 billion level of investment in 1995.  However, skeptics will point to the fact that despite growing R&D expenditures, the number of new drug approvals has declined since the mid-1990s [see chart below].

Access to Capital

During the second week of January, more than 8,000 registrants gathered in San Francisco, California for the 30th Annual J.P. Morgan Healthcare Conference [JPMHC] to hear 25-minute presentations from 395 life science companies.  For industry executives and investors, the annual event typically serves as a good barometer for the rest of the year.

Between meetings, we roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored social media outlets throughout the event.  In general, the plane flights and networking receptions were crowded as usual, industry observers “Tweeted” a sense of optimism, and attendees appeared more upbeat than in 2011.

The recent closing of three new funds may support increased optimism as it relates to access to capital.  First, on January 3, 2012, Vivo Ventures announced the final closing of a $375 million fund targeting later development stage pharmaceutical and medical device companies in the US and in revenue stage healthcare companies in greater China.  Second, during the JPMHC Canaan Partners announced the closing of a $600 million fund, with one-third of the fund designated to healthcare investments in biopharmaceutical, medical device and healthcare infrastructure companies.  Also during the JPMHC, Flagship Ventures announced the closing of a $270 million life sciences fund, its largest fund to date.   According to Flagship’s press release, in addition to investing in early-stage companies, a portion of the new fund will be dedicated to “later-stage value investing opportunities resulting from the current capital-constrained environment.”  Finally, Luke Timmerman of Xconomy recently reported that Frazier Healthcare is also aiming for its first biotechnology fund since 2007.

Last year wasn’t too bad either.  In 2011, venture capitalists invested $28.4 billion in 3,673 deals, an increase of 22% in dollars and a 4% rise in deals over the prior year, according to the MoneyTree™ Report by PricewaterhouseCoopers LLP and the National Venture Capital Association [NVCA], based on data from Thomson Reuters.  In fact, venture capital investing in 2011 ranks in the top three years for venture capital investing in the past decade.  Biotechnology was the second largest investment sector, with $4.7 billion going into 446 deals.  This represents a 22% increase in investment dollars, but a 9% drop in terms of the number of deals.

2012 is also off to a solid start with regard to follow-on financings.  Synageva (GEVA), Arena Pharmaceuticals (ARNA), iBio (IBIO), Talon Therapeutics (TLON), ImmunoCelluar Therapeutics (IMUC), Vical (VICL), Synta Pharmaceuticals (SNTA), Chelsea Therapeutics (CHTP), Sequenom (SQNM), ZIOPHARM Oncology (ZIOP), Neurocrine Biosciences (NBIX), and NeuroMetrix (NURO) have each announced offerings since the start of the year.

Consolidation and Licensing

Adding to the optimism among industry executives and investors during the JPMHC, Bristol-Myers Squibb announced its $2.5 billion acquisition of Inhibitex, Inc. (INHX) on January 7, 2012.  In view of the fact that US pharmaceutical companies stand to lose billions of revenue due to patent expirations from 2010 to 2012, we expect merger and acquisition [M&A] activity to remain brisk.

In other M&A news, ISTA Pharmaceuticals (ISTA) is still being pursued by Valeant Pharmaceuticals (VRX), which recently increased its previously proposed price to acquire ISTA from $6.50 to $7.50 per share in cash. Valeant also communicated to ISTA that it could achieve a price of up to $8.50 per share following confirmatory due diligence.

Licensing deal activity is also off to a strong start in 2012, as evidence by Xenon Pharmaceuticals’ strategic alliance with Genentech, a member of the Roche Group (RHHBY), to discover and develop compounds and companion diagnostics for the potential treatment of pain.

According to the deal, which was announced during JPMHC, Xenon is eligible to receive research, development and commercialization milestone payments, totaling up to $646 million for multiple products and indications.  In addition, Xenon will receive royalties on sales of products resulting from the collaboration.

In other licensing news, BioDelivery Sciences (BDSI) recently signed a worldwide license and development agreement with Endo Pharmaceuticals (ENDP) for the exclusive rights to develop and commercialize BEMA Buprenorphine for the treatment of chronic pain.

Small Versus Large

Similar to recent years, we expect that small and mid-capitalization companies with late-stage programs and/or positive fundamental catalysts will continue to outperform their larger industry peers in 2012.

For example, after being the third worst performer in the prior year, Medivation (MDVN) became the largest percentage gainer within the NASDAQ Biotech Index during 2011 based on encouraging results with MDV3100, the company’s lead product candidate in Phase 3 development for the treatment of castration-resistant prostate cancer.

In another dramatic reversal of fortune, after declining 22% in 2009 shares of Akorn, Inc. (AKRX), a niche generic pharmaceutical company, made an impressive comeback by becoming the largest percentage gainer within the NASDAQ Biotech Index during 2010 and again making the list of top ten gainers in 2011 [see Table 1].

However, the prior year’s winners may not always stay hot.  Both Human Genome Sciences (HGSI) and Dendreon Corporation (DNDN) were among the top ten gainers from the NASDAQ Biotech Index in 2009 with dizzying returns of 1,342% and 474%, respectively.  In 2011, both names appear on the list of top ten decliners [see Table 2].

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2011

Ticker Company 2010 Close 2011 Close % Change
MDVN Medivation, Inc.

$15.17

$46.11

203.96%

QCOR Questcor Pharmaceuticals, Inc.

$14.73

$41.58

182.28%

ARIA ARIAD Pharmaceuticals, Inc.

$5.10

$12.25

140.20%

CRIS Curis, Inc.

$1.98

$4.68

136.36%

ONTY Oncothyreon, Inc .

$3.26

$7.58

132.52%

VICL Vical Incorporated

$2.02

$4.41

118.32%

SPPI Spectrum Pharmaceuticals, Inc.

$6.87

$14.63

112.95%

CBST Cubist Pharmaceuticals, Inc.

$21.40

$39.62

85.14%

ACHN Achillion Pharmaceuticals, Inc.

$4.15

$7.62

83.61%

AKRX Akorn, Inc.

$6.07

$11.12

83.20%

 

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2011

Ticker Company 2010 Close 2011 Close % Change
PACB Pacific Biosciences of Californ

$15.91

$2.80

-82.40%

SIGA SIGA Technologies Inc.

