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.”

 

Biotech Deal Activity a Mixed Bag During Major Conference

Last week, thousands of registrants gathered in San Francisco, California for the JP Morgan Healthcare Conference [JPMHC] to hear 25-minute presentations from 364 life science companies.  For industry executives and investors, deal activity emanating from the annual event typically serves as a good barometer for the rest of the year.

Adding to an already hectic schedule of one-on-one meetings during the week, the success of JPMHC has spawned numerous satellite events, such as Biotech Showcase, OneMedForum, New Paradigms Conference, and China Forum.  The latter event provides further evidence that China is emerging as an important component of the international biotechnology landscape, as 16 China-based life science companies also presented during an inaugural China Track at JPMHC.

In between offsite meetings, 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, the plane flights and networking receptions were crowded as usual, industry observers “Tweeted” a sense of optimism, and attendees appeared more upbeat than in 2010.  However, we once again sought to construct a less subjective assessment by analyzing year-over-year statistics from the conference.

Accordingly, we extensively reviewed press releases issued by biotechnology companies during JPMHC from 2009 to 2011, with a particular focus on identifying the number of merger & acquisitions [M&A], licensing & partnering transactions, and financing deals announced each year during the four-day event.

Merger and Acquisitions

 

Back in 2009, several large M&A transactions were announced during JPMHC.  That year, four M&A transactions with an aggregate value of $702 million were disclosed during the first two days of the event.  The largest deal went to Cephalon, Inc. (CEPH), which announced a $100 million option agreement providing the company with an opportunity to purchase all outstanding capital stock of Ception Therapeutics, Inc., a privately held biopharmaceutical company, for an additional $250 million.

Despite ongoing discussions between Sanofi-aventis (SNY) and Genzyme Corporation (GENZ), only one significant M&A transaction was announced during JPMHC in 2011, marking the second year in a row with a paucity of deals.  Finland-based Biotie Therapies Corp., a drug developer focused on central nervous system [CNS] and inflammatory diseases, announced that it is acquiring Synosia Therapeutics Holding AG in an all-share deal that values the private Swiss company at approximately $125 million.  Synosia Therapeutics Holding AG is a biopharmaceutical company focused on developing and commercializing a portfolio of CNS product candidates licensed from Roche Holding AG (RHHBY.PK), Novartis AG (NVS), and Syngenta AG (SYT).

Table 1. Select M&A Transactions Announced During JPMHC from 2009-2011 ($ in millions)

2009 2010 2011
# transactions 4 0 1
$ transactions $702 $0 $125

Licensing and Partnering

In 2009, ten strategic licensing and/or partnering transactions with an aggregate value exceeding $2.4 billion were announced during JPMHC. The transactions included a $1.1 billion deal between ZymoGenetics, Inc. and Bristol-Myers Squibb Company (BMY), a $500 million deal between Peptimmune, Inc. and Novartis AG (NVS), 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. Interesting to note, Bristol-Myers Squibb later acquired ZymoGenetics Inc. for $885 million in cash during September 2010.

In 2010, there were only six transactions totaling $314 million announced at JPMHC, driven primarily by a $290 million agreement between privately held KaloBios Pharmaceuticals, and Sanofi Pasteur, the vaccines division of the Sanofi-aventis, for the development and commercialization of KB001, an investigational new biologic for the treatment or prevention of Pseudomonas aeruginosa [Pa] infections.

In 2011, three major licensing and/or partnering transactions totaling more than $3 billion were announced during JPMHC, although three-quarters of the total value came from a single agreement:

