As of today, the NASDAQ Biotech Index is down more than 23% from its 52-week high of 1,143 and the stocks of many small biotechnology companies are reaching new lows.  Company executives are naturally questioning when investor sentiment will change, buyers will return, and how to adjust their corporate strategy and communication activities.  Having been through our share of market cycles, we’d like to offer some of our advice and perspectives on these issues.

First, it is important to note that investor sentiment can change quickly.  Although past performance doesn’t guarantee future results, within one year the NASDAQ Composite nearly doubled from the lows reached in early 2009.  The NASDAQ Biotech Index increased more than 58% during the same period.

No one has a crystal ball to determine when buyers will return, but it is also worth noting that many of the fundamental drivers supporting a favorable outlook for the life science industry remain intact.  These include the large number of products currently in clinical trials, number of new product approvals by the FDA, brisk pace of industry consolidation and licensing transactions, aging population, and attractive valuations among many small- and mid-capitalization companies among other factors.

It may be tempting to dramatically revise corporate strategy and communication activities to fit the current market environment.  In both good times and bad, however, we believe in clear and consistent communication with an emphasis on the long-term strategic vision and unique value proposition that your company offers current and prospective shareholders.  Speaking with confidence, emphasizing key fundamental attributes, and avoiding spin are the best ways to maintain and enhance credibility with investors and analysts.

Regardless of the market backdrop, regular communications with investors, analysts, and the media through telephone calls, electronic communications, conference presentations, hosting an analyst/investor day, and through one-on-one meetings can help a company stay visible.  In addition, make sure that fact sheets, slide presentations, and other corporate materials are up to date.  At some point, investors will put money to work again and these activities will help ensure that they remember your company.

Beyond external audiences, clear and consistent communications with employees is also important – especially during periods of volatility. Make sure that your management team speaks with the same voice and offers thoughtful answers to any questions that arise.  This can be particularly important for those employees who manage external relationships, such as physicians and nurses involved with clinical trials.  The steadfast loyalty and support of your employees can be invaluable – and they may also be current or future shareholders.

Lastly, due to greater focus on a company’s financial strength and ability to survive a downturn, distinguishing your organization from its peers can be beneficial.  Beyond current cash position, this includes highlighting assets that can potentially be monetized along with being transparent regarding the size and nature of any corporate liabilities, including conversion features and maturity dates.  Investors and analysts also benefit by understanding key metrics such as the company’s cash burn rate, years of cash on the balance sheet, and the magnitude or timing of royalty streams, milestone payments, government grants, and licensing transactions.

In closing, despite inquiries from anxious shareholders about declining stock prices and market volatility in the short term, we believe companies that clearly and consistently communicate their strategic vision and value proposition will attract interest from investors, analysts, and the media in the long run.  With deference to the credit rating agencies, the United States – in particular our life science clients working in the areas of oncology, cardiovascular disease, central nervous system disorders, and other major unmet medical needs – will always be “triple-A” in our mind.

• Tier 1: market capitalization in excess of $10 billion
• Tier 2: market capitalization greater than $2 billion but less than $10 billion
• Tier 3: market capitalization of at least $1 billion but less than $2 billion

At that time, the 30 companies in these three groups had a collective market capitalization of approximately $240 billion. Assuming that investors reinvested the entire $47 billion in cash they received from the Roche/Genentech transaction into these groups, it would have represented nearly 20% of the total value.  While some of the money may have been reinvested in Roche, such an imbalance between supply and demand could have resulted in relative outperformance from members of the three groups.

Following today’s news that Sanofi-aventis (SNY) is acquiring Genzyme Corporation (GENZ) for approximately $20 billion in cash [plus a contingent value right], we reviewed the performance of our three tiers to determine which companies, if any, benefited the most from the reinvestment of $47 billion following the Roche/Genentech transaction.

From the date that the Roche/Genentech transition was announced [March 12, 2009] through February 15, 20111, the NASDAQ Composite (COMP) was up approximately +97%.  In contrast, the NBI only increased +50% during the period.  Recall that the NBI is calculated under a modified capitalization-weighted methodology, taking into account the total market value of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalization have the highest weighting in the index – making the NBI a good proxy for the performance of larger capitalization biotechnology companies.

Contrary to expectations, the largest biotechnology companies did not appear to benefit from a reallocation of funds from the Roche/Genentech transaction and posted the worst overall performance during the period.  In fact, all six members of the Tier 1 group underperformed the NBI, which includes Genzyme [see Table 1].  The companies in Tier 1 should have been the closest to Genentech with regard to their risk/return profile.

