G. Steven Burrill's Biotech Outlook: What's Ahead in 2007, How We Fared in 2006

San Francisco (Dec. 18)-Biotechnology stocks dropped 14% in 2006, giving up more than half of the value they'd picked up during a "stellar" 2005, according to G. Steven Burrill, CEO of Burrill & Company (www.burrillandco.com), the venture and merchant banking company.

"Overall, it wasn't a great year for biotech," said Burrill in a year-end analysis, indicating that the biotechnology industry will finish the year with its collective market capitalization essentially unchanged, at approximately $490 billion.

Although biotech's blue chip companies were unable to sustain their momentum in 2006, with Genentech and Amgen down 12% and 11% year-to-date, the sector's mid-cap and small-cap companies picked up the slack, Burrill's report indicated. The Burrill Mid-Cap Biotech Index was up 15% and the Burrill Small-Cap Biotech Index was up 13%, mirroring the Dow Jones Industrial Average (DJIA, up 15%) and the Nasdaq (up 11%).

"The transition to a more personalized medicine world is creating the need for molecular diagnostics, biomarkers, genotyping assays, etc. and so companies specializing in these areas have received positive investor attention," said Burrill. "It was a big year for biotech/life sciences fund raising. Financings and partnering deals brought in a record $40 billion for US companies with over $25 billion through financings and $15 billion in partnering capital."

Looking Ahead

Overall, Burrill said, biotechnology will continue to fuel a the transformation in healthcare, a transformation emphasizing earlier disease detection, more targeted treatments, and adjunctive support through enhanced nutrition. We will see further progress on the personalized, predictive, preventative front with new products targeting the "individualization" of medicine in the marketplace. Other predictions for 2007 include:

• Capital markets in the United States will be more robust than 2006 and biotech's elite companies will outperform the DJIA and Nasdaq.

• Biotech IPOs will pick up and improve on their lackluster numbers of the past two years. More than 30 IPOs will close in the United States (an increase of 50% over the 2006 number). Of the 71 biotech IPOs that were completed since the window opened in 2003, 35 are under water as 2006 ends. By the end of 2007, Burrill says, most will be trading above their offer prices.

• US biotechs will raise more than $40 billion, and the industry's market cap will reach an all time high of $575 billion (a 15% year-over-year increase).

• Mergers and acquistions will remain hot through 2007. Both Big Pharma and Big Biotech will compete for companies with advanced product pipelines or important technology (á la Merck's $1.1-billion acquisition of Sirna).

• Partnering deals will raise $15 billion, much aimed at earlier stage technologies.

• US biotechs will find capital overseas-especially on the public side-with Euronext and AIM leading the pack, but Japan and Singapore joining in.

• It will be a tough year on the political front. The new Congress has drug-pricing high on its agenda: new powers for Medicare price-negotiators could drive pharma and biotech to pack better pharmacoeconomics into their pipelines, further whetting their appetites for acquisitions. Watch out, though: Congress may reduce the capital gains differential, making it harder to raise money for deals.

• Drug safety concerns will raise the bar for innovation, and pharmacovigilence will be the watchword in drug approvals.

• Debate over Prescription Drug User Fee Act and NIH spending will be hot, and healthcare discussions will heat up as the country gears up for the 2008 presidential elections.

• More biotech companies will sell more product, and more biotech companies will become profitable for the first time.

• Stem cell progress will continue, with more funding emanating from public and private sources. There will be increased activity at the state level as they encourage stem cell development locally.

• Biosimiliars will become more prevalent in Europe and pressure to approve biogeneric pharmaceuticals will increase in the United States-and the industry's protection through the manufacturing process will be whittled away.

• Biotech will grow ever more global as companies, particularly in the United States, look to India and China for manufacturing and clinical trials.

Predictions for 2006: Burrill's Hits and Misses

Capital Markets

• Prediction: A reasonably robust public equity IPO market with more than 30 IPOs completed in the United States
  Outcome: Only 18 biotech IPOs managed to get done in the United States in 2006, about the same (in number and capital raised) as 2005.

• Prediction: Biotech stocks in 2006 outperform NASDAQ, DJIA, and the pharma indices.
  Outcome: Although biotech kept pace with the market, it failed to outperform it with the macromarkets taking their toll on investor confidence, which saw them gravitate away from biotech into other industrial sectors including energy.

• Prediction: The industry will raise more than $35 billion in 2006-$25 billion in public equityl and $10 billion in partnering.
  Outcome: The US biotech industry raised an estimated $40 billion, more than $25 billion in equity and and $15 billion in partnering.

Mergers & Acquisitions/Partnering

• Prediction: Increasing consolidation at all levels: Big Pharma–Big Pharma, Big Pharma–biotech, and biotech–biotech.
  Outcome: Pharma–biotech and biotech–biotech consolidation continued to be red-hot. Major deals in the year included:
• Big Pharma–Big Pharma:
• Bayer AG–Schering AG $19.9 billion;

• Merck KGaA–Serono $12.9 billion;

• UCB–Schwartz Pharma $5.4 billion;

• Big Pharma–biotech:
• Abbott–Kos $3.7 billion;

• Eli Lilly–Icos $2.1 billion;

• Merck–Sirna $1.1 billion;

• Biotech–biotech:
• Gilead–Myogen $2.5 billion;

• Genentech–Tanox $900 million;

• Illumina–Solexa $500 million;

• Genzyme–AnorMED $560 million.

• Prediction: Pharma partners earlier in an improved partnering environment for biotechs with even larger values attributed to earlier stage compounds (including preclinical).
  Outcome: Partnering generated more than $15 billion for biotech in 2006, equaling last year's record, with pharma focused rather narrowly on identifying potential therapeutics to a single target or pathway, rather than on numerous targets.

Regulatory challenges

• Prediction: A more challenging regulatory environment.
  Outcome: The industry continued to wrestle with improving productivity and ensuring product safety. These issues kept drug approvals down in 2006, with just 21 new molecular entities and new biologic license applications approved, compared with 22 in 2005. FDA continued to drive its Critical Path Initiative agenda with personalized medicine firmly on the radar screen, pointing the industry towards more pharmacogenomics and theranostics (diagnostics attached to therapeutics to identify responding patient populations).

Stem cells

• Prediction: Increased scientific and economic progress for stem cell research.
  Outcome: Stem cells dominated scientific and political agendas in 2006. Technology advanced abroad; US politics created a chilly environment for research and investment at home. The September presidential veto of a more open embryonic stem-cell research bill may be challenged during the opening days of the new Congress.

Reimbursement

• Prediction: More pressure from payers (from CMS and HMOs through foreign health ministries) drives more product bundling, more personalized medicine, less "blockbusterology".
  Outcome: The CMS Medicare part D brought the drug-price debate into sharp focus, and all payers are demanding more from drug makers on the pricing front. To the surprise of many, this program is working very well. Seniors are happy, pharma is happy, and so is Medicare!

Biogenerics

• Prediction: More approval of, and use of, generics; biopharmaceutical generics emerge.
  Outcome: Many first-generation rDNA proteins are now off-patent, leaving them open to generic competition. Sandoz's somatropin (Omnitrope) won approval-in the European Union in April and the US in May-but no wave of biosimilar approvals materialized. Leading US biotech executives believe that it will be probably be many more years before we see them on the market.

Globalization

• Prediction: Increased international growth of biotech, especially in the BRIC countries (Brazil, Russia, India, China), Japan, and Scandinavia
  Outcome: Increasing international growth, with China and India leading the way.