Vivek Jain, Managing Director, JPMorgan H&Q
2002 has been a difficult year thus far for biotechnology financing. The optimism seen at the end of last year and beginning of this year for a first half re-opening of the biotech financing window, which can be seen in the number of company's in registration or poised to file, has thus far proved substantially weak. This is in part due to the volatility in the broader markets from concerns ranging from global terrorism, to a weak US economy to accounting issues. In addition, investors continue to believe that there are many attractive stocks available in the public markets at reasonable prices and as a result question why should they take greater risk on new equity issues. Most importantly for the biotechnology market in particular, there has been the rash of negative news from biotechs and big pharma.
After the 1999-2000 financing window was marked by early stage clinical companies and a multitude of so-called platform technology companies competing for small slices of market, the wisdom for 2002 was that companies in later-stage clinical trials would be the ones to open up the next financing window - those with a more attractive risk-reward profile. Unfortunately, much of the news this year has been of late stage product failures - Imclone, Cubist, Dendreon, Inspire, Ista, Sepracor, Coulter, Xoma - tarnishing, in some ways, the attractiveness of the later-stage clinical trial companies in the pipeline.
Pending the outcome of a handful of deals expected to price over the next few weeks, we see this translating into a relatively robust market for M&A in the second half of the year. We think investors are now demanding more than a single late stage product because they have seen Phase III products and filed products fail. This will likely drive investment toward companies with already approved products and companies with multiple late-stage shots on goal. That should provide impetus for product companies, both early and late stage, to merge in order to create a broader, later-stage portfolio to mitigate risk. In addition, we believe there still must be consolidation among the platform technology companies, too many of which are focused on the same, relatively small market opportunities.
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Sam Williams PhD, Robertson Stephens, Senior Research Analyst
The key drivers in Europe are Serono, Celltech, Actelion and Cambridge Antibody Technologies. Each is at a pivotal stage in their development. Serono obtained FDA approval for Rebif on March 8th and Actelion received FDA marketing approval for Tracleer in December 2001 and a positive opinion in Europe from CPMP in February. Celltech has product going through late stage Phase II trials (PD4 inhibitor with Merck) and phase III (Humicade and CDP870 with Pharmacia) and Abbot have just filed BLA with the FDA for D2E7 for which CAT will receive royalties.
This is a key defining moment for these stocks. Among these, Serono is probably the main driver for the sector right now and if they can show that Rebif can capture the market in the US they and European biotech will be on a high. However, if Actelion can also make Tracleer a $200-300 million drug then that will be excellent and these two stocks can combine to create a positive mood.
What these stocks say about biotech in general is that you can't put a price on good management and good product. Biotech is not about macro trends; their really are none. Rather, it's about individual companies and an investor has to be highly focused on the specific stocks. Picking good management teams, i.e. those that have actually developed a drug before, is one shortcut to success if the investor is not a medic who can analyse clinical data. In terms of general trends, there is always a lot of talk at the beginning of every year about it being a year for consolidation but the rate of consolidation just seems to trickle along at background pace. There really are very few good fits in biotech M&A anyway; you don't get M&A just for the sake of it and when you do, it's generally a disaster.
The market as a whole is still pretty depressed which means that you have to focus on the individual companies - those who know what they are doing. If you do that you can't go wrong.
--------------------------------------------------------------------------------
Alan H. Auerbach, Vice President/Senior Research Analyst (Biotechnology), Wells Fargo Securities
During 2002, we believe that the overriding investment theme in biotechnology will be that of the individual drugs themselves. Clearly the sector’s setbacks during the first quarter of the year, including disappointing Phase III trial results and negative FDA panel recommendations, have caused investors to have pessimism toward biotechnology stocks. However, we believe that the commercial success of several newly launched biotechnology drugs as well as the clinical success of several development stage drugs will help restore investor confidence in the sector during the remainder of the year and reinvigorate the sector as a whole.
In addition, we do not believe that any of the problems currently facing large pharmaceutical companies, such as earnings warnings, patent expirations and pipeline gaps, will have any impact on the biotechnology sector. We believe that investors have ascertained that the biotechnology and pharmaceutical sectors are two distinct groups with very different fundamentals and dynamics.
On the topic of consolidation, while we would not be surprised to see additional merger and acquisition activity in the sector during the year, we do not believe that consolidation will be a central theme for investors.
Lastly we believe that it is important for investors to remember that biotech is clearly a specialised, high-risk area and although over the last 20-30 years a number of specialised high risk sectors have emerged, there is no other sector that has shown the long-term longevity and staying power that biotechnology has demonstrated and will continue to display.
--------------------------------------------------------------------------------
Niels Leth, Financial Analyst, Enskilda
We are at the beginning of a cyclical upturn so naturally investors are focused on cyclical investments rather than defensive stocks such as healthcare. In the last 3-4 months there has been a portfolio shift into the cyclical sector denting performance in healthcare.
On top of this, the pharmaceuticals sector has been troubled by profit warnings.