Table 1: Tier 1 Group

With market capitalizations greater than $2 billion but less than $10 billion around the time that the Roche/Genentech transaction was announced, Tier 2 represented the best performing group.  While Tier 2 contained both winners and losers, more than half of the Tier 2 companies outperformed the NBI, including four with triple-digit gains during the period [see Table 2].

Table 2: Tier 2 Group

* Acquired by Astellas Pharma in May 2010, price as of 3/31/2009 and the acquisition price, respectively

Tier 3 was the second best performing group.  Half of the Tier 3 companies outperformed the NBI, including four with triple-digit gains during the period [see Table 3].

Table 3: Tier 3 Group

* Acquired by Gilead in March 2009, price as of 3/31/2009 and the acquisition price, respectively

** Acquired by Dainippon Sumitomo Pharma in September 2009, price as of 3/31/2009 and the acquisition price, respectively

In conclusion, the reallocation of funds following a significant merger & acquisition [M&A] transaction for cash doesn’t appear to benefit larger biotechnology companies with similar risk/reward profiles in terms of relative stock performance [Tier 1].  While a comprehensive analysis of the data is beyond the scope of this article, this could result from the reallocation of capital into the acquiring company, sufficient liquidity from larger biotechnology companies to withstand the increased demand, and/or other factors.   However, using history as a guide, those companies with a market capitalization between $2 and $10 billion appear most likely to benefit from reinvestment following the recent Sanofi/Genzyme transaction.

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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)

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)

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)

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.

• 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 research and development [R&D] investment
• Improving access to capital
• Brisk pace of industry consolidation and licensing transactions
• Many small- and mid-capitalization companies remain undervalued

With 2010 officially on the books, it appears an appropriate time to review the sector’s performance along with some of the themes highlighted in our previous articles.

Big Versus Small

The twenty-member NYSE Arca Biotechnology Index (BTK) was up 38% in 2010, while the broader NASDAQ Biotech Index (NBI) advanced 15%.  Performance of the NASDAQ Biotech Index was in line with the Dow Jones Industrial Average (INDU), S&P 500 (SPX), and NASDAQ Composite (COMP), which were up 11%, 13%, and 17%, respectively.

Why the huge discrepancy in returns between the two major biotechnology indices?  Unlike the equal-weighted NYSE Arca Biotechnology Index, the NASDAQ Biotech Index is calculated under a modified capitalization-weighted methodology, taking into account the total market value 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 weighting in the index.

During 2010, most of the large capitalization biotechnology companies [greater than $10 billion] underperformed the median return of 11% for the 130 companies in the NASDAQ Biotech Index.  For example, Celgene Corporation (CELG) was up 6%, Cephalon, Inc. (CEPH) was down 1%, Amgen, Inc. (AMGN) was down 3%, Teva Pharmaceutical Industries (TEVA) was down 7%, and Gilead Sciences, Inc. (GILD) declined by 16%.  Bucking the trend of underperformance among large capitalization biotechnology names were Shire plc (SHPGY), along with Genzyme Corporation (GENZ) and Biogen Idec, Inc. (BIIB), both of which were targeted by shareholder activist Carl Icahn [see our August 2009 article “Three Recent Biotechnology Activist Wins by Carl Icahn”].

Accordingly, the relative underperformance of large capitalization biotechnology companies in 2010 masked the fact that many smaller, innovative companies performed well, as evidenced by the fact that 30 of the 130 companies comprising the NASDAQ Biotech Index produced greater than 50% returns during the period.  This performance is consistent with our thesis that small and mid-capitalization companies with positive clinical or regulatory catalysts would continue to outperform their larger industry peers in 2010.  See Table 1 for a list of the top ten gainers from the NASDAQ Biotech Index in 2010.

Noticeably absent from the list of 2010 winners, however, were the staggering quadruple-digit returns witnessed in 2009 [Vanda Pharmaceuticals, Inc. (VNDA) +2,150% and Human Genome Sciences, Inc. (HGSI) +1,342%].

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2010

Last Year’s Laggards Become 2010 Winners

After declining 22% in 2009, shares of Akorn, Inc. (AKRX), a niche generic pharmaceutical company, staged an impressive comeback by becoming the largest percentage gainer within the NASDAQ Biotech Index during 2010.  In November 2010, the company announced that core business revenue is projected in the range of $79.0 million to $80.0 million in 2010, a 76%-79% increase over 2009, and up from the company’s prior guidance range of $71.0-$75.0 million.