$14.00

$2.52

-82.00%

SVNT Savient Pharmaceuticals Inc

$11.14

$2.23

-79.98%

TRGT Targacept, Inc.

$26.50

$5.57

-78.98%

DNDN Dendreon Corporation

$34.92

$7.60

-78.24%

GERN Geron Corporation

$5.19

$1.48

-71.48%

BPAX BioSante Pharmaceuticals, Inc.

$1.64

$0.50

-69.51%

HGSI Human Genome Sciences, Inc.

$23.89

$7.39

-69.07%

MNKD MannKind Corporation

$8.06

$2.50

-68.98%

DRRX Durect Corporation

$3.45

$1.18

-65.80%

 

2012 Outlook

The drivers supporting our favorable outlook for the biotechnology industry remain intact for 2012, such as the record number of products in clinical trials and annual industry R&D investment, improving access to capital, brisk pace of industry consolidation and licensing transactions, and attractive valuations among many small- and mid-capitalization companies, which should continue to outperform their larger industry peers.  In particular, 2012 represents a period with particularly robust news flow for emerging immuno-oncology companies, as indicated in our article “2012 Preview: Cancer Immunotherapy Catalysts.”

 

To Partner, or Not to Partner: That is the Question

Traditional wisdom holds that biotechnology companies benefit from collaborations with their larger pharmaceutical peers, which can help validate a company’s technology, provide capital to help fund clinical development, and enable access to experienced clinical, regulatory and commercial infrastructure.  While this was certainly true in the early days of biotechnology, the industry has now matured – ushering in a new era whereby executives must carefully weigh the trade-offs between raising capital to go alone [equity dilution] and sharing economics with a partner [asset dilution].  For a comparison between the old and new paradigms in biotechnology collaborations, refer to Table 1.

Table 1. Old Versus New Paradigm in Biotechnology Collaborations

Old Paradigm New Paradigm
Biotechnology company requires validation by large pharmaceutical partner to attract investment Investors are sufficiently experienced to assess the prospects for clinical, regulatory, and commercial success on their own
Complicated drug development paths are best navigated by large pharmaceutical companies Senior pharmaceutical executives have migrated to smaller biotechnology companies, helping level the playing field
Commercial success requires access to the established sales forces of large pharmaceutical companies Perhaps true for primary care targets, but large pharmaceutical company layoffs have created a surplus of experienced sales reps
Biotechnology companies lack requisite manufacturing expertise and facilities Biotechnology companies can outsource to third-party manufacturers and require biologic versus small molecule production

In addition, the negative considerations from large pharmaceutical partnerships are often overlooked, which begs the question: is it better to partner, or go alone?  To help address the topic, this article focuses on the oncology segment of the life science industry – one of the most popular therapeutic areas for partnering and merger & acquisition [M&A] activity.

Luck Vs Skill

Prior to addressing the question of whether or not a small biotechnology company should collaborate with a larger pharmaceutical organization, we solicited investor views regarding the process of corporate partnering.  Some of the feedback indicates there is a lack of transparency.

“As an investor, partnering activity is the most opaque part of our companies’ business,” said David Sable, portfolio manager, Special Situations Life Sciences Fund.  “Every small biotech CEO tries to create an image of limitless interest on the part of big pharma in each of the company’s projects, a dynamic that will inevitably result in a value-maximizing transaction.  Many management teams deliver on these promises; in retrospect, however, at least as many seem to have parked their molecule in the front yard with a ‘For Sale’ sign and hoped for the best.  While we can validate the importance of a molecular pathway, double-check market size predictions, run our own statistics and reality-check pricing assumptions, we have no way to identify talent in business development.”

Left at the Altar

One of the most important negative considerations for biotechnology companies looking to partner is that large pharmaceutical companies often shift resources and the focus of their pipeline development candidates over time, which may put their collaborators at risk.  Although sometimes done for strategic reasons rather than due to new clinical insight, the sudden departure of a large pharmaceutical partner can reflect poorly on an otherwise promising product candidate.

For example, Celldex Therapeutics, Inc. (CLDX) announced in September 2010 that the company would regain full worldwide rights to develop and commercialize rindopepimut [CDX-110] from Pfizer, Inc. (PFE).  The companies had entered into a global development and commercialization agreement in April 2008 for rindopepimut, an experimental therapeutic cancer vaccine that targets the tumor-specific molecule epidermal growth factor receptor variant III in patients with glioblastoma multiforme.  Pfizer informed Celldex that the rindopepimut program was no longer a strategic priority of Pfizer and terminated the agreement despite the fact that the product candidate met or exceeded all pre-determined safety and efficacy objectives across three clinical studies.  Shares of Celldex, which traded as high as $9.49 during 2010, reached a 52-week low of $2.91 on the news.

More recently, Transgene (TNG.PA) announced on February 22, 2011, that Roche Holding (ROG.VX) terminated their 2007 agreement under which Roche had been granted exclusive global development and commercialization rights to TG4001/RG3484, a therapeutic vaccine candidate currently in a 200 patient Phase IIb study to treat notably high grade cervical intraepithelial neoplasia [CIN] lesions [CIN2/3] caused by human papilloma virus [HPV] infection.  While Transgene stated that Roche’s decision to terminate the license agreement was based on strategic reasons and wasn’t data driven, the company’s shares reached a 52-week low on the news.

Hopes and Dreams Vs Revenue Streams

Another potential negative is that by partnering a product candidate, the “hope and dream” multiple of a potential partnership or acquisition may be replaced by the realities of a “revenue stream,” such as milestone payments and future product royalties.  By discounting the economics of a partnership deal for certain risk factors, investors can assign a net present value to the company that may be quite different than the speculative valuation in the absence of a partnership.  Representing a unique opportunity to review the effect of partnering on market capitalization, three separate deals were announced for late-stage product candidates aimed at treating prostate cancer during 2009, while two companies have remained independent [see Table 2].