  • Eli Lilly and Company (LLY) and Boehringer Ingelheim announced a $2.4 billion global agreement to jointly develop and commercialize a pipeline of oral diabetes agents and basal insulin analogues.  The alliance also includes the option to co-develop and co-commercialize Eli Lilly’s anti-TGF-beta monoclonal antibody.
  • Privately held Epizyme, Inc. announced a strategic alliance with GlaxoSmithKline plc (GSK) that could be worth over $650 million.  Epizyme is involved in the discovery and development of small molecule histone methyltransferase inhibitors, a new class of targeted therapeutics for the treatment of genetically-defined cancer patients, based on breakthroughs in the field of epigenetics.  Epigenetics refers to the regulation of genes with mechanisms other than changes to the underlying DNA sequence and such processes are widely believed to play a central role in the development and progression of almost all cancers.
  • Takeda Pharmaceutical Company Limited and Zinfandel Pharmaceuticals, Inc. announced an exclusive, worldwide licensing agreement regarding Zinfandel’s TOMM40 assay as a biomarker for the risk of Alzheimer’s disease, including potential use of the assay in combination with pioglitazone in high-risk older adults with normal cognition.  Pioglitazone is the active ingredient currently marketed in Takeda’s ACTOS® (pioglitazone HCl). Under the terms of agreement, Zinfandel will receive an upfront payment of $9 million and subsequent payments of up to $78 million for development milestones from Takeda.

Table 2. Select Licensing and Partnering Deals Announced During JPMHC from 2009-2011 ($ in millions)

2009 2010 2011
# transactions 10 6 3
$ transactions $2,400 $314 $3,137

Financing

While the quantity of public and private financing transactions announced during JPMHC has remained essentially flat from 2009-2011, the aggregate dollar value increased more than 60% in 2011.  Note that we excluded the $500 million convertible senior note transaction announced by Dendreon Corporation (DNDN), as it occurred after the market closed last Thursday [the last day of JPMHC].

Table 3. Select Financing Transactions Announced During JPMHC from 2009-2011 ($ in millions)

2009 2010 2011
Company Amount Company Amount Company Amount
Acclarent, Inc. (private) $26.00 Cell Therapeutics, Inc. (CTIC) $30.00 NextWave Pharmaceuticals (private) $45.00
Akorn, Inc. (AKRX) $25.00 VentiRx Pharma (private) $25.00 Cell Therapeutics (CTIC) $25.00
Singulex, Inc. (private) $19.00 BIND Biosciences, Inc. (private) $11.00 Civitas Therapeutics $20.00
Chiral Quest (private) $13.00 Cyclacel Pharmaceuticals (CYCC) $7.20 Rib-X Pharmaceuticals (private) $20.00
Mithridion, Inc. (private) $2.90 Rosetta Genomics Ltd. (ROSG) $5.10 Acadia Pharma (ACAD) $15.00
Soligenix, Inc. (SNGX.OB) $2.28 Advanced Cardiac Therap (private) $5.00 Celsion Corporation (CLSN) $9.00
Alseres Pharmaceuticals (ALSE.PK) $1.00 BioLeap, Inc. (private) $5.00 VAXIMM AG (private) $8.00
EntreMed, Inc. (ENMD) $2.50 NeoGenomics, Inc. (NGNM.OB) $3.00
Mithridion, Inc. (private) $1.25
Totals $89.18 $90.80 $146.25

Outlook

At the start of 2009, we provided a positive outlook for the biotechnology industry.  Most of the drivers supporting our favorable view remain intact for 2011, 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 we believe should continue to outperform their larger industry peers in 2011.

The +60% year-over-year increase in the aggregate value of financing transactions announced during JPMHC in 2011 supports our improving access to capital thesis, offset in part by the fact that both the quantity and value of M&A and licensing/partnering transactions during the period were below 2009 levels [excluding a single agreement for $2.4 billion in 2011].   Using 2010 as a guide, the mixed bag of activity emanating from JPMHC is simply the pause that refreshes and activity should accelerate throughout the year.

Looking beyond JPMHC, the key risk to our positive outlook in 2011 relates to the number of U.S. Food and Drug Administration [FDA] drug approvals, which declined in 2010 and is more than 50% below the high of 56 new approvals in 1996 despite the fact that legislation passed in 2008 gave the FDA more money and resources.  There is no discounting the negative impact of clinical and regulatory setbacks on the psyche of biotechnology investors, as evidenced by the greater than 10% decline in the NASDAQ Biotech Index in late February 2009 following a spate of high profile disappointments.

