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Chief Executive Officer at Burrill & Company
Big biotechs will do just fine in the ongoing financial crisis, but the smaller companies will have more difficulty weathering the storm.
First the good news: my 23rd annual report on the biotechnology industry—Biotech 2009–Life Sciences: Navigating the Sea Change—officially records that after 40-plus years since the industry began, it finally turned a profit in 2008. Yet, this good news has been overshadowed by the financial events that continue to affect the industry.
G. Steven Burrill
Financing and investor confidence in biotech's hopes and dreams helped spawn many of today's world-class biotech powerhouses, such as Amgen and Genentech. The product successes of these companies are a major reason why the industry turned a profit in 2008. But the majority of the industry's biotech companies still remain a work in progress.
Biotech 2009 shows how quickly the financial crisis affected the 357 publicly listed biotechnology companies. Almost 60% have seen their market cap fall to well below $100 million. In addition, over 100 North American public and private biotech/pharmaceutical companies to date have announced a corporate restructuring by slashing staff and putting promising projects on ice.
As of the end of February 2009, there was no evidence that the restructuring and refocusing strategies of the majority of biotech companies was slowing down. The more mature and blue-chip biotech companies have so far weathered this period quite well because they have plenty of cash, product revenue streams, strong pipelines, and Big Pharma partners. Investors view these large-cap companies as safe havens. However, even these companies are not immune to the macroeconomic environment in which they operate.
Many of biotech's elite companies took a major hit to their share values in the wake of President Barack Obama's call to expand healthcare coverage and curb costs by providing access to cheaper generic versions of biotechnology drugs, cutting Medicare payments to private insurers, allowing consumers to buy cheaper medicines from overseas, and preventing drug companies from making deals that block generics competition. The budget plan, released on February 26, seeks massive savings to pay for a major healthcare overhaul.
It was high on President Obama's agenda during his presidential campaign and so it should not have come as a surprise to anyone that the budget plans of his administration put healthcare costs directly in its cross-hairs. However, it appears it did and during the last two trading days of February, investors sold off healthcare shares big time on fears that the proposal would sap industry profits.
The Burrill Biotech Select Index (Table 1) closed the month of February, down 7% compared to the Dow and NASDAQ, both falling 11.7% and 6.6% respectively. Up until the budget announcement, biotech had been holding firm against the market uncertainties that raged around it. However, the final two days of the month saw the Index fall 8.5%. Genentech's share value held steady, however, closing up 5% for the month at $85.55 per share even in the face of Roche's hostile takeover offer of $86.50 per share for the outstanding shares it doesn't already own. Biotech's other blue-chip stocks—Amgen (down 11% for the month), Gilead (down 11%), Celgene (down 15%), and Genzyme (down 12%)—took it on the chin, with most of these losses coming at the end of February.
Biotech got caught up in the general healthcare stock-selling frenzy as a result of this knee-jerk reaction to the budget plans. There is nothing in Obama's healthcare proposals that is surprising or different from what he articulated during the campaign and biotech's fundamentals continue to remain strong. As we saw, investors get quickly spooked over uncertainty. My new book predicts that in the ongoing financial crisis, biotech's elite companies will do just fine—it is the small and medium-sized public biotech companies that will have more difficulty weathering the storm.
It will be a very painful time for many of them as they are forced to make difficult choices to ensure their survival. Many company obituaries will be written. When the markets do return in 2010, the industry will look very different than it does today.
The Burrill Mid-Cap Biotech Index dropped 15% in February, sharply illustrating the volatile nature of the share prices of these companies. The share performance of Geron demonstrated just how quickly investor sentiments can change for members of this group. In January, the company's share price jumped 68%, buoyed by the possibility that President Obama might loosen restrictions on federal funding for embryonic stem cell research and the FDA clearing Geron's application to conduct early-stage clinical trials on its stem-cell based therapy, aimed at treating severe spinal-cord injuries. Fast forward one month, and their shares dropped 43% after reporting fourth-quarter revenues were only $544,000, down from $4.7 million in the year-ago quarter.
Shares of Idenix Pharmaceuticals suffered a similar fate—plummeting 37% in the month—after reporting a wider-than-expected fourth-quarter loss. Shares of Questcor Pharmaceuticals fell 25% in February, after it said the regulatory process for expanded approval of Acthar was taking longer than expected. The drug is currently approved in the US to treat flare-ups of multiple sclerosis. The company wants to expand the drug's use officially to treat infantile spasms, a potentially life-threatening disorder that typically begins in the first year of life.
The collective market cap of the industry closed February at $369 billion, a drop of 7% for the month. Genentech's market cap closed the month at $90 billion (up5%). Genentech now has surpassed Pfizer in terms of market cap, which closed February at $83 billion. Amgen was at $51.2 billion (down 11%) and Gilead Sciences at $40.8 billion (down 12%). According to the Burrill Report, which tracks the progress of the 360 publicly listed biotech companies, there were 187 companies that had a market cap of less than $100 million at the end of February.
G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, firstname.lastname@example.org