As the first transaction announced that year, Johnson & Johnson’s (JNJ) acquisition of Cougar Biotechnology for nearly $1 billion in cash in May 2009 initially looked attractive.  However, following approval of Provenge® [sipuleucel-T] in April 2010, the market capitalization of Dendreon Corporation (DNDN) exceeded $7 billion, which demonstrates the potential benefit of remaining independent or retaining worldwide rights.  In contrast, more than a year after partnering their late-stage programs, the market valuations of two other companies, Medivation, Inc. (MDVN) and OncoGenex Pharmaceuticals, Inc. (OGXI), are $605 million and $150 million, respectively.

Using Dendreon’s valuation as an example, it isn’t surprising that Bavarian Nordic A/S (BAVA.CO) announced earlier today that the company is reviewing alternate options to maximize value for shareholders and fund the pivotal Phase 3 trial of its “off-the-shelf” therapeutic vaccine product candidate Prostvac® on its own.  Keeping its options open, however, Bavarian Nordic is exploring opportunities to pursue independent development in parallel with continuing partnership discussions.

Table 2. Late-stage Prostate Cancer Programs

Company Product Partnered /acquired Stage at time of partnership Current market cap (or acquisition price*) Partner/ acquirer(date announced) Upfront payment Additional economics
Dendreon Corporation (DNDN) Provenge® No n/a $4,690 million n/a n/a n/a
Bavarian Nordic A/S (BAVA.CO) Prostvac® No n/a $625 million n/a n/a n/a
Cougar Biotechnology Abiraterone acetate Yes Two Phase 3 trials underway $970 million* Johnson & Johnson(May 2009) $970 million n/a
Medivation, Inc. (MDVN) MDV3100 Yes Phase 3 AFFIRM trial underway $605 million Astellas Pharma,(October 2009) $110 million $655 million, co-promote w/ 50% of profits in U.S., royalties ex-US
OncoGenex Pharmaceuticals, Inc. (OGXI) OGX-011 Yes Entering two Phase 3 trials $150 million Teva Pharmaceutical Industries Ltd. (December 2009) $60 million $370 million, royalties, option to co-promote

A Means to an End

The biggest argument against partnering is the fact that some of the most successful biotechnology companies to date are those that have commercialized their own products, such as Amgen, Inc. (AMGN), Celgene Corporation (CELG), and several others.

“Celgene is a unique example of success by taking a slightly different approach,” said Charles Duncan, managing director and senior biotech analyst at JMP Securities LLC.  “The company built a pipeline and worldwide infrastructure for Revlimid® [lenalidomide] that was funded and supported through its early sales of Thalomid® [thalidomide].”

“We viewed partnering our lead product as a critical strategic decision that would shape the company and significantly impact our vision,” said Sol J. Barer, Ph.D., Executive Chairman of Celgene Corporation.  “We felt that our pursuing the development of Revlimid worldwide alone was the best option consistent with our vision a of becoming a major global biopharmaceutical company over the next few years.  We clearly recognized the short versus long term trade-offs in the decision; nevertheless, our belief in the product and in our ability to manage the product globally was important in our decision not to partner.”

Some companies have also partnered a specific program in certain geographies or disease settings and use the validation and resulting economics to help advance their own pipeline – sometimes even in competitive areas.  For example, Amgen originally developed Epogen® [epoetin alfa], which the company commercialized as a treatment for anemia in dialysis patients and partnered non-dialysis rights with Johnson & Johnson [sold as Procrit®].  Amgen later developed and commercialized Aranesp® [darbepoetin alfa], an erythropoiesis stimulating protein with a longer half-life and increased biologic activity that was not partnered.

Similarly, Oncothyreon, Inc. (ONTY) has granted a license to Merck KGaA of Darmstadt, Germany for the clinical development, manufacturing, and marketing of Stimuvax®.  Oncothyreon is eligible for cash payments based on the achievement of certain process transfer events, regulatory submissions in first and second cancer indications, regulatory approval for first and second cancer indications, and for sales milestones.  Oncothyreon will also receive a royalty based on net sales.  If successful in the clinic, Stimuvax could also help validate another Oncothyreon product candidate, ONT-10, which is a completely synthetic MUC1-based liposomal glycolipopeptide cancer vaccine that could compete with Stimuvax.  Merck KGaA has a right of first negotiation with respect to ONT-10.

Geographically Undesirable

Although selective encumbered assets can still attract buyers, partnering a product candidate in certain geographies with one large pharmaceutical company may preclude an acquisition by another that is only interested in worldwide rights or control of key markets.  On the other hand, some partnerships can later lead to an acquisition – a strategy employed by Bristol-Myers Squibb Company (BMY) on more than one occasion.

For example, Bristol-Myers Squibb and Medarex, Inc. formed a worldwide collaboration in 2004 valued at more than $530 million to develop and commercialize Yervoy® [ipilimumab, MDX-010], which was in Phase III clinical development at the time for the treatment of metastatic melanoma and multiple Phase II clinical trials in other oncology indications.  In 2009, Bristol-Myers Squibb acquired Medarex for $16.00 per share, a 90% premium over the prior day’s closing price of $8.40 per share, for an aggregate purchase price of approximately $2.4 billion.

What started as a lawsuit for infringement of its patents related to fusion protein technology in 2006, ZymoGenetics, Inc. signed a deal with Bristol-Myers Squibb in 2009 worth more than $1.1 billion for PEG-Interferon lambda, a novel type 3 interferon in Phase Ib development for the treatment of Hepatitis C, and its related development program.  The following year, Bristol-Myers Squibb acquired ZymoGenetics for $9.75 per share in cash [an 84% premium to the prior day close] in a transaction valued at approximately $885 million.

While ultimately thwarted by Eli Lilly & Co.’s (LLY) superior offer in October 2008, Bristol-Myers also attempted to acquire its partner ImClone Systems.  Back in September 2001, Bristol-Myers had entered into an agreement with ImClone to co-develop and co-promote Erbitux® [cetuximab, IMC-C225] in the United States, Canada and Japan.

All that Glitters is not Gold

Maintaining worldwide rights and commercializing a product without a partner doesn’t necessarily translate into a lofty market valuation.  Several companies have struggled to commercialize oncology products on their own.