For Biotechnology in 2010, it’s Déjà vu All over Again

It’s déjà vu all over again” – Yogi Berra

With Opening Day less than a month away, it seems only fitting to reference one of the most quoted personalities of our time to describe our analysis of the biotechnology sector in 2010.  In this article, we review our favorable outlook for the industry, draw comparisons with the prior year, and introduce the results of our recent “Life Sciences Industry Outlook” survey that targeted industry executives, investors, analysts, and members of the media.

Bullish Outlook

Our favorable outlook for the biotechnology industry in 2010, which builds upon many of the same catalysts we proposed for 2009, is based on the following key drivers:

  • Sector’s defensive characteristics and impact on future economic growth
  • Highest number of annual new product approvals since 2004
  • 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 small and mid-capitalization companies remain undervalued

In fact, several of these themes were reinforced by the results of our industry survey.

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 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.

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 October 2009 article “Innovative New Medicines are Key to Economic Growth,” a permanent one percent 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

In a repeat of last year, 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 2009 was the highest since 2004.  Of course, cynics will rightfully call attention to the modest year-over-year increase [25 in 2009 versus 24 in 2008] and that recent performance is still more than 50% below the high of 56 new approvals in 1996.

However, we believe that viewing the number of FDA approvals in the context of new risk evaluation and mitigation strategies [REMS] that were introduced in 2008 and internal resource constraints that have plagued the agency provides optimism going forward.  While legislation passed in 2008 gave the FDA more money and resources, hiring and training hundreds of new employees takes time.  With that process well underway, combined with increased familiarity of the REMS program, we believe the drug approval process should improve going forward.

In terms of therapeutic areas, oncology represented one out of five [20%] approvals by CDER in 2009 according to a recent publication [Nature Reviews Drug Discovery 9, 89-92, February 2010].  Not surprisingly, oncology was our highest ranked survey response with regard to attracting investment and/or business development activity in 2010.  See Table 1 below.

Table 1. In terms of raising capital and/or business development activity, which key therapeutic area do you expect to attract the most interest/visibility during 2010?

Answer Response Ratio*
Oncology (solid tumors) 37.7%
Metabolic disorders (eg, diabetes, obesity) 17.7%
Central nervous system disorders (eg, Parkinson’s disease) 17.7%
Oncology (hematological malignancies) 11.1%
Infectious disease 8.8%
Other 6.6%

* Numbers may not add up to 100% due to rounding

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 drugs currently in development.  In the US alone, there are 633 biotechnology medicines being developed, including 254 medicines for cancer, 162 for infectious diseases, 59 for autoimmune diseases, 34 for HIV/AIDS and related conditions, 25 for cardiovascular disease, and 19 for diabetes and related conditions.

Annual research and development expenditures by PhRMA member companies also reached a record $50.3 billion in 2008, more than tripling the $15.2 billion level of investment in 1995.

Access to Capital

In 2010, companies at all stages of development will try to attract investors and the competition will be fierce.  However, in terms of access to capital for life sciences companies, our survey indicated that more than 46% of respondents expect favorable conditions in 2010, with modest improvement over 2009.  Another 46% of respondents indicated that they expect access to capital to be about the same as 2009.  Only 4% of respondents expected access to capital to improve markedly with initial public offerings [IPO] possible.

In 2009, venture capital investment in biotechnology declined by 19%, both in dollars and deals, from the prior year according to the MoneyTree™ Report by PriceWaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.  However, biotechnology was the single largest investment sector for 2009 with $3.5 billion going into 406 deals.

In terms of initial public offerings [IPOs], only three biotechnology companies successfully tested the public markets in 2009.  In 2010, two IPO’s have already been completed, albeit both below the expected offering price, and several others are in queue, including Prometheus Laboratories, Aveo Pharmaceuticals, Trius Therapeutics, Aldagen, Alimera Science, and Tengion.  See Table 2 for recent biotechnology IPO performance.

