Editor

In a time when optimism about the economy almost equals heresy, using phrases like "clouds parting" or "potential upswing" can be dangerous. But anyone seeking signs and wonders that suggest that one of the industry's bleaker stretches is coming to a close can find them. A few of them, anyway.

Here's one: The amount of money raised by biotech firms has surpassed - for the first time this year - levels at this same juncture in 2008. There are broader indicators, too. The Dow Jones Industrial Average posted another gain, rising 4 percent in May. Nasdaq did well, ticking north by 3.3 percent.

Leerink Swann analyst John Sullivan credited "a powerful three-month rally" for the brighter picture, noting in his June 1 research report the best three-month return for the U.S. equity market since 1998. Steven Burrill, CEO of San Francisco-based Burrill & Co., said the battered members of his Burrill Mid-Cap Biotech Index found cause for cheer. It's the guarded kind, though. "I don't think it's yet a trend," said Glen Giovannetti, Ernst & Young's leader of global biotechnology. "Certainly things have stabilized."

Since the start of 2009, all but one of biotech's five giants have suffered. Amgen Inc., of Thousand Oaks, Calif., is down 13.8 percent. For Summit, N.J.-based Celgene Corp., the number is 24 percent. Genzyme Corp., of Cambridge, Mass., has dropped 11 percent, and Foster City, Calif.-based Gilead Sciences Inc. has a minus sign in front of its 16.5 percent figure. Alone in the gainer category is Biogen Idec Inc., of Cambridge, Mass., up 8.6 percent.

But recently Johnson & Johnson's disclosure of a plan to pay $970 million for Cougar Biotechnology Inc. jazzed the sector. New Brunswick, N.J.-based J&J in late May put a 16 percent premium ($43 per share) on the table to get Cougar, of Los Angeles, and its lead compound, the Phase III prostate cancer therapy abiraterone. Cougar also has candidates in the pipeline for breast cancer and multiple myeloma. (See BioWorld Today, May 26, 2009.)

"It was good to see J&J do the deal with Cougar," said Michael Latwis, analyst with Decision Resources. "They've been focusing their [merger and acquisition] dollars outside of pharma, in med-tech and their services groups," and spending on a biotech firm should encourage the sector, though "with J&J, you shouldn't read too much into it."

The acquisition, for sure, was hardly a shocker. J&J has a habit of acquiring successful biotech firms and turning them into productive subsidiaries. The strategy has worked out well with Centocor Inc. (now Centocor Ortho Biotech Inc.), of Horsham, Pa., bought for $4.9 billion, net of cash, in 1999. Ditto the 2002 buyout of HIV-focused Tibotec in Mechelen, Belgium, for about $320 million in cash and debt. There's even a delivery firm in the mix: ALZA Corp., of Mountain View, Calif., taken by J&J in 2001 in a stock-for-stock exchange with a net equity value of $10.5 billion.

Still, J&J's pledge of a handsome premium for Cougar probably did more for the sector upturn than the recent, and closely watched, annual meeting of the American Society of Clinical Oncology. Thick with data, as usual, ASCO offered some interesting-enough findings but nothing that rocked the world. Expectations were similarly mild for the ongoing meeting of the American Diabetes Association. Outperformance of the sector has "stemmed largely from investors' rising expectation of further takeouts among biotech companies," in the view of Sullivan and many others.

Among the juicy takeover candidates is another prostate cancer play: Seattle-based Dendreon Corp., which in April laid to rest doubts about its vaccine Provenge (sipuleucel-T) with news that a confirmatory Phase III trial met its primary endpoint of improving overall survival, though the firm held off providing full data until the American Urological Association's annual meeting two weeks later. Dendreon's results with Provenge helped the company price a public offering that raised $221 million - the second-largest biotech public offering this year, behind Cambridge, Mass.-based Vertex Pharmaceuticals Inc.'s $320 million deal in March. More good news for the sector.