Allos Therapeutics, Inc. (ALTH) developed Folotyn® [pralatrexate injection], a folate analogue metabolic inhibitor, and began commercializing the product in the U.S. for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma [PTCL] in October 2009.  Since the product’s launch, Folotyn sales have been below Wall Street analyst’s expectations and shares of Allos recently reached a 52-week low of $2.64.

Despite an inauspicious launch in the U.S., some analysts believe that Allos may finally be executing on a regional strategy with the recent filing of a Marketing Authorisation Application for European approval and the potential for a partner in Asia as highlighted during the company’s recent quarterly teleconference with investors.

“If Allos gets traction with an ex-U.S. approval and partnership, investor sentiment will most certainly improve as this will provide some external validation on the viability of a regulatory path and market opportunity in PTCL, despite it being a rare disease and there being emerging potential competition from Celgene’s Istodax® [romidepsin],” said Charles Duncan.  “At this point, all but the most patient, value-oriented investors have extricated themselves from the Allos story due to what we believe to be a lack of confidence in senior management, and having another company to shoulder the risk ex-U.S. will provide a much-needed boost to the capabilities and capital needed to profitably market Folotyn.  Perhaps this too could be an example where a collaboration discussion turns into an acquisition, although we anticipate that should such a scenario materialize, it would likely involve contingent-value rights [CVR’s] given the uninspiring early revenue trajectory.”

Summary

Looking ahead, the trade-off between equity dilution and asset dilution represents an important crossroad that many late-stage biotechnology companies will face in the near future [see Table 3 for a select list].  While one size doesn’t fit all, the fact that Dendreon has achieved the largest market valuation of any company in the late-stage prostate cancer segment of the market by commercializing its product without a partner helps support the notion that going alone may provide the highest value to stakeholders.  Such a strategy requires that the company can access resources and capital to develop and launch its product globally.  If not, a selective or global partnership may be the next best options – provided the terms are attractive and that there is a remaining pipeline to be leveraged in the future.  In the end, whether a company proceeds alone or with a partner, there is an attractive landscape of motivated buyers for late-stage and marketed products that may ultimately lead to M&A.

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Table 3. Select Companies with Phase III Oncology Programs Not Yet Partnered

Company Product Stage Indication Market Cap
AVAX Technologies Inc. (AVXT.PK) MVax® Planning pivotal Phase 3 under SPA Melanoma $26 million
Bavarian-Nordic A/S (BAVA.CO) Prostvac® Planning Pivotal Phase 3 under SPA Hormone-refractory prostate cancer $625 million
Biovest International, Inc. (BVTI.PK) BiovaxID® Phase 3 completed Follicular lymphoma $93 million
Cell Therapeutics, Inc. (CTIC) Pixantrone Phase 3 completed Non-Hodgkin’s lymphoma [NHL] $197 million
Celldex Therapeutics, Inc. (CLDX) Rindopepimut Planning Pivotal Phase 3 in H2 ‘11 Glioblastoma multiforme [GBM] $127 million
Cyclacel Pharmaceuticals, Inc. (CYCC) Sapacitabine Enrolling in Pivotal Phase 3 under SPA Frontline acute myeloid leukemia [AML] $61 million
Exelixis, Inc. (EXEL) Cabozantinib [XL184] Phase 3 ongoing Medullary thyroid cancer $1,240 million
Light Sciences Oncology Aptocine™ [talaporfin sodium] Phase 3 ongoing Hepatocellular carcinoma and metastatic colorectal cancer private
Oncolytics Biotech, Inc. (ONCY) Reolysin Phase 3 ongoing Squamous cell carcinoma of the head and neck $420 million
Onconova Therapeutics EstybonT™ [ON01910.Na] Planning Pivotal Phase 3 under SPA Myelodysplastic syndromes [MDS] private
Sunesis Pharmaceuticals, Inc. (SNSSD) Vosaroxin Enrolling in Phase 3 Relapsed AML $86 million

 

Merger Means Billions for Biotechnology?

In March 2009, we asked the question “Where Might Genentech Investors Redeploy $47 Billion?” in response to the news that Roche Holding AG (RHHBY.PK) would acquire the outstanding publicly held interest in Genentech for a total payment of approximately $47 billion in cash.   We hypothesized that investors seeking biotechnology companies of comparable size and liquidity would gravitate towards the 30 largest companies within the NASDAQ Biotech Index (NBI), which we divided into the following three groups:

  • Tier 1: market capitalization in excess of $10 billion
  • Tier 2: market capitalization greater than $2 billion but less than $10 billion
  • Tier 3: market capitalization of at least $1 billion but less than $2 billion

At that time, the 30 companies in these three groups had a collective market capitalization of approximately $240 billion. Assuming that investors reinvested the entire $47 billion in cash they received from the Roche/Genentech transaction into these groups, it would have represented nearly 20% of the total value.  While some of the money may have been reinvested in Roche, such an imbalance between supply and demand could have resulted in relative outperformance from members of the three groups.

Following today’s news that Sanofi-aventis (SNY) is acquiring Genzyme Corporation (GENZ) for approximately $20 billion in cash [plus a contingent value right], we reviewed the performance of our three tiers to determine which companies, if any, benefited the most from the reinvestment of $47 billion following the Roche/Genentech transaction.

From the date that the Roche/Genentech transition was announced [March 12, 2009] through February 15, 20111, the NASDAQ Composite (COMP) was up approximately +97%.  In contrast, the NBI only increased +50% during the period.  Recall that the NBI is calculated under a modified capitalization-weighted methodology, taking into account the total market value of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalization have the highest weighting in the index – making the NBI a good proxy for the performance of larger capitalization biotechnology companies.

Contrary to expectations, the largest biotechnology companies did not appear to benefit from a reallocation of funds from the Roche/Genentech transaction and posted the worst overall performance during the period.  In fact, all six members of the Tier 1 group underperformed the NBI, which includes Genzyme [see Table 1].  The companies in Tier 1 should have been the closest to Genentech with regard to their risk/return profile.