In another dramatic reversal of fortune, three of the top ten gainers from the NASDAQ Biotech Index in 2010 made the list of top ten decliners in the prior year.  Questcor Pharmaceuticals, Inc. (QCOR), Idenix Pharmaceuticals, Inc. (IDIX), and NPS Pharmaceuticals, Inc. (NPSP) rebounded sharply in 2010, each posting triple-digit returns due in part to the following:

• Questcor’s performance was largely due to strong revenue growth from its H.P. Acthar® Gel (repository corticotropin injection), which is indicated for the treatment of acute exacerbations of multiple sclerosis in adults, as monotherapy for the treatment of infantile spasms in infants and children under 2 years of age, and for the treatment of several other diseases and disorders.
• Despite news in September 2010 that the U.S. Food and Drug Administration [FDA] placed two of the company’s HCV drug candidates on clinical hold, Idenix Pharmaceuticals benefited from its drug candidate for the treatment of HIV/AIDS advancing into a Phase 2b trial by its corporate partner, ViiV Healthcare.
• Interest in NPS Pharmaceuticals can be attributed to the fact that in early 2011 the company expects to report top-line results from a Phase 3 study of teduglutide, a proprietary analog of GLP-2, in patients with short bowel syndrome who are chronically dependent on parenteral nutrition.

Losers Brought to You by the Letter “A”

Affymax, Inc. (AFFY), AMAG Pharma (AMAG), Arena Pharma (ARNA), Alexza Pharma (ALXA), and Alnylam Pharma (ALNY) were among the top ten decliners from the NASDAQ Biotech Index in 2010 [see Table 2].

Affymax, Inc. (AFFY), which hopes that its investigational anemia drug peginesatide could ultimately compete with Amgen Inc.’s Aranesp® [darbepoetin alfa], posted the largest percentage decline within the NASDAQ Biotech Index for 2010.  Top-line results from the Phase 3 clinical program released in June 2010 showed that the frequency of death, stroke, myocardial infarction, congestive heart failure, unstable angina, and arrhythmia was higher in non-dialysis patients taking peginesatide than those taking Aranesp, which sent shares of Affymax plummeting.   In November 2010, Affymax and partner Takeda confirmed their goal of submitting a new drug application [NDA] for peginesatide for the treatment of anemia in chronic renal failure patients on dialysis in the second quarter of 2011.

AMAG Pharmaceuticals, Inc. (AMAG) launched Feraheme® (ferumoxytol) to treat iron deficiency anemia in July 2009, but anemic sales earned the company a spot in the top ten decliners of 2010.  Net product revenues from Feraheme were $15.1 million in the third quarter of 2010, well below the $500 million to $1 billion in annual sales originally projected by Wall Street analysts.  See our February 2010 article “Iron Safety Hits AMAG Pharmaceuticals.”

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2010

Our Top Ten Articles

In the spirit of analyzing statistics from 2010, we reviewed our website traffic to identify the top ten articles from the past year.  The list below is ranked in descending order, starting with the most popular article:

1)              Cancer vaccine therapies: failures and future opportunities (Apr ‘10)

2)              Investment opportunities with five frontline therapies for AML (Sep ‘10)

3)              Cancer immunotherapy to take center stage at ASCO (Jun ‘10)

4)              Monoclonal antibody companies command premiums (Jul ‘10)

5)              Stem cell competition heating up (Aug ‘10)

6)              Buyout buzz at ASH hematology confab preview (Dec ‘09)

7)              Cyclin dependent cancer confab preview (Apr ‘10)

8)              Drug development spotlight: the mTOR’s new clothes (Nov ‘10)

9)              Past pitfalls and potential promise for pancreatic cancer (Oct ‘10)

10)            Five key factors weighing on Dendreon (Jul ‘10)

Interesting to note that despite popularity among readers, companies focusing on cancer immunotherapy, hematological malignancies, monoclonal antibodies, or stem cells did not make the list of top ten gainers from the NASDAQ Biotech Index in 2010.

2011 Outlook

Most of the drivers supporting our favorable outlook for the biotechnology industry 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 should continue to outperform their larger industry peers in 2011.

The key exception relates to the number of 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.

