Capital Market's Woes Weigh Heavily on Biotech

July 1, 2010

BioPharm International

Volume 23, Issue 7

After a bright start to the year, some of biotech's blue chip companies have seen their early gains turn into losses.

The Burrill Biotech Select Index recorded a 10% drop in May to close below 300 for the first time in almost 18 months. For the most part, the Index was dragged down by the volatile capital markets that saw the Dow dip below 10,000 heading into June. The downturn has been fueled by ongoing concerns that the Euro-zone debt woes would escalate into a global financial crisis. The Dow Jones industrial average closed down 8% for the month, its worst May performance since 1962, and the NASDAQ suffered a similar monthly drop.

The Burrill Biotech Select Index is now down almost 5% in value year-to-date (YTD) while the Dow is down 3% and the NASDAQ 0.6%. At one time, in periods of economic uncertainty, like the climate we are facing today, investors would move into the relative safety of biotech and pharma stocks. However, this is no longer the case and for the foreseeable future, biotech's fortunes will be linked with the performance of the broader capital markets.

G. Steven Burrill

After a bright start to the year, some of biotech's blue chip companies have seen their early gains turn into losses YTD. By the end of May, for example, Amgen's share price was down 9% despite reporting that its new drug Prolia (denosumab) had been approved by the US Food and Drug Administration to help prevent fractures in postmenopausal women. This decision came close on the heels of its approval in Europe.

Another company that has seen its shares fall 30% YTD is Exelixis. In March it announced that it would eliminate about 270 jobs, or around 40% of its staff, to conserve its cash resources and continue development of cancer drugs with Sanofi-Aventis SA and Bristol-Myers Squibb Co. Exelixis said it will save about $90 million per year from the moves, starting in 2011.

Other drug companies to be hit by the market conditions include Vertex Pharmaceuticals (down 19%) and Gilead Sciences (down 17%). Interestingly, it has been the tools companies that have been resistant to the volatile market conditions. Illumina's shares are up 37% YTD. The FDA recently granted 510(k) market clearance for its VeraCode Genotyping Test for Factor V (Leiden) and Factor II (Prothrombin). The VeraCode Genotyping test comprises the company's VeraCode digital microbead technology and proprietary assay chemistry. Affymetrix (up 11% YTD), which makes genetic testing technology, reported a narrower first-quarter loss as revenue improved and it cut back on costs.

BUSY TIME FOR BIOTECH IPOS

Several biotech companies were able to price their initial public offerings (IPOs) in the past couple of months, although they had to lower their expectations.

Tengion completed its IPO, pricing well below its initial range. The Pennsylvania-based regenerative medicine company, which is focused on growing replacement organs from a patient's own cells, raised $30 million by offering 6 million shares at $5 per share. In its first filing in December 2009, the company had targeted raising $40.25 million, which it raised to $46 million in an amended filing in mid-March. At that time, it planned to sell 4.4 million shares at a range of $8–10 per share.

Codexis raised $78 million through the sale of 6 million shares at $13 per share. Although the company priced at the low end of its range, shares ended the month at $13.62, 5% above their initial offering price. The Redwood City, California-based biotech develops biocatalysts used in the production of pharmaceuticals and renewable fuels and chemicals. Also in April, Amyris Biotechnologies, another Bay Area company in the renewable energy space, filed a registration statement with the SEC to go public through an IPO of up to $100 million of its common stock.

Alimera Sciences priced at $11 per share, 29% below its target range of $15 to $17, raised $72 million. The Alpharetta, Georgia-based biotech's late-stage lead compound is a treatment for diabetic macular edema.

GenMark Diagnostics, which offers a molecular diagnostics testing system to hospitals and laboratories, raised $28 million by offering 4.6 million shares at $6 per share, the low end of its revised $6–7 range. The company had originally planned to sell 4.5 million shares at a range of $8–10 per share. The company closed its first day of trading down 10%.

To date, there now have been eight biotech IPOs completed this year and their average market performance as of the end of May is –17.5% (Table 1).

Table 1.

BY THE NUMBERS

The industry closed the month of May with a collective market cap of $341.25 billion (down 10.7% for the month; down 2% YTD). Fifty-six biotech companies (18.4%) have market caps greater than $1 billion (compared to 49 companies at the same time last year). Ninety-three biotech companies (30.5%) have market caps less than $100 million (compared to 39% or 122 companies) at the same time last year. The Burrill Biotech Select Index is down almost 5% (Table 2). Several companies completed secondary financings in May including Pharmasset, which raised $101.1 million and Jazz Pharmaceuticals, which raised $58.5 million, and will use the funds to repay a portion of its outstanding senior secured notes.

Table 2.

G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, publications@b-c.com