Table 1: Tier 1 Group

Company 3/12/09 close 2/15/11 close % Change
Amgen, Inc. (AMGN) $50.27 $53.84 7.10%
Biogen Idec, Inc. (BIIB) $48.88 $67.09 37.25%
Celgene Corporation (CELG) $47.16 $53.14 12.68%
Genzyme Corporation (GENZ) $55.63 $74.30 33.56%
Gilead Sciences, Inc. (GILD) $44.43 $38.99 -12.24%
Teva Pharmaceutical Industries Ltd. (TEVA) $43.10 $51.70 19.95%
Average 16.38%

With market capitalizations greater than $2 billion but less than $10 billion around the time that the Roche/Genentech transaction was announced, Tier 2 represented the best performing group.  While Tier 2 contained both winners and losers, more than half of the Tier 2 companies outperformed the NBI, including four with triple-digit gains during the period [see Table 2].

Table 2: Tier 2 Group

Company 3/12/09 close 2/15/11 close % Change
Alexion Pharmaceuticals, Inc. (ALXN) $34.71 $90.08 159.52%
Cephalon, Inc. (CEPH) $64.40 $58.99 -8.40%
Gen-Probe, Inc. (GPRO) $43.65 $62.74 43.73%
Illumina, Inc. (ILMN) $36.35 $71.88 97.74%
Life Technologies Corporation (LIFE) $28.82 $54.30 88.41%
Myriad Genetics, Inc. (MYGN) $37.48 $19.39 -48.27%
OSI Pharmaceuticals (OSIP)* $38.26 $57.50 50.29%
Perrigo Company (PRGO) $21.66 $73.55 239.57%
Qiagen N.V. (QGEN) $16.19 $19.77 22.11%
Shire plc (SHPGY) $34.25 $82.85 141.90%
Vertex Pharmaceuticals, Inc. (VRTX) $29.26 $39.49 34.96%
Warner Chilcott plc (WCRX) $7.26 $24.74 240.77%
Average 88.53%
* Acquired by Astellas Pharma in May 2010, price as of 3/31/2009 and the acquisition price, respectively

Tier 3 was the second best performing group.  Half of the Tier 3 companies outperformed the NBI, including four with triple-digit gains during the period [see Table 3].

Table 3: Tier 3 Group

Company 3/12/09 close 2/15/11 close % Change
Acorda Therapeutics, Inc. (ACOR) $26.00 $22.99 -11.58%
Amylin Pharmaceuticals, Inc. (AMLN) $10.06 $15.52 54.27%
Auxilium Pharmaceuticals, Inc. (AUXL) $28.99 $22.14 -23.63%
BioMarin Pharmaceutical, Inc. (BMRN) $11.00 $26.94 144.91%
CV Therapeutics (CVTX)* $19.88 $20.00 0.60%
Endo Pharmaceuticals Holdings, Inc. (ENDP) $16.80 $34.92 107.86%
Isis Pharmaceuticals, Inc. (ISIS) $13.18 $8.69 -34.07%
ONYX Pharmaceuticals, Inc. (ONXX) $28.72 $36.56 27.30%
Regeneron Pharmaceuticals, Inc. (REGN) $13.33 $37.11 178.39%
Sepracor (SEPR)** $14.66 $23.00 56.89%
Techne Corp (TECH) $50.00 $68.51 37.02%
United Therapeutics Corp (UTHR) $31.27 $67.02 114.33%
Average 54.36%
* Acquired by Gilead in March 2009, price as of 3/31/2009 and the acquisition price, respectively
** Acquired by Dainippon Sumitomo Pharma in September 2009, price as of 3/31/2009 and the acquisition price, respectively

In conclusion, the reallocation of funds following a significant merger & acquisition [M&A] transaction for cash doesn’t appear to benefit larger biotechnology companies with similar risk/reward profiles in terms of relative stock performance [Tier 1].  While a comprehensive analysis of the data is beyond the scope of this article, this could result from the reallocation of capital into the acquiring company, sufficient liquidity from larger biotechnology companies to withstand the increased demand, and/or other factors.   However, using history as a guide, those companies with a market capitalization between $2 and $10 billion appear most likely to benefit from reinvestment following the recent Sanofi/Genzyme transaction.

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Biotech Deal Activity Declines…The Pause that Refreshes?

* MD Becker Partners reporting live from the JP Morgan Healthcare Conference

This week, nearly 6,500 registrants gathered in San Francisco, California for the JP Morgan Healthcare Conference to hear 25-minute presentations from 338 life science companies.  For industry executives and investors, the annual event serves as a good barometer for the rest of the year.

We roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored online media commentaries throughout the event.  In general, there was a flurry of activity, the plane flights and networking receptions were crowded as usual, and several industry observers “Tweeted” a sense of optimism for 2010.  However, we sought to construct a less subjective assessment by analyzing year-over-year statistics from the conference.

Accordingly, we extensively reviewed company press releases issued during the JP Morgan Healthcare Conference in both 2009 and 2010, with a particular focus on identifying the number of merger & acquisitions, licensing & partnering transactions, and financing deals announced each year during the four day event.

Merger and Acquisitions

In contrast to the absence of any significant M&A deals announced during the JP Morgan Healthcare Conference in 2010, several large M&A transactions with an aggregate value of $702 million were disclosed during the first two days of the event in 2009 [January 12-15, 2009].  The largest deal went to Cephalon, Inc. (CEPH), which announced an agreement providing the company with an option to purchase all outstanding capital stock of Ception Therapeutics, Inc., a privately held biopharmaceutical company.  Under the terms of the option agreement, Cephalon paid Ception $100 million upfront for the option.  If Cephalon exercises its option, the company will purchase all of the outstanding capital stock of Ception for $250 million along with additional payments related to clinical and regulatory milestones.  Other transactions announced that year included:

  • Medtronic, Inc.’s (MDT) acquisition of privately held Ablation Frontiers, Inc. for an initial payment of $225 million plus potential additional payments contingent upon achievement of certain clinical milestones
  • The Medicines Company’s (MDCO) merger agreement with Targanta Therapeutics Corporation for $42 million in cash and additional regulatory and commercial milestone payments
  • NuVasive, Inc.’s (NUVA) option to acquire Progentix Orthobiology BV, a Netherlands based company focused on developing novel orthobiologics, consisting of an upfront investment of $15 million along with the obligation to purchase the remaining equity of Progentix for $45 million upon accomplishment of certain development milestones [with additional potential payments of up to $25 million upon the achievement of additional milestones and based upon NuVasive’s sales success]

Licensing and Partnering

Kicking off the JP Morgan Healthcare Conference in 2010, privately held KaloBios Pharmaceuticals, Inc. announced a $290 million agreement with Sanofi Pasteur, the vaccines division of the sanofi-aventis Group (SNY), for the development and commercialization of KB001, an investigational new biologic for the treatment or prevention of Pseudomonas aeruginosa [Pa] infections.  KaloBios, which is developing first-in-class human antibody therapeutics that offer advantages over other methods of human antibody creation in terms of immunogenicity, potency, and manufacturing yields, will receive an upfront payment of $35 million, plus development, regulatory and commercial milestones for a potential further $255 million, as well as royalties on eventual product sales.

