Biotech takes it on the chin in October

It was a turbulent month as stocks values waxed and waned throughout culminating in a dramatic plunge on the last trading day of October as a report about a drop in consumer spending fueled worries that the economic recovery would not be sustainable, comments Burrill & Co, a San Francisco, USA-based in life sciences oriented merchant banking group. The drop served to erase the previous day's big gains.

Biotech's steady improvement during the third quarter also came to an abrupt stop with the Burrill Biotech Select Index posting a 10% fall in value in October in contrast to the Dow, which finished unchanged and the NASDAQ, which fell 3.6% in value.

Almost all members of the Burrill Biotech Select Index saw a reversal in their share values. Heading the list was Affymetrix, whose shares dropped sharply and closed the month down 40% after it posted disappointing third-quarter results and offered a soft revenue forecast for the fourth quarter. Rival Illumina's shares suffered a similar fate, closing the month down 24% after it reported third-quarter results and 2009 guidance below analyst estimates.

Drug setbacks for Amgen and Biogen

Of the biotech majors, Amgen and Biogen Idec both saw their share values drop 10% and 16%, respectively. Biogen's shares were hit following reports that the number of cases of a rare brain infection in patients taking Biogen's drug Tysabri (natalizumab; The Pharma Letter October 26) is higher than previously reported. European regulators reported 24 cases of so-called progressive multifocal leukoencephalopathy (PML), more than twice the 11 cases Biogen reported in July. Amgen saw its shares drop on news that the Food and Drug Administration had requested additional clinical trials for its drug candidate Prolia (denosumab; TPL October 20) before it will consider approving the drug for the treatment of bone-loss in breast and prostate cancer patients.

"There wasn't a lot to cheer about for biotech companies in October," said Steven Burrill, chief executive of Burrill & Co, adding: "The nervousness about the strength of the economic recovery combined with weaker or average financial results took its toll on biotech's top companies.'

He continued: "However, it wasn't just biotech's elite companies that took a hit. With investors nervous about the economy they have taking profits and cashing in on the excellent gains made by emerging biotech companies and, as a result, the Burrill Biotech Mid-Cap Index fell a whopping 18 percent and Burrill Biotech Small Cap Index was down 15% for the month.'

Drugmakers facing $60 billion rebates over 10 year due to health reform

"There has also been some investor uncertainty over the health care reform debate and this is likely to continue, as the legislators wade through the proposals," commented Mr Burrill. "The drug industry certainly will take a big hit in the House bill, which was released by the Democrats at the end of the month. For elderly people who are eligible for both Medicare and Medicaid, the bill mandates rebates from the drugmakers so that the Medicare system ends up paying less. Those rebates are estimated to cost the industry $60 billion over a decade.

"The bill is in favor of allowing 12 years of data exclusivity for biotech drugs and that is good for our industry," concluded Mr Burrill. "It is clear that there will be plenty of debate in the upcoming month as legislators try and get the healthcare reform bill passed before the end of the year. With 25-50 million Americans added to the health care system, revenues for the healthcare industry should increase...so the bills are a mixed bag for pharma, med devices and biotechs," he said.

IPO watch

In the early part of October, it looked as though the Initial Public Offering (IPO) window was opening a crack as Omeros Corp became the first venture-backed biotech to go public this year. It priced its IPO of 6.82 million shares at $10 each, but then saw its shares drop almost immediately, closing down 13% on its first day of trading (it closed out the month down 44.3%). The company will use the funding to complete its Phase III trials of its lead drug candidate, which is being evaluated for use during arthroscopic surgery to improve postoperative joint function and reduce postoperative pain.

"Omeros' opening and subsequent share price performance underscores the difficulty that will exist for many biotech companies that are not yet profitable and are thinking about raising money in the public markets," noted Mr Burrill. "We are likely to see more than 20 companies add themselves to the IPO runway this quarter with the hope that around the time of the JP Morgan Healthcare Conference in early January 2010 the markets will be receptive enough to invest in new biotech issues. The first biotech IPO movers of the new year will have to perform well if we are to see the IPO window opening."

Durham, North Carolina based Aldagen took its place in the queue of companies hoping to go public in the coming months as the IPO window begins to open. The company, which develops regenerative cell therapies, had initially filed to go public in May of 2008 but withdrew those plans last October when the stock market melted down.

Now that the markets have strengthened, the company hopes to raise an estimated $80.5 million in an IPO to fund a Phase III trial of its most advanced therapy for the treatment of critical limb ischemia, noted Burrill & Co.