"After posting several excellent quarters of positive stock market results, biotech came down to earth with a solid bump in the first quarter of 2005," said G. Steven Burrill, CEO of Burrill & Company, a San Francisco based life sciences merchant bank. "A string of product disappointments, lower earnings projections, and heightened concerns over drug safety compounded biotech's woes."

"If those issues weren't enough, surging oil prices, which hit a record high of $57.60/barrel in March, and general market jitters over inflation, corporate earnings and a soft economy served to cap a generally miserable quarter for the biotech and industrial sectors alike," Burrill added. "It was a tough quarter all around with the Dow closing the period down 2.6% and the NASDAQ off 8%."

Drug safety and product failures dominate the headlines

"The fall out from the market shock that Biogen Idec and Elan were pulling Tysabri their potential blockbuster MS drug from the market has been far reaching," said Burrill.

The ripple effects were most strongly felt by the emerging and younger biotech companies along with their recent IPO graduates.

"Considering their stage of development investors are equating these companies with a high level of risk -- something that they are not prepared to share -- which is why the Burrill Small-Cap Biotech Index and Burrill Biotech 2003/4/5 IPO Index, fell so dramatically, 28% and 20% year-to-date, respectively.

"In stark contrast, more mature biotech companies that have robust drug pipelines and products on the market have been able to weather the stormy conditions," added Burrill.

The Burrill Large-Cap Biotech Index was down 6.2% at quarter's end.

"After closing out the year in very good shape -- up 24% -- the Burrill Biotech 2003/4/5 IPO Index has given nearly all that value back," stated Burrill.

"In additional to being caught up in the prevailing market conditions, the dramatic drop in value has also been fueled by a string of companies reporting disappointing clinical trials results," Burrill added.

Corgentech Inc.'s (CGTK), share price, for example, lost half its value following the news, March 30, their Phase III trial with edifoligide (E2F Decoy) to treat vein graft failure after coronary bypass graft surgery failed to show a benefit. The investigational drug had already failed to significantly delay vein graft failure in patients who had the procedure performed in the leg.

Companies Squeeze through Closing IPO Window ...

The IPO market was especially tough for biotech companies with only six making it through a closing window. The amount of $289 million raised by these companies in the quarter fell well short of the $651 million that was raised through IPOs in Q1 04.

The uncertain market conditions also caused two biotech companies to withdraw their initial public offerings towards the end of March. Targacept Inc.'s plans to sell nearly 6.3 million shares at between $11 and $13 were put on hold ... as was Boston-based CombinatoRx Inc.'s similarly priced IPO.

"In order to get offerings done companies had to dramatically discount biotech IPOs to attract investors," said Burrill. "Now that biotechs are in a holding pattern as they wait until market conditions improve before hitting the Street again with their offerings they are increasingly turning to alternative financing strategies."

A good example of this trend is Peninsula Pharmaceuticals Inc.'s decision to postpone its initial public offering while it explores a possible merger with a pharmaceutical company.

Solid performance on Capital Markets

Despite the prevailing conditions, the industry managed to get deals done raising a total of $6.2 billion in the quarter, compared to $7.7 billion raised in the same quarter of 2004.

"While Wall Street has cooled to biotech and their stock prices have been taking it on the chin lately, in biotech company boardrooms across the country it appears to be business as usual.

"Debt and secondary issues collectively garnered the industry $2.3 billion in the quarter and this compares with approximately the same amount recorded in Q1 04," Burrill noted.

The $781 million raised in private venture financing deals was only about half the amount raised in Q1 04. "While on the face of it this could be seen as a negative, the first quarter of 2004 was, in terms of funds raised, one of the industry's best ever," Burrill explained. "The Q1 05 total is in keeping with the amounts raised in the last three quarters of 2004, which themselves were considered positive numbers."

Topping the deals list was San Francisco-based FibroGen, Inc., which completed a placement of convertible preferred stock generating approximately $100 million in net proceeds.

Partnering continues at a healthy pace ...

"The pendulum is swinging away from IPOs more to M&As and partnering. In the last two years these activities have generated over $20 billion for the biotech industry, compared to $2.2 billion generated through IPOs in the same period.

"Although the reported $3.6 billion in partnering deals in Q4 04 would be a tough act to follow," Burrill said, "transactions did not show any signs of slowing down as the total of $2.1 billion for Q1 05 indicates.

"Pharma's appetite for what biotech has to offer will continue to remain healthy throughout the rest of the year, and the Shire alliance with New River Pharmaceuticals to strengthen its franchise in the ADHD area is a typical example of deals, which are designed to boost pharmas drug pipelines," Burrill added.

Shire Pharmaceuticals Group plc (SHPGY) and New River Pharmaceuticals Inc. (NRPH) have entered into an agreement for the global commercialization of NRP104, New River's Phase III compound for treatment of Attention Deficit Hyperactivity Disorder (ADHD), as well as for other potential indications. Shire pays an initial sum of $50 million on signing, a further $50 million upon acceptance of filing of the New Drug Application by the FDA and up to $300 million in milestone payments; an additional $100 million milestone would be payable as a sales bonus upon achieving a significant sales target.

Pfizer Inc. was also active in the quarter with a significant partnering deal. Its exclusive global license agreement to develop, manufacture and commercialize Coley Pharmaceutical Group, Inc.'s ProMune (CPG 7909) for the treatment of non-small cell lung cancer involves an initial payment of $50 million, with the potential for up to $455 million in additional milestone payments, plus royalties.

... as does M&A

"There is a very clear indication that M&As are also becoming a more attractive option for biotech companies to help drive their product development programs and ultimately increase shareholder value," said Burrill. "Now that the IPO window is essentially closed for biotechs, I would expect to see 'deal making' become a preferred option for them during the rest of 2005."

M&A transactions of note announced in Q1 05 included:

- - Pfizer plans to acquire San Diego-based Idun Pharmaceuticals Inc., gaining access to their leading intellectual property position in apoptosis.

- - Protein Design Labs, Inc. (PDL) revealed plans to acquire ESP Pharma Inc. for approximately $475 million ($300 million in cash and approximately $175 million in PDL common stock). ESP Pharma was founded in April 2002 around the acquisition of several therapeutics from Wyeth (WYE), including leading product, Cardene(R) IV, an intravenous anti-hypertensive used extensively in cardiac- and neurosurgery.

Also, in the quarter Valeant completed its acquisition of Xcel Pharmaceuticals, following the early termination by the U.S. Federal Trade Commission of the waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976. The acquisition of Xcel is expected to expand the company's business in the US with $60 million in revenues from in-market products. Aphton Corporation (APHT) also completed its acquisition of Igeneon AG, Vienna, Austria. The transaction, Aphton says, is a key component in their strategy to become a global player in the oncology market.

About Burrill & Company

Burrill & Company is a life sciences merchant bank, focused exclusively on companies involved in biotechnology, pharmaceuticals, diagnostics, human healthcare and related medical technologies, wellness and nutraceuticals, agricultural technologies, and industrial biotechnology (biomaterials/bioprocesses).