While other licensing and partnering transactions were announced during the JP Morgan Healthcare Conference in 2010, they were substantially smaller or specific financial terms were not disclosed.  These include:

  • Proteus Biomedical Inc. announced an exclusive worldwide license and collaboration agreement with Novartis AG (NVS) to develop and commercialize pharmaceutical products that incorporate Proteus’ novel sensor-based technologies in the field of organ transplantation along with certain option rights in cardiovascular and oncology product applications.  Under the terms of the agreement, Novartis will make upfront cash and equity investments in Proteus totaling $24 million and Proteus will also receive royalties on worldwide net sales of any Novartis products incorporating its sensor-based technology.
  • Trillium Therapeutics, Inc., a biopharmaceutical company developing innovative immune-based biologics, announced that it has entered into a definitive license agreement with Biogen Idec, Inc. (BIIB), granting the latter exclusive worldwide rights to one of Trillium’s development programs.  Under the terms of the agreement, Trillium will receive an upfront payment and is eligible to receive milestone payments based on achievements of specified clinical, regulatory and commercial accomplishments.  Trillium will also receive royalties on global product sales.  Biogen Idec will be solely responsible for clinical development, regulatory approvals, manufacturing and commercialization.
  • MedGenesis Therapeutix Inc., a biopharmaceutical company developing and commercializing innovative treatments for patients with serious central nervous system [CNS] diseases, announced an agreement with Amgen, Inc. (AMGN) that provides MedGenesis with an exclusive, worldwide license for glial cell line-derived neurotrophic factor [GDNF] protein in CNS and non-CNS indications.  As part of the license agreement, Amgen now holds a small equity stake in MedGenesis.  In parallel, Biovail Corporation (BVF) and MedGenesis concluded an agreement to collaborate on the development of GDNF in Parkinson’s disease and potentially other CNS indications.  GDNF is a naturally-occurring growth factor capable of protecting and promoting the survival of dopamine producing nerve cells.
  • AstraZeneca Plc (AZN) and CrystalGenomics announced a research collaboration to discover and develop a novel anti-infective for use as a potential antibacterial agent.  Under the terms of this agreement, Korea-based CrystalGenomics will receive research funding from AstraZeneca for two years.  CrystalGenomics will also be eligible to receive future milestones and royalty payments associated with development and commercialisation of a drug candidate.
  • AnaptysBio, Inc., a privately-held therapeutic antibody platform and product company, announced it has signed an agreement with Roche (RHHBY) for the development of novel antibody therapeutics.  Under the terms of the agreement, AnaptysBio will be responsible for generating novel antibodies using its proprietary somatic hypermutation platform and Roche will receive a worldwide license to develop and commercialize antibodies optimized by AnaptysBio.  In addition to a signing fee paid by Roche, AnaptysBio will be eligible to receive milestone payments and royalties upon product sales.

The six transactions announced during the JP Morgan Healthcare Conference in 2010 with reported financial terms totaling $314 million pale in comparison to the ten deals reported at the meeting during 2009 worth more than $2.4 billion in aggregate value.  These included a $1.1 billion deal between ZymoGenetics, Inc. (ZGEN) and Bristol-Myers Squibb Company (BMY), a $500 million deal between Peptimmune, Inc. and Novartis AG, a $396 million deal between Micromet, Inc. (MITI) and Bayer AG (BAYZF.PK), and a $200 million deal between FORMA Therapeutics the Novartis Option Fund to develop inhibitors for an undisclosed protein-protein interaction target in the field of oncology, among others.

Financing

The quantity and aggregate dollar value of public and private financing transactions announced during the JP Morgan Healthcare Conference were essentially flat in 2010 compared with the prior year as reflected in the table below.

2009 2010
Company Name Ticker $ Million Raised Company Name Ticker $ Million Raised
Acclarent, Inc Private 26.00 Cyclacel Pharma CYCC 7.20
Mithridion, Inc Private 2.90 Advanced Cardiac Therap Private 5.00
Singulex, Inc. Private 19.00 VentiRx Pharma Private 25.00
Soligenix, Inc SNGX.OB 2.28 EntreMed, Inc ENMD 2.50
Akorn, Inc AKRX 25.00 BioLeap, Inc Private 5.00
Alseres Pharmaceuticals ALSE.PK 1.00 Cell Therapeutics, Inc CTIC 30.00
Chiral Quest Private 13.00 BIND Biosciences, Inc Private 11.00
Rosetta Genomics Ltd ROSG 5.10
TOTAL $89.18 TOTAL $90.80

 

Outlook

At the start of 2009, we provided a positive outlook for biotechnology, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions.  The latter was quickly reinforced by M&A transactions with an aggregate value of $702 million and licensing & partnering deals worth more than $2.4 billion in aggregate value announced January 12-15, 2009, during the JP Morgan Healthcare Conference.

While we believe that a positive outlook for 2010 is once again warranted, and the first two weeks of the year don’t necessary indicate a trend, hopefully the paucity of M&A activity coupled with the decline in both the quantity and value of licensing & partnering transactions announced during the JP Morgan Healthcare Conference in 2010 is simply the pause that refreshes and the action improves throughout the year.

Where Might Genentech Investors Redeploy $47 Billion?

