Burrill expects good year for biotech

The year 2006 will be a good one for biotech, according to San Francisco's bullish biotech maven, Steve Burrill.

Burrill, the CEO of investment bank Burrill & Co, and biotechnology's best-known investor, predicts that biotechnology will continue to fuel a major transformation in healthcare in 2006 -- one that emphasises earlier disease detection, more targeted treatments, and adjunctive support through enhanced nutrition.

He also predicts that in 2006, biotech stocks will continue to outperform the Nasdaq, the Dow Jones Industrial Average and the pharma indices. However macro-markets such as the price of oil, inflation, the war in Iraq, rising interest rates and corporate earnings in the non-biotech sector may retard the biotech sector's growth, taking performance out of the industry's direct control. Overall, the world economy will not be as strong as it should be.

The next year will see a reasonably robust public equity IPO market with more than 30 IPOs in the US and an even larger number internationally, according to Burrill.

The industry will raise more than US$35 billion in 2006 -- $25 billion from the public equity markets capital and $10 billion in partnering.

And 2006 will also see substantially more M&A deals than in 2005, especially among the larger companies. Similarly, there will be more and larger partnering deals with an emphasis on discovery-stage deals.

Approvals for drugs will be tougher to obtain and drug safety issues will be high on the agenda, the trend towards personalised medicine will accelerate and there will be scientific and political progress on stem cells.

2005 predictions

Burrill told last year's annual BIO conference, held in June in Philadelphia, that "the IPO market will be strong in 2005/06. I'm fairly optimistic that the capital markets will improve."

Burrill's prediction that there would be more than 30 US IPOs in 2005 and an even larger number internationally was proven wrong by a prevailing macroeconomic climate which discouraged IPOs. Only 17 biotech IPOs were completed in the US, most at the low end of their pricing ranges, raising $809 million. Europe mirrored the US with 17 biotech IPOs completed.

"Most of our 2005 predictions for the industry's performance in terms of money raised and market performance were accurate, except for our expectation of a better IPO market during the year," said Burrill.

Last year Burrill predicted that the biotech industry would raise more than $20 billion in the US, a figure that was outstripped by more than half.

"Overall, 2005 turned out to be an exceptional year for the biotech industry in terms of financings and partnering, bringing in a record $32 billion for US companies," said Burrill.

The US biotech industry raised more than $17 billion through financings and $15 billion in partnering capital in 2005, smashing the record $10.9 billion raised through partnering in 2004.

However, private investment in public equity (PIPEs) and secondaries remained flat while IPO and debt financings declined. Overall, public financings also remained flat.

The biotech industry's market cap hit an all time high of $488 billion at the end of November 2005, surpassing the previous record of $475 billion reached in the summer of 2000.

While rising interest rates, skyrocketing energy prices and the aftermath of Gulf Coast hurricanes meant that capital markets remained extremely cautious throughout the year, the Burrill Biotech Select Index widely outperformed the Nasdaq and the Dow Jones Industrial -- up 20 per cent, compared with 4 per cent for the Nasdaq and 0.4 per cent for the Dow.

Biotech's 'blue chip' companies, such as Amgen and Genentech, led the way, both hitting the $100 billion market cap.

Another prediction that proved correct for 2005 was that VCs will raise more money for life science ventures, spend more money, and increase their interest in early-stage investments. In 2005, US-based biotech funds raised $7 billion, up from $5 billion in 2004. Life science investments by the VC community also increased from 2004.

Consolidation

But the major story for 2005, according to Burrill, was the improved partnering environment for biotechs with even larger values attributed to earlier-stage compounds (including preclinical). With a prediction that 2005 would see increased big pharma consolidation, increased biotech to big pharma consolidation as well as increased biotech to biotech consolidation, the outcome was "hot, hot, hot", Burrill said.

For example, 2005 saw, in pharma/pharma deals:

• Teva/Ivax $7.4 billion
• Novartis/Hexal $7.3 billion
• Solvay/Fournier $1.7 billion

Big pharma/biotech deals were also impressive:

• Novartis/Chiron $5.1 billion
• Pfizer/Vicuron $1.9 billion
• GSK/ID Biomedical $1.4 billion

And so were the biotech/biotech deals:

• Amgen/Abgenix $2.2 billion
• Shire/TKT $1.6 billion
• OSI/Eyetech $0.9 billion
• Quest/LabOne $0.9 billion
• Genzyme/BoneCare $719 million

In 2005, the pendulum swung from IPOs toward M&A and partnering. "What many of the small, private companies have -- products and innovation -- many big pharmas need," Burrill. "The trend for them has been to move away from their traditional phase II 'partnering entry point' towards discovery-stage deals with rather sizeable total payouts if all milestones are successfully achieved."

Rather than focusing on numerous targets, pharma is narrowly focusing on identifying potential therapeutics to a single target or pathway, said Burrill.

After the Vioxx scare, Chiron's vaccine issues and concern for children's anti-depressants, Burrill predicted that the 2005 regulatory environment would be more challenging. The year 2005 saw a raising of the bar for drug approval with drug safety labelling and warnings from the FDA up 40 per cent from 2004 (29) to 2005 (41).

At BIO2005, Burrill said that "If you want to get [a drug] to market, you had better have a diagnostic test attached to it. Theranostics is the only way you're going to get a drug on the market."

According to Burrill, 2005 was the year that the FDA put personalised medicine on its radar, driving the industry towards the increased use of pharmacogenomics and theranostics (diagnostics attached to therapeutics to identify responding patient populations).

Burrill also told last year's BIO conference that "I think we're going to see dramatic progress on stem cells."

While stem cells dominated both science and the political agenda during 2005, a stem cell bill is currently 'stalled' in the US congress, with official voting on the bill scheduled for sometime in the first half of 2006. While California's $3 billion stem cell bond initiative is tied up in the courts, other US states are racing to join California and develop dedicated funding for stem cell research, according to Burrill.

Another hot issue is reimbursement. Burrill warned BIO2005 delegates that "If you think getting to the market is just the FDA, you better work on your CMS [Centres for Medicare and Medicaid] strategy. The pathway to reimbursement approval is going to be every bit as complex."

In November 2005, the CMS Medicare part D was enacted and is predicted to be the beginning of a government price controls system on the drug industry as a whole.

Burrill predicted that 2005 would see more approval, and use, of generics and the emergence of biopharmaceutical generics. However, debate on the issue continues with leading US biotech company executives believing that it will probably be many more years before 'biosimilars' appear on the market while EU regulatory agencies are predicting they will surface no later than two years from now. This year, Burrill warned again that biogenerics would eventually be a fact of life.

Finally, Burrill predicted an increase growth of biotech internationally, especially in the BRIC countries (Brazil, Russia, India, China), Japan and Scandinavia in 2005. China and India are emerging with the potential to be biotech "powerhouses" in the next five to 10 years, according to Burrill.

"There's no question that we have globalised the industry," said Burrill at BIO2005.