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?

* 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

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.”

With 2009 officially on the books, it appears an appropriate time to review the sector’s performance along with some of the themes highlighted in our previous articles.

Big Versus Small

The twenty-member NYSE Arca Biotechnology Index (BTK) was up 46% in 2009, while the broader NASDAQ Biotech Index (NBI) was only up 16%, underperforming the Dow Jones Industrial Average (INDU), S&P 500 (SPX), and NASDAQ Composite (COMP), which were up 19%, 24%, and 44%, respectively.  Why the huge discrepancy in returns between these two major biotechnology indices?  Unlike the equal-weighted NYSE Arca Biotechnology Index, 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 weighting in the index.

During 2009, large capitalization biotechnology companies [greater than $10 billion] dramatically underperformed their smaller peers.  For example, Celgene Corporation (CELG) was essentially flat, Amgen, Inc. (AMGN) was down 2%, Gilead Sciences, Inc. (GILD) declined by 15%, and Genzyme Corporation (GENZ) dropped 26% [earning Henri Termeer the coveted Nance Trophy for worst biotech CEO of 2009 by TheStreet.com’s Adam Feuerstein].  Some of the reasons for this poor performance include concerns over generic competition and pipeline progress – ironically some of the same issues that have plagued big pharma.

Accordingly, the relative underperformance of 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.  In fact, two biotechnology companies were among the largest percentage gainers in the NASDAQ Composite with their staggering quadruple-digit returns: Vanda Pharmaceuticals, Inc. (VNDA) +2,150% and Human Genome Sciences, Inc. (HGSI) +1,342%.  See Table 1 for a list of the top ten gainers from the NASDAQ Biotech Index in 2009.

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2009

Oncology: Prostate Cancer Spotlight

Driven by positive Phase 3 results from Dendreon Corporation (DNDN) regarding its prostate cancer vaccine study, investors gravitated towards biotechnology companies working in the field of prostate cancer treatment as noted in our May 2009 article.  This enthusiasm only increased when Johnson & Johnson (JNJ) announced in May 2009 that it would acquire Cougar Biotechnology, Inc., a development stage company with an oral prostate cancer treatment being studied in two Phase 3 clinical trials, for approximately $1 billion. 

While not a member of either major biotechnology index, shares of Oncogenex Pharmaceuticals, Inc. (OGXI) started the year around $3.00 and ended above $22 for a 643% return.  Oncogenex is developing OGX-011, which is designed to inhibit the production of clusterin, a protein that is associated with cancer treatment resistance, and has completed Phase 2 clinical trials in prostate, lung and breast cancer.  OGX-011 received Fast Track designation from the FDA for the treatment of progressive metastatic prostate cancer in combination with docetaxel.  Shares of Oncogenex had traded higher than $42 in August 2009, but the stock price declined following a license agreement with Teva Pharmaceutical Industries (TEVA) for OGX-011 that apparently did not meet investor’s expectations.

Not all biotechnology companies working in the area of prostate cancer were as fortunate as Dendreon, Cougar, and Oncogenex.  Shares of GTx, Inc. (GTXI) were the second largest industry decliner for 2009 due to a complete response letter from the Food and Drug Administration [FDA] that cited clinical deficiencies regarding the company’s New Drug Application [NDA] for toremifene 80 mg to reduce fractures in men with prostate cancer receiving androgen deprivation therapy.  See Table 2 for a list of the top ten decliners from the NASDAQ Biotech Index in 2009.

Shareholder Activist Wins

In view of past major coups with MedImmune and ImClone, in August 2009 we reviewed Carl Icahn’s biotechnology holdings as reported in SEC filings and identified three companies that significantly underperformed the NASDAQ Biotechnology Index over the past five years, but with recent successful shareholder activist outcomes that could positively impact future performance.  In particular, we noted that Alexander Denner, who has served as Managing Director of entities affiliated with Carl Icahn and as a director of ImClone, had recently been elected as a director at each company.

During 2009, those three companies, Biogen Idec, Inc. (BIIB), Amylin Pharmaceuticals, Inc. (AMLN), and Enzon Pharmaceuticals, Inc. (ENZN) produced positive returns of 12%, 31% and 81%, respectively.  While Biogen Idec underperformed the sector, it notched the highest return among large capitalization biotechnology companies.