Following a spate of high profile clinical setbacks and regulatory delays that sent the sector into a tailspin during the final week of February 2009 (see prior column), investors shrugged off further disappointing clinical news as merger and acquisition activity helped biotechnology stocks stage a partial recovery last week. The NASDAQ Biotech Index (NBI) gained nearly 9 percent during the period, slightly lagging the broader market’s advance as evidenced by the 10.7 percent increase in the S&P 500 Index.

Last week, Genentech (DNA) and Biogen Idec (BIIB) reported that a Phase 3 study of Rituxan® failed to meet the primary endpoint as a treatment for patients with a form of lupus. This was the second setback for patients with lupus in less than a month, as La Jolla Pharmaceutical (LJPC) recently announced that the Independent Data Monitoring Board for its Riquent® Phase 3 study in lupus completed the first interim efficacy analysis and determined that continuing the study is futile.

Also during the week, Human Genome Sciences (HGSI) announced that Albuferon® met its primary endpoint of non-inferiority to peginterferon alfa-2a in a Phase 3 clinical trial for patients with chronic hepatitis C. Unfortunately, investors apparently had higher expectations for the study and sent the company’s stock to an all-time low on the news. Recent clinical setbacks in the area of lupus also likely weighed on Human Genome Sciences. The company is investigating LymphoStat-B®, a human monoclonal antibody that inhibits the biological activity of B-lymphocyte stimulator, in two Phase 3 superiority trials for patients with systemic lupus erythematosus (SLE). Human Genome Sciences expects to have the first Phase 3 data available for LymphoStat-B® by mid-2009, and all Phase 3 data to support regulatory filings available in fall 2009.

Putting disappointing clinical updates aside, last week’s big news came from Roche (ROG.VX) and Genentech, which announced a merger agreement under which Roche will acquire the outstanding publicly held interest in Genentech for a total payment of approximately $47 billion in cash. This positive development fueled speculation as to where investors might redeploy their proceeds (see related article by Thomson Reuters).

Seeking biotechnology companies of comparable size and liquidity, investors will likely gravitate towards the larger companies among the 135 members of the NBI that we divided into the following three groups using data obtained through Gridstone Research:

Tier 1: market capitalization in excess of $10 billion (6 companies)
Tier 2: market capitalization greater than $2 billion but less than $10 billion (12 companies)
Tier 3: market capitalization of at least $1 billion but less than $2 billion (12 companies)

The 30 companies in these three groups had a collective market capitalization of approximately $240 billion at the end of last week. Assuming that investors reinvested the entire $47 billion in cash they receive for their Genentech shares into these groups, it would represent approximately 20 percent of the current value. Of course, it is unlikely that the entire $47 billion will return to the biotechnology sector, as index funds and other Genentech holders may reallocate their proceeds to other industries. Nonetheless, it is reasonable to assume that the majority of funds will be reinvested within the biotechnology sector.

Tier 1 consists of Amgen (AMGN), Biogen Idec (BIIB), Celgene (CELG), Genzyme General (GENZ), Gilead Sciences (GILD), and Teva Pharma (TEVA). Not surprisingly, this group performed exceptionally well during the past week. Year-to-date laggard Celgene (CELG) benefited the most and advanced 17 percent during the period.

Tier 1 Graph


Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved. Used with permission.

Tier 2 consists of Shire plc (SHPGY), Life Technologies (LIFE), Vertex Pharmaceuticals (VRTX), Cephalon (CEPH), Illumina (ILMN), Myriad Genetics (MYGN), Qiagen N.V. (QGEN), Alexion Pharmaceuticals (ALXN), Warner Chilcott (WCRX), Gen-Probe (GPRO), OSI Pharmaceuticals (OSIP), and Perrigo (PRGO). In addition to possibly benefiting from the reallocation of Genentech proceeds, Tier 2 includes some of the sector’s best performing stocks year-to-date, including Myriad Genetics, Life Technologies and Illumina.

Tier 2 Graph (partial list)


Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved. Used with permission.

Tier 3 consists of Endo Pharmaceuticals (ENDP), Techne (TECH), ONYX Pharmaceuticals (ONXX), Sepracor (SEPR), United Therapeutics (UTHR), Amylin Pharmaceuticals (AMLN), CV Therapeutics (CVTX), Isis Pharmaceuticals (ISIS), Auxilium Pharmaceuticals (AUXL), BioMarin Pharmaceutical (BMRN), Regeneron Pharmaceuticals (REGN), and Acorda Therapeutics (ACOR). Tier 3 represents a number of companies that have been rumored as takeover targets themselves, including ONYX Pharmaceuticals, Amylin Pharmaceuticals, and Acorda Therapeutics. Just last week, Gilead Sciences and CV Therapeutics announced the signing of a definitive agreement pursuant to which Gilead will acquire CV Therapeutics for $20.00 per share, which topped an unsolicited proposal from Astellas Pharma Inc. to acquire CV Therapeutics.

Tier 3 Graph (partial list)


Copyright ©1999-2008 by StockCharts.com Inc., Redmond Washington. All rights reserved. Used with permission.

The brisk pace of merger and acquisition activity along with licensing transactions is central to the bullish outlook for biotechnology proposed at the start of 2009. However, new product approvals and positive clinical trial results are an equally important theme. As such, investors will likely be closely monitoring near-term events, such as results from the first Phase 3 trial of Human Genome Sciences’ LymphoStat-B® for lupus in mid-2009, AMAG Pharmaceuticals (AMAG) obtaining approval for Feraheme™ to treat anemia, final results from Dendreon’s (DNDN) Phase 3 trial of Provenge® for prostate cancer expected in April, and results from Genentech’s Phase 3 study of Avastin® plus chemotherapy in adjuvant colon cancer expected in mid-2009.

2009: Positive Perspectives for Biotechnology

After a brief bout of euphoria during the early portion of the decade, the biotechnology industry, as measured by the Amex Biotech Index (BTK), was shunned by investors for the better part of the 1990’s. The BTK, which was established with a benchmark value of 200 on October 18, 1991, declined by 50% to nearly 100 seven years later (around mid-1998) despite improving industry fundamentals, including record levels of late-stage clinical trials, new product approvals, profitable biotechnology companies, and industry merger and acquisition activity. With this in mind, and being somewhat of a contrarian, it was July 1998 that I first started publishing an investment newsletter focusing on biotechnology.