Table 2. Recent Biotechnology IPO Performance

Company IPO Date IPO Price Raised ($m) Latest Price % Change
Cumberland Pharmaceuticals (CPIX) 8/10/09 $17 $85 $11.60 -31.76%
Talecris Biotherapeutics (TLCR) 10/1/09 $19 $950 $21.94 +15.47%
Omeros Corporation (OMER) 10/8/09 $10 $70 $6.36 -36.40%
Ironwood Pharmaceuticals (IRWD) 2/3/10 $11.25 $203 $13.14 +16.80%
Anthera Pharmaceuticals (ANTH) 3/1/10 $7 $54 $7.00 unchanged

 

In terms of public financings, several companies have already completed offerings in 2010, including Amicus Therapeutics, Inc. (FOLD), BioSante Pharmaceuticals, Inc. (BPAX), Cell Therapeutics, Inc. (CTIC), Chelsea Therapeutics International, Inc. (CHTP), Cleveland Biolabs, Inc. (CBLI), Cyclacel Pharmaceuticals, Inc. (CYCC), Derma Sciences, Inc. (DSCI), EntreMed, Inc. (ENMD), InterMune, Inc. (ITMN), Palatin Technologies, Inc. (PTN),and XOMA Ltd. (XOMA).

Improving access to capital could lead to an acceleration of merger and acquisition activity and licensing deals, as large pharmaceutical companies begin to lose their leverage and company valuations start increasing.

Consolidation

More than 82% of survey responders expected merger and acquisition activity to accelerate in 2010 compared with 2009.  In view of two recent deals, the paucity of merger and acquisition activity and decline in both the quantity and value of licensing & partnering transactions announced during the JP Morgan Healthcare Conference in 2010 appears to have been the pause that refreshes [see “Biotech Deal Activity Declines…The Pause that Refreshes?”].

For example, on February 23, 2010, Cephalon, Inc. (CEPH) exercised its option to acquire Ception Therapeutics, Inc. for $250 million in view of positive Phase 2 data from a clinical study in adults with eosinophilic asthma.  In January 2009, Cephalon paid Ception $100 million upfront for the option.

On March 1, 2010, Astellas Pharma, Inc. offered to acquire all outstanding shares of common stock of OSI Pharmaceuticals, Inc. (OSIP) for $52.00 per share in cash, or an aggregate of approximately $3.5 billion on a fully diluted basis.  The offer represented more than a 40% premium on the closing price of OSI Pharmaceuticals’ common stock of $37.02 per share on February 26, 2010, and shares have subsequently traded above $57 on expectations for a higher bid.

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 activity to remain brisk.

Small Versus Large

As highlighted in our “Biotech’s 2009 Stealth Small Cap Rally” article, small capitalization biotechnology companies were among the best performers of 2009.  The relative underperformance of many large capitalization biotechnology companies in 2009 masked the fact that many smaller, innovative companies performed well, with 20 of the 125 companies comprising the NASDAQ Biotech Index producing triple-digit returns during the period.  Vanda Pharmaceuticals (VNDA), Human Genome Sciences (HGIS), and Targacept, Inc. (TRGT) led the way, with stock prices up 2,150%, 1,342%, and 487%, respectively.

Similar to 2009, we expect that small and mid-capitalization companies with positive clinical or regulatory catalysts will continue to outperform their larger industry peers in 2010.

Beware the Ides of March

In our February 2009 article “Chink in the Biotechnology Armor,” we cited the spate of high profile clinical setbacks and regulatory delays during the month as the reason for the sector’s precipitous decline.  The NASDAQ Biotech Index, which traded as high as 772 during the first week of February, traded as low as 605 by the first week of March – losing more than 21% of its value during the 30-day period.

In February and March 2010, there have also been a significant number of clinical and regulatory setbacks.  Consider the following:

  • AMAG Pharmaceuticals, Inc. (AMAG) – Purported safety concerns regarding Feraheme® [ferumoxytol], the company’s marketed product for the treatment of iron deficiency anemia in adult patients with chronic kidney disease, kicked off a 27% decline in shares of AMAG Pharmaceuticals, Inc.  The stock, which traded as high as $45.61 on February 3, 2010, subsequently traded as low as $33.29 despite assurances from the company that the rate of serious hypersensitivity reactions related to Feraheme are consistent with the product’s label.
  • Cell Therapeutics, Inc. (CTIC) – On February 8, 2010, the FDA released its briefing documents for the company’s lymphoma drug, pixantrone, in advance of an Oncologic Drugs Advisory Committee [ODAC] meeting originally scheduled for February 10, 2010.  Shares of Cell Therapeutics, Inc., which closed at $1.06 the prior week, traded as low as $0.53 that day.  Among other issues, the FDA raised concerns about pixantrone’s efficacy in view of the fact that the randomized study was stopped at less than 50% of its planned patient target because of poor accrual.  The ODAC meeting was subsequently rescheduled for March 22, 2010.
  • Isis Pharmaceuticals, Inc. (ISIS) – On February 10, 2010, the company and its partner, Genzyme Corporation (GENZ), announced results from a Phase 3 study of mipomersen in patients with heterozygous familial hypercholesterolemia [heFH].  While the trial met its primary endpoint with a highly statistically significant 28 percent reduction in LDL-cholesterol after 26 weeks of treatment, the results raised safety concerns and apparently fell short of Wall Street’s expectations.  Shares of Isis Pharmaceuticals, which closed above $11 the day before the results were released, traded as low as $8.85 the next day.
  • XenoPort, Inc. (XNPT) – On February 17, 2010, XenoPort, Inc. and its partner GlaxoSmithKline plc (GSK) received a Complete Response letter from the FDA, delaying approval for Horizant™ [gabapentin enacarbil] Extended-Release Tablets, an investigational non-dopaminergic treatment for moderate-to-severe primary Restless Legs Syndrome.   Shares of XenoPort, Inc., which closed at $19.60 the day before the news, hit an all-time low of $6.39 the next day.
  • Novelos Therapeutics, Inc. (NVLT.OB) – On February 24, 2010, the company announced that the primary endpoint of improvement in overall survival was not met in a pivotal Phase 3 trial for advanced non-small cell lung cancer [NSCLC] with its lead product, NOV-002, in combination with first-line chemotherapy.  Shares of Novelos Therapeutics, Inc., which closed at $1.65 the day before the results were released, traded as low as $0.28 the next day.
  • Adventrix Pharmaceuticals, Inc. (ANX) – On March 1, 2010, the company announced that it received a refuse to file letter from the FDA regarding its New Drug Application for ANX-530 [vinorelbine injectable emulsion].  In the letter, the FDA indicated that the data included in the initial submission from the intended commercial manufacturing site was insufficient to support a commercially-viable expiration dating period.  Shares of Adventrix Pharmaceuticals, Inc. which closed at $0.29 the prior week, traded as low as $0.16 that day.
  • Medivation, Inc. (MDVN) – On March 3, 2010, the company and its partner, Pfizer, Inc. (PFE), announced that the investigational drug dimebon [latrepirdine] unexpectedly failed in a Phase 3 trial in patients with Alzheimer’s disease.  Shares of Medivation, Inc., which closed above $40 the day before the results were released, traded as low as $12.55 the next day.

Helping to offset the negative impact of these setbacks, the NASDAQ Biotech Index is market value-weighted, taking into account the total market capitalization of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest impact on the index.  Further, several companies experiencing clinical or regulatory setbacks were not included in the NASDAQ Biotech Index.

In addition, recent merger and acquisition activity may also help mask the effects of the aforementioned clinical and regulatory setbacks.  For example, the NASDAQ Biotech Index closed up 2.7% the day that Astellas Pharma, Inc. offered to acquire OSI Pharmaceuticals, Inc.

Upcoming Catalysts

When it comes to raising visibility and capital, 40% of survey respondents cited general risk aversion in the financial markets as the single greatest challenge facing most life sciences companies in 2010.   Another 28.8% of respondents cited the average market capitalization of life sciences companies being too small and/or lack of liquidity as the single greatest challenge.

