Burrill & Co: Biotech recovers in second half of year and is poised to have a strong 2010

This year saw a gradual recovery in the capital markets, and the worst of the global economic dislocation seems to be behind us, according to life sciences merchant bank Burrill & Co.

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SAN FRANCISCO—This year saw a gradual recovery in thecapital markets, and the worst of the global economic dislocation seems to bebehind us, according to life sciences merchant bank Burrill & Co.
From their lows in March 2009, the markets have gained about60 percent. Both the Dow Jones industrial average and the S&P 500 hit13-month closing highs following Thanksgiving, Burrill notes.
"The economic data indicates a stabilization in the laborand housing markets and provides hope that the economy is finally in a recoverymode," says G. Steven Burrill, the firm's CEO.
The public capital markets for biotech recovered as well. Itwas not only the blue chip biotech companies that saw their values increase inthe second half of 2009, with the Burrill Large Cap Biotech index up 20percent, the Burrill Mid-Cap Biotech index up 13 percent, and the BurrillSmall-Cap Biotech index up 10 percent, year-to-date respectively. The companiesthat have survived the 18 months of difficult financial conditions are adaptingwell to the new environment.
Despite the tough economic environment, the biotech industryin the United States is on target to raise $18 billion this year compared toonly $10 billion last year, according to Burrill. Even the IPO window opened acrack with three companies raising a collective $1 billion between them in2009.
"This has encouraged several biotech companies to addthemselves to the IPO runway, and we are likely to see many of these cross thefinish line in early 2010," Burrill notes.
At the beginning of 2009, the industry's market cap stood at$404 billion.With Roche's acquisition of Genentech (valued at $100 billion),the industry's market cap dipped below $300 billion in May, but has sincerebounded to $350 billion (up 16 percent since that low point). Partnering wason a tear through much of the year with the industry raising $30 billion throughpartnerships—a record for the industry. With nearly $50 billion raised, 2009will go down in history as our industry's second largest financing year, albeitduring one of the most difficult financing environments ever.
"The message: when companies have to raise capital,companies do, even when the cost of capital is unfavorable," Burrill says. 
As a prelude to the release of "Biotech 2010-Life Sciences:Adapting for Success," the 24th edition of Burrill's annual report on thebiotechnology industry (February 2010), the firm has provided predictions forwhat lies ahead for biotech in the new global financial environment:
    Financial environment: The worldwide financing environment in 2010 will be more robust but choppy and selective at times. This environment favors risk mitigated companies rather than earlier stage development companies. Capital markets in the United States and globally will continue to strengthen, building on a return of investor confidence that helped create a 50 percent increase in major stock market indices during the second half of 2009 from their lows at the end of March 2009. Much of the global economic recovery has so far been driven by stimulus funding, and as a result, real economic growth will remain uncertain in 2010.
    Biotech and the capital markets: The biotech industry did benefit from the return of investor confidence in the second half of the year. Expect to see biotech's elite companies continue to perform well with their financial returns meeting analysts' expectations. Although the Burrill Biotech Select Index lagged the general markets in 2009, we will see a steady improvement in 2010 and by year-end the index will have outperformed the Dow Jones industrial average and Nasdaq composite index.
    Biotech IPOs: The biotech IPO window will continue to crack open. During the first half of 2010, there will be at least five companies that get their offerings done, particularly after the JP Morgan Healthcare Conference in January. By year-end, we predict that 15 biotech IPOs in the United States will have been completed, but supply will overwhelm demand, and the markets will be very selective.
    Biotech consolidation to continue: The large universe of small public companies and private companies looking for venture capital will still face challenges as they try to find ways to extend their runway and stretch out their remaining funds. Expect to see further consolidation in 2010 although at a slower pace that we saw in 2009.
    Capital: More than $15 billion will be raised by U.S. biotechs, better than 2009; partnering/M&A will again trump financings and in total $35 billion will be raised. The industry's market cap will grow from its present level of $350 billion to $400 billion, despite significant consolidation and attrition as valuation is lost through M&As. There will be significant funding available for public companies through secondary financings, registered direct offerings and PIPEs, especially after they report good news.
    Partnering: To deal with their impending patent cliffs, Big Pharma will continue to keep a robust pace of partnering deals. Both Big Pharma and Big Biotech will continue to compete for companies with advanced product pipelines, as well as important land grabs of technology. There will also be new players competing for technologies—such as major medical devices, instrumentation and healthcare IT companies, and even generics companies will be acquirers. The traditional sector lines of pharma, biotech, devices, diagnostics, healthcare IT, services and generics/biosimilars will blur as we see converging technologies (and companies) responding to new market opportunities that present themselves as we move a system focused on treating sickness to one that seeks to maintain wellness.