The BTK quickly doubled from its low and reclaimed the 200 level towards the end of 1998. Over a two-year period, the BTK rose from approximately 100 to 800 – from September 1998 to September 2000. In other words, $10,000 invested in the BTK stock index would have turned into $80,000 during this two year period.

But similar to the experience of the 1990’s, exuberance turned to despair in the early portion of the new millennium. Once again, it took the BTK seven years to rise above the high of 800 achieved during the year 2000.

By mid-2008, the BTK nearly reached 900 and was outperforming the broader market. Analogous to 1998-2000, it looked like another multi-year biotechnology bull market was beginning – that is until the equity market meltdown that occurred in the second half of the year.

Indeed, 2008 is a year that many investors would like to forget. The Dow Jones Industrial average recorded its worst annual performance since 1931 and the NASDAQ Composite had its worst year since inception in 1971. On the heels of such a miserable year, it may seem counter intuitive to provide a positive outlook for the biotechnology industry in 2009, but there are both fundamental and technical attributes worth considering.

Defensive Sector

The biotechnology sector is often portrayed as defensive given that disease is relentless in both good economic times and bad. Despite medical advances, there remains a need for quality, innovative products to diagnose and treat a broad variety of diseases such as cancer, central nervous system disorders, cardiovascular diseases, diabetes and infectious diseases. This defensive characteristic appears to have held true in 2008 given the 13% decline in the NASDAQ Biotech Index compared to declines ranging from 30 to 40% for the major market indices, such as the Dow Jones Industrials, S&P 500, and NASDAQ Composite. With all of the uncertainties going into 2009, defensive industries like biotechnology may remain in vogue.

More Resources for FDA

Beyond its defensive attribute, new drug approvals by the FDA during 2008 were the highest in three years. Of course, cynics will rightfully call attention to the quarter-century low number of approvals in 2007, that the FDA failed to decide whether to clear many products within the timetable established by Congress during 2008, and that 2008’s performance still pales in comparison to the high of 37 new approvals in 1999. But viewing this in the context of internal resource constraints that have plagued the agency may provide optimism going into 2009, as legislation passed last year gives the FDA more money and resources in 2009.

The Bullish Percent

From a technical perspective, one market indicator turned bullish for biotechnology industry going into the New Year. This indicator, called the Bullish Percent, is based on the percentage of stocks in the broader NASDAQ Biotech Index that are currently trading above their 200-day moving average. A stock that is trading above its 200-day moving average is viewed bullish by technical analysts, while one trading below its 200-day moving average is viewed bearish. Accordingly, if 34 out of the 136 companies in the NASDAQ Biotech Index were currently trading above their 200-day moving averages – the Bullish Percent for the group would be 25%.

In general, Bullish Percent levels above 70% are considered overbought, whereas levels below 30% are considered oversold. However, just because a stock or sector is oversold doesn’t mean it cannot become even more oversold, so the Bullish Percent technical indicator doesn’t turn bullish until the level falls below 30% and then subsequently reverses up by at least 6%. Conversely, the Bullish Percent indicator turns bearish when it goes above 70% and then reverses down by at least 6%.

After the Bullish Percent hit a low of 5% on December 1, 2008, when a mere 7 companies were trading above their 200-day moving average, the indicator has been steadily rising and exceeded the 11% reversal level (calculated by taking the 5% low plus the requisite 6% reversal) required to turn bullish. In fact, the Bullish Percent reading was 21% as of December 31, 2008. Amgen (AMGN), ArQule (ARQL), Cubist (CBST), Cephalon (CEPH), Micromet (MITI), NPS Pharma (NPSP), Sequenom (SQNM), ViroPharma (VPHM) and Vertex (VRTX) are just a few of the 29 biotechnology companies trading above their 200-day moving average at that time.

Consolidation

Merger and acquisition activity remains brisk and may also generate renewed interest in the biotechnology sector as U.S. pharmaceutical companies stand to lose billions of revenue from 2010-12 due to patent expirations. Pfizer, Wyeth and Merck have recently indicated that they are on the prowl for acquisitions. In addition, the challenging financing climate may force many small biotechnology companies to combine for survival. M&A activity over the past year includes, among others (acquirer/target): Eli Lilly/ImClone, Takeda/Millennium, Roche/Memory, EUSA/Cytogen, Stiefel Laboratories/Barrier Therapeutics, and just this week – Endo Pharma/Indevus. Incidentally, both Endo and Indevus were trading above their 200-day moving averages at the end of 2008.

Investor Visibility

Upcoming conferences offer an excellent opportunity for biotechnology leaders to generate momentum for the industry in the year ahead. More than 300 companies will deliver presentations to thousands of investors next week at J.P. Morgan’s 27th Annual Healthcare Conference held January 12-15, 2009 in San Francisco. This event is the first and perhaps most important biotechnology investor meeting of the year, followed quickly by the BIO CEO & Investor conference held February 9-10, 2009 in New York.

On a more local level, and as the nation’s center of bioscience and pharmaceutical research and development, more than 300 members of New Jersey’s bioscience community will gather for BioNJ’s 16th Annual Meeting held January 22, 2009 at the Hilton East Brunswick, New Jersey. Featured speakers include Barclays Capital Vice Chairman Frederick Frank and Biotechnology Industry Organization (BIO) President & CEO James C. Greenwood, the former U.S. Congressman of Pennsylvania’s 8th District. For more information, visit the BioNJ website: http://www.bionj.org/

Conclusion

To be sure, the capital markets remain turbulent and there may even be casualties along the way among undercapitalized companies, but many of the biotechnology industry’s fundamentals, such as the number of products in clinical trials, new product approvals, profitable biotech companies and industry mergers & acquisitions remain favorable. Combine these positive attributes with yet to be seen benefits from decoding the human genome, an improvement or stabilization in the capital markets, greater resources for the FDA and a novel blending of technology, chemistry and biology and many of the necessary ingredients for The Biotechnology Revolution that I first proposed in December 1999 remain intact.

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Disclaimer: This article contains the author’s own opinions, and none of the information contained therein constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. To the extent any of the information contained in the article may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.