Biotech Cruises On Despite a Turbulent Economic Climate

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BioPharm International, BioPharm International-10-01-2008, Volume 21, Issue 10

The biotech industry's year-to-date report card contains good grades despite the turbulent economic climate.

The biotech industry's report card for the year-to-date contains surprisingly good grades for its performance on the capital markets and for partnering and venture capital (VC) deal-making, but other forms of financing haven't faired as well, particularly biotech IPOs. Macroeconomic factors such as inflation, recession, credit-market turmoil, and escalating oil prices have taken their toll and just one company, Bioheart, managed to eke out an IPO, raising $50 million.

G. Steven Burrill

Biotech has outperformed the broader stock market indices through August (Table 1). The Burrill Biotech Select Index was up almost 10% in contrast to the Dow and NASDAQ—both down a whopping 13% and 11% respectively. In these times of economic uncertainty, investors have clearly gravitated to biotech's elite companies and away from the traditional "safe havens" of Big Pharma. Even during the traditional slow summer months of July and August, investors were fascinated by biotech. Their attention was grabbed by the announcement that Roche had made a bid of almost $44 billion for the 44% remaining shares of Genentech it didn't already own.

Table 1. Biotech has outperformed the broader stock market indices through August

The biotech product "land grab" by Big Pharma, which intensified when they started feeling the pain of their own blockbuster products coming off patent and facing the specter of increasing generics competition, has reached fever pitch. One or two marquee biotech company acquisitions per year have been part of the biotech scene for at least 15 years but it looks like the floodgates have opened and big takeover deals will be prominent in the second half of the year.


Our analysis has shown that since 2005, more than $60 billion has been invested in biotech acquisitions by the pharmaceutical industry, taking into account the market cap of each company at the time of its acquisition. The potential acquisitions of Genentech and ImClone could potentially add a further $106 billion in biotech value.


The industry's market cap closed in August at $507 billion, easing back from a record setting $520-billion mark posted mid-month. Genentech's market cap closed at $104.2 billion; Amgen remained in the second spot at $66.5 billion; and Gilead Sciences was at $48.5 billion.


After a slow first quarter, partnering deals picked up pace in the second quarter of 2008 to bring in more than $4.1 billion for US biotech companies. Notable deals in the quarter included a potential $770-million partnership between Astellas and CoMentis to develop products from CoMentis's beta-secretase inhibitor program, including the lead compound CTS-21166, which is being developed as a disease-modifying treatment for Alzheimer's disease.

Except for VC deals, mostly in oncology, neurology, and diagnostics, all other forms of financing have fallen compared to the first quarter of 2008 and comparative 2007 figures. The public markets have little to offer, and although the number of private investment in public equity (PIPEs) went up slightly in Q2 2008 as compared to Q1 2008, the total transaction value was still the lowest in three years. The $511 million raised (Table 2) in Q2 2008 was significantly lower than both Q2 2007 ($2.2 billion) and Q2 2006 ($4.5 billion).

Table 2. US biotech financings ($ million). The number of PIPEs went up slightly in Q2 2008 as compared to Q1 2008 but the total transaction value was lower.

Many companies are resorting to other creative ways of financing in addition to traditional and well-established avenues. For example, Exelixis obtained a flexible $150-million line of credit from healthcare hedge fund Deerfield Management; and CV Therapeutics sold half of the North American royalties it is due from partner Astellas for the newly approved drug Lexiscan to a private investment group, which netted the company $175 million.

Another form of financing that is back in play again in these weak markets is the registered direct offering (RDO). The RDO is somewhere between a PIPE and a full-fledged underwritten offering. Until public markets become more favorable to allow follow-on offerings, this unusual form of financing could increase in popularity among public biotech companies looking to raise much needed capital quickly.

In an RDO, a public company offers a new issue of shares to a limited number of accredited private investors, typically experienced investors who are already familiar with the company and the industry. In contrast to traditional public offerings, shares are offered on a "best-effort" basis. The Committed Equity Financing Facility (CEFF) is another financing vehicle that has become a popular way of financing drug development. The CEFF allows a company to raise capital over a set period at its discretion, usually to support R&D activities.

Biotech's elite companies have spent most of July pushing higher, benefitting from a series of favorable headlines and merger fever in the air. This translated into the substantial gain of almost 16% in the Burrill Biotech Large-Cap Index. But even more remarkable was the performance of the mid-cap companies, with the Burrill Biotech Mid-Cap Index jumping 18% in July. All year, the market conditions have proved to be tough on these emerging biotech companies.

As the financial markets settle down, we will continue to see biotech benefit from increased M&A activity. I would expect the next few months to be good ones for the industry and by the end of the fourth quarter of 2008, we will begin to see a resumption of biotech IPOs. We can expect to see swings in the fortunes of biotech throughout the rest of the year. However, biotech's performance will improve on its current 10% year-to-date gain in the final four months of 2008.

G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400,