In view of the aforementioned clinical and regulatory setbacks, investors will be closely monitoring the following events, as there is no discounting the negative impact of continued clinical and regulatory setbacks on biotechnology investor’s appetite for risk:

  • MannKind Corporation (MKND) – In January 2010, the company announced that the FDA would be unable to complete its review of Afrezza™ before the mid-January Prescription Drug User Fee Act [PDUFA] date in order to complete an inspection of a manufacturing-related facility belonging to one of the company’s suppliers.  Alfrezza is a novel, ultra rapid acting mealtime insulin therapy under review for use in adult patients with type 1 and type 2 diabetes mellitus for the treatment of hyperglycemia.  The company has not been given a new PDUFA date by the FDA.
  • InterMune, Inc. (ITMN) – A Pulmonary-Allergy Drugs Advisory Committee [PADAC] meeting is scheduled for March 9, 2010, to review the NDA for pirfenidone, the company’s investigational drug candidate for the treatment of patients with idiopathic pulmonary fibrosis [IPF] to reduce decline in lung function.
  • Amylin Pharmaceuticals, Inc. (AMLN), Eli Lilly and Company (LLY), and Alkermes, Inc. (ALKS) – Following a weather delay, the FDA has set a new PDUFA action date of March 12, 2010, for its review of the NDA for exenatide once weekly.  Exenatide is being developed in collaboration with Eli Lilly and based on technology from Alkermes, Inc.
  •  Cell Therapeutics, Inc. – The rescheduled ODAC meeting for pixantrone takes place on March 22, 2010.
  • Delcath Systems, Inc. (DCTH) – On February 4, 2010, the company announced that sufficient events have been reached to allow data analysis to begin on its Phase 3 trial for a novel drug delivery platform to deliver ultra-high doses of anti-cancer drugs to the liver while preventing these high doses of drug from entering the patient’s bloodstream.  The 92 patient, randomized, multi-center, Phase 3 trial used the drug melphalan to treat patients with metastatic melanoma in the liver.  Assuming a successful trial endpoint, the company expects to file a new drug application [NDA] with the FDA in April 2010.
  • Dendreon Corporation (DNDN) – A Biologics License Application for Provenge® [sipuleucel-T] for the treatment of men with metastatic, androgen-independent prostate cancer, has been assigned a PDUFA date of May 1, 2010.

Conclusion

While the capital markets remain turbulent, 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 remain intact.  Or, as Yogi Berra simply said, “You can observe a lot by watching.”

Bullish Thesis for Biotechnology Remains Intact

At the start of the year I provided a positive outlook for the biotechnology industry in 2009, 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.

With January officially on the books, it appears an appropriate time to revisit this bullish biotechnology thesis. After all, there’s a saying on Wall Street: As January goes, so goes the rest of the year.

However, while a gain in the S&P 500 during the month of January has led to a positive overall year for stocks 85 percent of the time, the so-called January barometer may be no better than the proverbial toss of a coin when the month’s return is negative. The most recent example being 2003, with a positive return greater than 25 percent for the full year despite a negative 3.5 percent return during January. That may be good news in view of the fact that both the S&P 500 and Dow Jones Industrials lost nearly 9 percent for the month in 2009.

In contrast to one of the worst yearly starts for the broader market, the NASDAQ Biotech Index (NBI) was virtually unchanged during January 2009. In fact, the NBI has been outperforming the S&P 500 since mid-2008. This strong relative performance may signal that defensive industries like biotechnology remain in vogue with investors.

In addition to this defensive attribute, my previous column pointed out that new drug approvals by the FDA during 2008 were the highest in three years. With more money and greater resources, new drug approvals by the FDA could accelerate during 2009. This is important, as there are currently more than 400 biotech drug products and vaccines currently in clinical trials targeting more than 200 diseases according to Ernst & Young and BIO (Biotechnology Industry Organization).

2009 is off to a decent start with the mid-January FDA approval of Savella™, a selective serotonin and norepinephrine dual reuptake inhibitor for the management of fibromyalgia by Forest Laboratories, Inc. (FRX) and Cypress Bioscience, Inc. (CYPB). Additionally, Galderma Laboratories, L.P. received FDA approval for Vectical™, a unique vitamin D3 product for the treatment of mild-to-moderate plaque psoriasis in adults.

From a technical perspective, last month’s column introduced an indicator called the Bullish Percent, based on the percentage of stocks in an industry group or index that are currently trading above their 200-day moving average, and discussed how the indicator had turned positive for the NASDAQ Biotech Index going into the New Year.

