Biotech Industry Financing Falters In 1998; Upswing Expected In '99

Burrill & Co. (San Francisco, CA), a private bank focused on life-science companies, announced that the biotechnology industry in the United States raised a total of $4.0 billion in financing during 1998. This is 44% less than the $7.1 billion of financing gathered in 1997.

Initial public offerings (IPOs) for biotech companies, of which 14 were completed, accounted for $371 million in 1998 compared to $709 million (27 IPOs) in 1997. Disclosed figures in upfront and milestone payments for strategic alliances totaled an additional $6.2 billion, a 5% increase from the payments gathered in 1997.

"The capital markets for biotech companies virtually dried up during the last half of 98, with the moneys raised in 1998 approximating only half that raised in 1997," says G. Steven Burrill, CEO of Burrill & Co. "Many companies are quietly waiting out the storm and looking for the upturn in 1999. We exist in a competitive capital marketplace, and the Internet is where the action is today. Biotech's long-term, high-risk, high-reward potential is less exciting to these investors today than it was during the first half of this decade."

Market Capitalization
According to Burrill & Co., the biotech industry lost approximately 40% of its market capitalization during the summer of '98. This market capitalization returned late in the year. At calendar year-end, total industry aggregate market capitalization stood at approximately $150 billion, up from $120 billion a year earlier. In late summer, market capitalization was less than $100 billion.

The top 20 biotech companies accounted for approximately two-thirds of the total biotech industry market capitalization at year-end. On the other end of the spectrum, over two-thirds of the industry's 365 public companies each had market capitalization of less than $100 million.

In 1998, the Food and Drug Administration (FDA) approved 14 biotech drugs, including COR Therapeutics' Integrilin, Immunex's Enbrel, Herceptin from Genentech and most recently Provigil from Cephalon. Although in some cases these approved medicines are addressing blockbuster markets, the sales growth observed to date has been less than the companies and Wall Street expected.

Mergers And Acquisitions
The massive impact from the pharmaceutical industry megamerger trend continues to ripple throughout the biotechnology industry. The most recently announced mergers of Hoechst with Rhone-Poulenc Rorer and Astra with Zeneca, as well as rumors of mergers with other companies, potentially will not only affect healthcare, but also the agbio, animal health, and the chemical industries.

"The merger trend in large pharmaceutical companies keeps decision makers distracted from signing partnering agreements with biotech companies," Burrill says. "However, positive fall out from the merger activity will be the emergence of "spin outs," pieces of the merged companies spun out to form a new generation of entrepreneurial growth companies."

Over the past several years, the number of service-based companies has increased significantly, some of which are earnings based and have high valuations today. Yet, a consolidation trend is also emerging in this sector as potential customers such as large pharmaceutical, agricultural and chemical companies demand added value for each deal they sign and move toward more one-stop shopping for their discovery/development technology needs, according to Burrill & Co.

Agricultural Biology
The agbio sector has also seen rapid consolidation recently, through arrangements such as AgrEvo's acquisition of part of Cargill Hybrid Seeds and Monsanto's purchases of DeKalb Genetics; Delta and Pine Land; and Holden's Foundation Seeds. Through these, the chemical industry is racing to develop second-generation agbio products and move away from traditional chemical-based products.

Many agricultural companies have already added a biotechnology aspect to their portfolios, as the need to add to their pipelines is driving further consolidation. Advancements in genomics, bioinformatics and a better understanding of the plant-cell cycle are all factors that will play a vital role in the development of the new agbio products, according to Burrill & Co.

Biotechnology In 1999
For 1999, Burrill & Co. forecasts that the biotech markets will improve, fueled by a lessening in the Asian economic crisis and an improvement in the world's equity markets. These events will increase interest by the European investment community in equities in general, and biotechnology in specific, adding dramatically to the biotech companies' abilities to assess their capital needs.

Large capitalization biotech stocks have led the recovery to date; smaller capitalization stocks (which have been hurt more) should now recover as more investors return to small capitalization stocks where values are disproportionately low. Product approvals and product market success will drive earnings and company success and the markets will react favorably. Venture capital interest will return as values become more apparent and liquidity re-emerges.

A larger number of product approvals is expected for 1999. These should include Coulter's Bexxar for non-Hodgkin's lymphoma, Centocor's Remicade for rheumatoid arthritis, Biota/Glaxo Wellcome's new agent for influenza called Relenza and Genentech/Alkermes' depot formulation of human growth hormone called Nutropin Depot.

Industry consolidation will continue as biotech-biotech mergers increase; partnering will also take a more prominent role. Large companies will access more innovations from smaller companies. Genomics will continue to drive industry restructuring as the breadth of genomic knowledge, understanding of disease pathways, bioinformatics and more sophisticated tools revolutionize agriculture and human health.

Agbio, animal health and nutraceuticals will increase in importance as the biotech industry expands beyond human healthcare therapeutics and diagnostics. Genetics in the food chain and bioethics will become a bigger issue in 1999 as consumer awareness increases and human cloning experiments continue to push the envelope. Improving the inputs/outputs of agriculture should gather less emotional debates than the "human engineering" dialogue, but both will become bigger issues.

Since the cloning of Dolly, ethical debates among scientists have been ignited regarding the cloning of human embryonic cells. The debate was further fueled this quarter following the announcement of human cell cloning by Korean scientists. There is currently no governing body regulating research of human embryonic cells and it has been suggested that the National Bioethics Advisory Commission provide input on an appropriate regulatory framework.

Burrill & Co. is a private merchant bank focused exclusively on life science companies including biotechnology, pharmaceuticals, agriculture, and related technologies. B&C's business revolves around three core activities: strategic partnering, spin-outs, and venture capital investments. B&C has negotiated and structured more than 15 strategic partnerships with a value in excess of $450 million.

For more information, call 415-743-3160.