    Deal structures will change from the usual model of large upfront and smaller milestone payments towards product partnership across the board, smaller upfronts and shared risk.
    Mergers & acquisitions: Big Pharma consolidation will continue as these companies position themselves for the new market realities and competitive pressures from the generics world. Pharma will also start to adapt from its vertically integrated business model to one that reflects virtual integration. Companies will build dedicated business product units with their own management structures and decision-making processes.
    More spin-outs: Expect also to see more spin-outs and new companies built around technology platforms and product franchises.
    Healthcare reform: Obama's State-of-the-Union address (on Jan. 20) will report on a new healthcare reform bill just passed. The reform will stimulate ways to move the system from one based on cost to one based on value. Providers will look for ways to reduce costs by improving healthcare delivery and rewarding behaviors that promote healthier lifestyles. But most of the impact of this healthcare reform bill will be on reforming the insurance industry and who pays for a largely dysfunctional system. Healthcare reform II will begin immediately, trying to fix what is still a broken system.
    Biosimilars: The growing use of biologics and their high price tag will put pressure on U.S. legislators to establish a pathway to allow the FDA to approve generic versions of biosimilars.
    Regulatory environment: The regulatory world will become more complex as comparative effectiveness research enters the equation (cost/value + utilization/comparative efficacy).
    Increased government involvement: The federal government, through Medicare and Medicaid, will play a greater role in the delivery and reimbursement of healthcare. This trend will create an array of new regulatory and compensatory rules, issues and challenges for healthcare providers.
    Science and technology: We will continue to see companies both large and small build their business models around the technologies that are driving personalized medicine. Targeted therapies will be developed that focus more on subpopulations rather than the traditional one-size fits all model. Expect to see Big Pharma operate more like innovative biotech companies. Stem cells will become increasingly important as tools for technology development, especially in the areas of cancer and regenerative medicine.
    Clean tech will boom: The clean tech boom (biocleantech) in non-food crops will continue in 2010 as major investments in solar power, wind power, and next generation biofuels gets attention.  The market will not only embrace green, but technologies that improve energy efficiency and environmental "friendliness"—less polluting, less consuming.  As a result, clean technology companies will attract financing in record amounts.
    Biofuels: Biomass must be sustainable, affordable, reliable, and available. Significant investments will be made in the development of "cheap sugars" to feed the advanced biofuels industry. The market for the by-products of biofuel production will grow as companies leverage their technologies for more near-term opportunities in renewable chemicals and biopolymers, and a diverse use of their resources.
    Ag/animal health: The ag/animal health sectors will also see an increase in interest and funding, driven by the world food crisis and companies looking to spin their units off as a source for funding.
    Global markets: Global emerging markets, particularly in China, India and Brazil, will grow faster than the United States and Europe. Increasing affluence, a growing middle class, and government policies will make healthcare big business in these countries. The global nature of biotech will put pressure on the United States to maintain its dominance and we will see increasing evidence of other countries/regions taking the lead in some technologies and business sectors.
    Global arbitrage: Global arbitrage will be a major driving force as companies increasingly look beyond their borders to maximize the value of their businesses and access sources of capital that may be unavailable locally.
    Biotech clusters: Will be redefined away from geography focused clusters and be more virtual built around diseases, pathways, markets, and unique industry segments. As such, business models will continue to evolve more virtually.
    The year ahead: Overall, 2010 will be a productive year for the industry as companies learn to adapt to their new environment, Burrill says. The past 12 months has exacted a significant toll on the biotech industry (through bankruptcies, downsizing and cost-cutting) and we have a very different industry today than previously existed. The companies that have survived the difficult financial conditions will have to adapt to this new environment. The main challenges for 2010 for the industry will be healthcare reform, comparative effectiveness, biogenerics/biosimilars, follow-on biologics and reimbursement pressures from government efforts to cut healthcare costs.

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