But the field of technical analysis encompasses a variety of indicators to gauge the direction of the market and the Bullish Percent is just one arrow in the quiver. Technicians also keep a close eye on the number of stocks making new 52-week highs and lows.

In view of the poor performance logged by the broader indices in January, it’s not surprising that a paucity of stocks made new 52-week highs during this period. Interestingly, of the mere half-dozen NASDAQ stocks reaching new 52-week highs on a daily basis during the month of January, many were biotechnology companies.

For example, companies working in the field of stem cell research, such as Geron Corporation (GERN) and StemCells, Inc. (STEM), frequently appeared on the new 52-week high list during the month. Anadys Pharmaceuticals Inc. (ANDS), Repros Therapeutics Inc. (RPRX), and Maxygen, Inc. (MAXY) also frequently appeared on the new high list throughout January. Myriad Genetics Inc. (MYGN), which commercializes molecular diagnostic tests that can determine if a person is predisposed to certain cancers, exceeded prior 52-week high territory throughout the month of January and continues to do so after reporting strong second-quarter earnings this week.

Another biotechnology company that reached a 52-week high during January is CV Therapeutics, Inc. (CVTX), which received an unsolicited proposal from Astellas Pharma Inc. to acquire the company. Indeed, merger and acquisition activity along with licensing transactions remain brisk and is central to the bullish outlook for biotechnology.

In addition to CVTX, M&A activity since my last column includes (acquirer/target): The Medicines Company (MDCO)/Targanta Therapeutics Corporation (TARG), Pfizer Inc. (PFE)/ Wyeth (WYE), and an option for Cephalon, Inc. (CEPH) to acquire Ception Therapeutics, Inc. Recent major licensing transactions include (licensor/licensee): BioMarin Pharmaceutical Inc. (BMRN)/La Jolla Pharmaceutical Company (LJPC), Myriad Genetics Inc. (MYGN)/Panacos Pharmaceuticals, Inc. (PANC), and Bayer Schering Pharma AG/Micromet, Inc. (MITI).

I also previously noted that upcoming conferences offer an excellent opportunity for biotechnology leaders to generate momentum for the industry in the year ahead. Next week, a total of 150 companies will present at the BIO CEO & Investor Conference held February 9-10, 2009 in New York. Now in its eleventh year, the BIO CEO & Investor Conference is the largest independent investor conference for the life sciences industry focused on publicly-traded biotechnology companies.

To provide a fair balance of information, it is prudent to reiterate that the capital markets remain turbulent and there may be casualties along the way among undercapitalized biotechnology companies. According to industry statistics compiled by BIO in January 2009, 120 companies are trading with less than 6 months of cash on hand and 180 companies have less than 1 year of cash.

However, hope remains that the Net Operating Loss (NOL) refund provision that BIO has been advocating will be included in President Barack Obama’s economic stimulus options to promote innovation and job creation. Unlike bailouts, the NOL refund provision could allow biotechnology and other research-intensive industries to accelerate the utilization of their existing tax assets. As an example, a company with $100 million in accumulated NOL’s could potentially claim a refund of $20 million on their 2008 tax return.

The proposal is modeled after a New Jersey State law that went into effect in 1999 allowing emerging technology and biotechnology companies to sell net operating losses and unused research and development credits to get the cash they need to flourish. Profitable companies paying New Jersey corporate tax buy these credits and use them to reduce their state tax obligation. The main difference is that the government would provide the cash directly if the federal tax law change is approved as proposed under BIO’s NOL refund provision.

Using history as a guide for the potential benefits of the NOL refund provision, Celgene Corporation (CELG) was one of the first companies that benefited from New Jersey’s tax-credit transfer program and has since become the largest biotechnology company in New Jersey and one of the world’s largest as measured by market capitalization.

The bullish thesis for biotechnology in 2009 remains intact, as evidenced by the sector’s defensive characteristics and favorable technical and fundamental attributes. The favorable outlook is further bolstered by the sector’s relative outperformance during January 2009.

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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 ne
eds of any specific person.

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.