This negative impact from both portfolio rotations and recent profit warnings makes me slightly concerned about near-term healthcare outlook among the big-pharma companies, but there is the potential for this to benefit biotech. The recent big biotech mergers create more
interest and mark a turnaround in capital raised in the first quarter of 2002.
This seems to be borne out by figures showing that US biotechs raised around $6.3bn during Q1 and the high number of M&As compared to Q1 last year.
World-wide, biotech companies are in need of new capital and would probably respond with transaction activity to an increase in valuations. This could be further triggered by more warnings from the big pharmas.
As far as Europe is concerned there is a major IPO backlog. A burst of activity could follow a couple of successful transactions.
Even then Europe should be careful. US companies are in general larger and have broader product portfolios. Investors are not willing to take the same risks as 2 years ago and too much focus on single products discourages some investors from buying the shares. Investors are looking for companies with broad late stage portfolios.
Europe faces a challenge to create companies with higher market capitalisation and broader portfolios or continue to lose out to the US
in the biotech arena.
--------------------------------------------------------------------------------
Tracy T. Lefteroff, Global Managing Partner, Life Sciences Industry Services, PricewaterhouseCoopers
Whilst compared to late 1999 and early 2000 the capital market outlook for biotechnology companies may seem depressed, in actuality markets are behaving fairly consistently with historic norms and outperforming most other tech sectors.
The overall volume of venture capital invested in the biotech sector has dropped 25 percent in 2001 from the historic levels of 2002. However, that primarily reflects the overall decline in VC investment as charted in the Money Tree venture capital survey conducted by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association.
With over US$4.9 billion invested in health sciences, 2001 ranks as the second most active year for VC investment in that sector. And when taken as a percentage of overall VC investments, life sciences companies garnered dramatically more VC money in 2001, creating one of the few bright spots for VC investing.
Likewise, while it may be a long time before public markets reach the unnatural highs of the genomics bubble in 2000, we expect that the IPO market will return to historical norms within the next year.
There are several factors driving this, including a maturing market with many companies at or near profitability since the last major influx of capital; an increasing number of products on the market or in late-stage clinical trials; and an ageing baby-boomer market that will inevitably increase the demand side of the equation, as they, unlike their parents, are willing to pay the price for lifestyle enhancing treatments. Additionally, with the overall population living longer - or to put it more accurately, staying old longer, there is an increasing demand for on-going treatment since the increase of chronic conditions such as Type 2 diabetes, cardiovascular disease, and cancer.
2002 has been a difficult year thus far for biotechnology financing. The optimism seen at the end of last year and beginning of this year for a first half re-opening of the biotech financing window, which can be seen in the number of company's in registration or poised to file, has thus far proved substantially weak. This is in part due to the volatility in the broader markets from concerns ranging from global terrorism, to a weak US economy to accounting issues. In addition, investors continue to believe that there are many attractive stocks available in the public markets at reasonable prices and as a result question why should they take greater risk on new equity issues. Most importantly for the biotechnology market in particular, there has been the rash of negative news from biotechs and big pharma.
After the 1999-2000 financing window was marked by early stage clinical companies and a multitude of so-called platform technology companies competing for small slices of market, the wisdom for 2002 was that companies in later-stage clinical trials would be the ones to open up the next financing window - those with a more attractive risk-reward profile. Unfortunately, much of the news this year has been of late stage product failures - Imclone, Cubist, Dendreon, Inspire, Ista, Sepracor, Coulter, Xoma - tarnishing, in some ways, the attractiveness of the later-stage clinical trial companies in the pipeline.
Pending the outcome of a handful of deals expected to price over the next few weeks, we see this translating into a relatively robust market for M&A in the second half of the year. We think investors are now demanding more than a single late stage product because they have seen Phase III products and filed products fail. This will likely drive investment toward companies with already approved products and companies with multiple late-stage shots on goal. That should provide impetus for product companies, both early and late stage, to merge in order to create a broader, later-stage portfolio to mitigate risk. In addition, we believe there still must be consolidation among the platform technology companies, too many of which are focused on the same, relatively small market opportunities.
--------------------------------------------------------------------------------
Sam Williams PhD, Robertson Stephens, Senior Research Analyst
The key drivers in Europe are Serono, Celltech, Actelion and Cambridge Antibody Technologies. Each is at a pivotal stage in their development. Serono obtained FDA approval for Rebif on March 8th and Actelion received FDA marketing approval for Tracleer in December 2001 and a positive opinion in Europe from CPMP in February. Celltech has product going through late stage Phase II trials (PD4 inhibitor with Merck) and phase III (Humicade and CDP870 with Pharmacia) and Abbot have just filed BLA with the FDA for D2E7 for which CAT will receive royalties.
This is a key defining moment for these stocks. Among these, Serono is probably the main driver for the sector right now and if they can show that Rebif can capture the market in the US they and European biotech will be on a high. However, if Actelion can also make Tracleer a $200-300 million drug then that will be excellent and these two stocks can combine to create a positive mood.