In other shareholder activist news, holders of Vanda Pharmaceuticals (VNDA) are likely pleased that the company’s Board of Directors spurned a request by Tang Capital Partners, LP to liquidate the company in February 2009.  Shares of Vanda were up 2,150% for the year [see Table 1] following FDA approval in May 2009 to market the company’s Fanapt™ [iloperidone], a novel antipsychotic for the acute treatment of adult patients with schizophrenia, and a subsequent marketing agreement for the product with Novartis AG (NVS).

CNS: Developments for Parkinson’s Disease

Vanda Pharmaceuticals wasn’t the only company working in the area of central nervous system [CNS] disorders to make news.  Shares of Impax Laboratories, Inc. (IPXL), which were trading around $7.50 at the time we published our August 2009 article titled “Treating Parkinson’s Disease: Investment Opportunities and Challenges,” continued to reach new 52-week highs and ended up 172% for the year [see Table 1].  Impax recently initiated the second of two Phase 3 studies designed to support marketing approval of its IPX066 product candidate for the treatment of Parkinson’s disease.  IPX066 is an investigational extended release carbidopa-levodopa product intended to rapidly achieve and then sustain effective blood concentrations of levodopa, potentially improving clinical symptom management.

Gastrointestinal Disease: 3 Hits, 3 Misses

First, the good:

Both Salix Pharmaceuticals, Inc. (SLXP) and Santarus, Inc. (SNTS) appear in the list of top ten biotechnology gainers for 2009 with triple-digit returns due to favorable regulatory progress reported during the year [see Table 1].  In September, Salix announced the successful outcome of two Phase 3 trials to evaluate the efficacy and safety of Xifaxan® [rifaximin] for the treatment of non-constipation irritable bowel syndrome.  Salix is planning an NDA submission for the first half of 2010.  In December, Santarus announced that the FDA approved the company’s New Drug Application [NDA] for its prescription tablet product for all of the indications being sought, including for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease. 

While not a member of either major biotechnology index, shares of Soligenix, Inc. (SNGX.OB) increased 317% during 2009.  In January, the company reached agreement with the FDA on the design of a confirmatory, pivotal Phase 3 clinical trial evaluating its lead product orBec® for the treatment of acute gastrointestinal Graft-versus-Host Disease [GVHD].  The following month, Soligenix announced a potential $30 million North American partnership agreement with Sigma-Tau Pharmaceuticals for orBec and in October 2009 initiated patient enrollment in the confirmatory Phase 3 trial that is expected to complete with clinical data available in the first half of 2011.

Next, the bad:

As discussed in our December 2009 article “Graft Versus Host Disease: Failures and Future Opportunities,” Osiris Therapeutics, Inc. (OSIR) recently reported preliminary results from two Phase 3 trials evaluating its Prochymal product candidate for the treatment of acute GVHD.  Unfortunately, neither trial reached its primary endpoint, sending shares from $14 to a 52-week low of $5.35 by November 2009, earning the company a spot in the top ten decliners for the year [see Table 2]. 

The other two casualties working in the area of gastrointestinal disease and appearing in the top ten decliners for 2009 are:

• Progenics Pharmaceuticals, Inc. (PGNX), which announced in October 2009 that the company regained worldwide rights to Relistor® [methylnaltrexone bromide] for the treatment of opioid-induced constipation from Wyeth Pharmaceuticals.  Global net sales of Relistor for the third quarter of 2009 were a mere $3.3 million, as compared to $3.2 million in sales for the previous quarter.
• In the absence of any negative clinical or regulatory news, NPS Pharmaceuticals, Inc. (NPSP) stated it remains on track to reach full patient enrollment before the end of the first quarter of 2010 for a confirmatory Phase 3 trial with Gattex™ (teduglutide), the company’s proprietary analog of naturally occurring human glucagon-like peptide 2 [GLP-2], for the treatment of short bowel syndrome [SBS].  NPS believes that positive results from the trial, expected to complete in October 2010 according to ClinicalTrials.gov, will enable the company to seek U.S. marketing approval for Gattex.

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2009

2010 Outlook

The capital markets remain turbulent and there may 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 for 2010. Similar to 2009, small capitalization companies with clinical or regulatory catalysts should continue to outperform their larger industry peers in the year ahead.

What is your outlook for the biotechnology industry in 2010?  Take a moment to complete our survey, which is only ten questions long and will take just minutes to complete.  The results of this important survey along with our industry outlook will be communicated in early 2010 through a future article.  Take the survey now by clicking here.