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.

Michael D. Becker, moderator and president and chief executive officer of MD Becker Partners, made a number of key points and observations in his opening remarks, beginning with some upbeat comments regarding the approximate 2,000-point rebound in the Dow Jones Industrial Average (DJIA) from its low in March 2009. He also indicated that some biotechnology companies have been able to successfully access the capital markets. Specifically, investors have been backing companies with later stage pipelines that have been executing on their milestones and have solid management. Examples of financing transactions cited at the time were Allos Therapeutics, Inc. (ALTH), Micromet, Inc. (MITI), and Seattle Genetics, Inc. (SGEN).

Mr. Becker also observed improving trends in clinical trial results and regulatory approvals, such as the recent Phase 3 results for a prostate cancer vaccine by Dendreon Corp. (DNDN) and the FDA approval of a schizophrenia product by Vanda Pharmaceuticals, Inc. (VNDA).

The roundtable session that followed was an open discussion for participants from diverse backgrounds to offer shared insights and perspectives on strategies to enhance visibility and access capital. There was general agreement among the expert panelists on five key principles that biotechnology companies may want to consider in order to not only survive – but thrive – in the current environment. Participants underscored the following:

1) Communicate simply, succinctly and consistently

Biotechnology companies would benefit by embracing Albert Einstein’s famous quote “nothing is so complex that it cannot be explained simply.” In contrast to direct communications with more sophisticated investors, press releases, informal pitches for media coverage, and other general communications are not times to showcase technical terms, acronyms, and professional jargon. In a complex industry, such as biotechnology, there is a delicate balance between providing the information simply and concisely while including key scientific data. “It helps to talk to somebody who understands the business of communication,” says James E. Dentzer, Chief Financial Officer at Amicus Therapeutics, Inc. (FOLD). “Walk them through your business model and ask them for advice.”

But be succinct. “I also get a lot of people who write a pitch where they start out with a paragraph of background – most of which I already know – and I’m still looking, “where is the news, where is the news?” says Linda A. Johnson, Health/Business Writer at The Associated Press. “The best thing you can do is at the top of your press release, which should be written in English, put three maybe four sentences summing up what your news is and why it’s important. That’s the way to get a reporter to pay attention.”

Consistency is also critical, especially taking into consideration how the internet has immortalized certain aspects of investor relations. People can go online and find a wealth of past and present information about a company.

2) Engage competent and experienced external advocates

In the current environment, businesses are faced with decreasing human and financial resources, which is increasing the strain on management’s limited time and attention. Outsourcing can help a company shift its focus from peripheral activities toward work that serves the underlying enterprise of the business, which in biotech is science. For smaller organizations, outsourcing can also help companies act “big” by giving them access to the same level of expertise that large companies enjoy.

Panelists agreed that competency and experience are key criteria to look for when a company is considering outsourcing – especially when it comes to handling investor or public relations. Look for a person or firm that brings the breadth of real-world, in-house experience necessary – expertise in financial, scientific, medical and communications – all operating within the legal parameters required. “I want someone who, when I ask questions, can actually answer them instead of having to say I’ll get back to you, I’ll find out, I’ll ask someone,” says Linda A. Johnson, Health/Business Writer at The Associated Press. “That’s wasting my time. So you need somebody who really knows their stuff and who is prepared.”

Cost-cutting may be another reason for companies to outsource. Outsourcing converts fixed costs into variable costs, releasing capital for investment elsewhere in the business. This may be especially important for early-stage companies.

3) Credibility and management experience

With the crisis in confidence, now more than ever companies need to establish personal relationships with the financial community. Investors are increasingly focused on credibility. Are you achieving milestones, are you putting out information in timely fashion, are you being forthright with your investors? “Once companies lose their credibility, whether it is data release or just over embellishing a situation, it’s very hard to get that credibility back,” says Michael A. Margolis, R.Ph., Managing Director at Merriman Curhan Ford (MERR).

Be upfront, be honest, and do not hide the bad stuff. “If somebody tries to slip something by, that does create a lasting memory and you will look at what they file a little more closely,” says John George, Biotechnology Staff Writer at the Philadelphia Business Journal.

Just how important is the credibility or experience of the management team in contrast to the science and the market opportunity? “I think we’re all going to say the same thing because it’s a very critical – it’s probably the most critical – aspect of the business,” says Todd C. Brady, M.D., Ph.D., Principal at Domain Associates.

4) Be proactive

Companies have different philosophies and different approaches to investor relations, with some viewing it as largely reactive – responding to inquiries from analysts or investors as they come in. “For companies, I think one thing to be very careful of though, is to keep in mind that investor relations has to be an active – not a passive – event,” says John W. Chambers, Managing Director at Merriman Curhan Ford (MERR). “The folks that have had a reasonable investor relations campaign that’s been in existence not just in the bad market – they’re not going in for the first time in this type of market to see someone – are getting an audience.”

In the current environment, another common mistake by companies is to reduce their investor relations activity or curtail outreach to the investment community. When competing for capital, however, a company must have the proper resources to distinguish itself in the market. The more a company makes investors aware of its existence, business, and strategies – the more likely it is to be rewarded with access to capital, potential partnerships, and a fair valuation.

The process of raising capital is much longer than companies are used to in the past where they could have raised money in a matter of days or weeks. In addition, it is unusual for investors to invest in a company after hearing the story for the first time. Accordingly, time and effort spent now to get in front of investors is time well spent.

5) Growing stronger through adversity

At the start of the year, MD Becker Partners provided a positive outlook for the biotechnology industry in 2009, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions. Some of the panelists agreed and even hinted at a stronger biotechnology industry going forward.

“If we’re going to weather the tsunami, I see the end kind of coming because you’re seeing fundamental investors that are willing to take meetings, they’re willing to see a differentiated story,” says John W. Chambers, Managing Director at Merriman Curhan Ford (MERR). “The type of investors that folks are targeting has changed while we’ve gone through this financial upheaval, but I think we’re on a very good track to create a stronger, fundamental driven and institutionally driven market place for life sciences once we get out the other end.”

“I would expect that we are going to see the market get better over time,” says James E. Dentzer, Chief Financial Officer at Amicus Therapeutics, Inc. (FOLD). “It’s not going to get better overnight, and it’s going to be led by people who are investing in companies they already know well.”

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The roundtable was successful in producing valuable information and insights as well as suggestions for the future. Click here to request a complimentary electronic reprint of the 19-page “Successful Strategies for Raising Visibility and Capital” event transcript.

About MD Becker Partners LLC

MD Becker Partners is a boutique management and strategy consulting firm focusing on both public and private companies in emerging growth industries, such as pharmaceuticals, biotechnology, medical devices, and cleantech. The firm’s mission is to bring experience-based insights gleaned from the three independent disciplines of investor relations, strategic advisory and operational improvement together and apply them to carefully conceived and expertly enacted strategies that help companies increase visibility, unlock value and access resources to grow their business. For more information, visit the website: http://www.mdbpartners.com/