What these stocks say about biotech in general is that you can't put a price on good management and good product. Biotech is not about macro trends; their really are none. Rather, it's about individual companies and an investor has to be highly focused on the specific stocks. Picking good management teams, i.e. those that have actually developed a drug before, is one shortcut to success if the investor is not a medic who can analyse clinical data. In terms of general trends, there is always a lot of talk at the beginning of every year about it being a year for consolidation but the rate of consolidation just seems to trickle along at background pace. There really are very few good fits in biotech M&A anyway; you don't get M&A just for the sake of it and when you do, it's generally a disaster.
The market as a whole is still pretty depressed which means that you have to focus on the individual companies - those who know what they are doing. If you do that you can't go wrong.
--------------------------------------------------------------------------------
Alan H. Auerbach, Vice President/Senior Research Analyst (Biotechnology), Wells Fargo Securities
During 2002, we believe that the overriding investment theme in biotechnology will be that of the individual drugs themselves. Clearly the sector’s setbacks during the first quarter of the year, including disappointing Phase III trial results and negative FDA panel recommendations, have caused investors to have pessimism toward biotechnology stocks. However, we believe that the commercial success of several newly launched biotechnology drugs as well as the clinical success of several development stage drugs will help restore investor confidence in the sector during the remainder of the year and reinvigorate the sector as a whole.
In addition, we do not believe that any of the problems currently facing large pharmaceutical companies, such as earnings warnings, patent expirations and pipeline gaps, will have any impact on the biotechnology sector. We believe that investors have ascertained that the biotechnology and pharmaceutical sectors are two distinct groups with very different fundamentals and dynamics.
On the topic of consolidation, while we would not be surprised to see additional merger and acquisition activity in the sector during the year, we do not believe that consolidation will be a central theme for investors.
Lastly we believe that it is important for investors to remember that biotech is clearly a specialised, high-risk area and although over the last 20-30 years a number of specialised high risk sectors have emerged, there is no other sector that has shown the long-term longevity and staying power that biotechnology has demonstrated and will continue to display.
--------------------------------------------------------------------------------
Niels Leth, Financial Analyst, Enskilda
We are at the beginning of a cyclical upturn so naturally investors are focused on cyclical investments rather than defensive stocks such as healthcare. In the last 3-4 months there has been a portfolio shift into the cyclical sector denting performance in healthcare.
On top of this, the pharmaceuticals sector has been troubled by profit warnings.
This negative impact from both portfolio rotations and recent profit warnings makes me slightly concerned about near-term healthcare outlook among the big-pharma companies, but there is the potential for this to benefit biotech. The recent big biotech mergers create more
interest and mark a turnaround in capital raised in the first quarter of 2002.
This seems to be borne out by figures showing that US biotechs raised around $6.3bn during Q1 and the high number of M&As compared to Q1 last year.
World-wide, biotech companies are in need of new capital and would probably respond with transaction activity to an increase in valuations. This could be further triggered by more warnings from the big pharmas.
As far as Europe is concerned there is a major IPO backlog. A burst of activity could follow a couple of successful transactions.
Even then Europe should be careful. US companies are in general larger and have broader product portfolios. Investors are not willing to take the same risks as 2 years ago and too much focus on single products discourages some investors from buying the shares. Investors are looking for companies with broad late stage portfolios.
Europe faces a challenge to create companies with higher market capitalisation and broader portfolios or continue to lose out to the US
in the biotech arena.
--------------------------------------------------------------------------------
Tracy T. Lefteroff, Global Managing Partner, Life Sciences Industry Services, PricewaterhouseCoopers
Whilst compared to late 1999 and early 2000 the capital market outlook for biotechnology companies may seem depressed, in actuality markets are behaving fairly consistently with historic norms and outperforming most other tech sectors.
The overall volume of venture capital invested in the biotech sector has dropped 25 percent in 2001 from the historic levels of 2002. However, that primarily reflects the overall decline in VC investment as charted in the Money Tree venture capital survey conducted by PricewaterhouseCoopers, Venture Economics and the National Venture Capital Association.
With over US$4.9 billion invested in health sciences, 2001 ranks as the second most active year for VC investment in that sector. And when taken as a percentage of overall VC investments, life sciences companies garnered dramatically more VC money in 2001, creating one of the few bright spots for VC investing.
Likewise, while it may be a long time before public markets reach the unnatural highs of the genomics bubble in 2000, we expect that the IPO market will return to historical norms within the next year.
There are several factors driving this, including a maturing market with many companies at or near profitability since the last major influx of capital; an increasing number of products on the market or in late-stage clinical trials; and an ageing baby-boomer market that will inevitably increase the demand side of the equation, as they, unlike their parents, are willing to pay the price for lifestyle enhancing treatments. Additionally, with the overall population living longer - or to put it more accurately, staying old longer, there is an increasing demand for on-going treatment since the increase of chronic conditions such as Type 2 diabetes, cardiovascular disease, and cancer.