Analysts at Rodman & Renshaw boldly read the tea leaves after the J&J/Cougar deal. In a late-May "biotechnology balance sheet" research report, they predicted that M&A activity will continue over the next month or two, involving "mostly companies under the $2 billion mark, with the majority involving pharma companies (or large biotechs) buying up companies significantly below the sub-billion dollar range. We would not be surprised to see one or two more acquisitions similar to the J&J/Cougar type, where a big player buys a smaller one, usually for access to a single molecule, anytime from now until the end of July."

Maybe so. Giovannetti, though, said uncertainty around valuations will continue to hobble the industry for the near term. "What's an asset worth in this world?" he said. "Anecdotally, we're hearing conversations between companies and bankers, including some talking about potential initial public offerings later this year. I'm glad to hear those conversations are happening," he said, but they are always in the context of a wider economic improvement and usually in the context of good clinical data.

Latwis also was reluctant to herald the dawn of an overall rise for the sector. "The jury's still out on that," he told BioWorld Insight. "Maybe some of the banks have gotten their houses in order," but recovery in the U.S. - where consumers pay a significant portion of medical costs out of pocket - is still "pretty well correlated" with how those consumers feel about the economy. And nobody feels great.

He agreed that M&A is "going to be important for everybody," as smaller biotechs run out of money and big pharmas run out of pipelines. More deals are in the offing that resemble the option exercise by Amgen to get rights to the cardiac muscle drug CK-1827452, triggering a $50 million payment to Cytokinetics Inc., of South San Francisco, along with as much as $600 million in pre-commercial milestone payments. (See BioWorld Today, May 27, 2009.)

"It looked like Cytokinetics was nearing the end of its rope," Latwis said.

The company was. Last fall, Cytokinetics quit internal oncology research and cut 29 percent of its staff, intending to spend more resources on muscle biology work and to three external cancer drugs partnered with London-based GlaxoSmithKline plc - which, a few months later, returned the rights to two of them. That put Cytokinetics' future mainly in muscle biology and CK-1827452.

Other possible hints of recovery in May included the deal between Exelixis Inc., of South San Francisco, and the Paris-based Sanofi-Aventis Group, a licensing and discovery deal for phosphoinositide-3 kinase (PI3K) inhibitors targeting cancer that could mean as much as $1 billion to Exelixis. (See BioWorld Today, May 29, 2009.)

"But the other story in this is the haves and the have-nots," Giovannetti said. Smaller-cap stocks have become micro-cap, where as more mature, profitable companies, along with some perceived to have solid platform technologies, have pulled through and probably always will. "Those companies didn't suffer as big of a downturn," he noted. Hard times and their improvement are "very much in the eye of the beholder," he said. "Where you sit matters."

Measures that suggest a happier trend are driven by those "haves," and such firms are important in carrying forward any recovery that happens. "I'm not discounting that," Giovannetti said. "But about half the industry is still staring at having less than a year of cash remaining. Many only have six months."

At least some of the apparent rally in the sector may be due to companies with products approved overseas benefiting from exchange rates. Measured quarter over quarter against the Euro, British pound and Swiss franc, the dollar has weakened an average of 2.8 percent, 4.9 percent and 1.7 percent respectively as of June 2, Deutsche Bank Securities pointed out in a research bulletin that day. If the dollar stays flat through the end of the quarter, then the averages would rise to 4.5 percent, 7.6 percent and 3.4 percent, although companies with sales outside the U.S. have ways of mitigating the balance-sheet effects of exchange rates.

Whether U.S. firms are doing better or not, it's clear that foreign companies fare much worse, said Christoph Bieri, partner with IMAP, an international advisor for middle-market firms planning mergers and acquisitions. "What we see here is not at all an upswing," he told BioWorld Insight. "There are a lot of opportunities, a lot of companies are trading below cash, [but] we don't see many buyers. That's the problem."

Globally, there was an expectation that well-financed Indian firms would use the economic tough times to build their pipelines, Bieri said. "What we see is the reverse," he said. "We try to talk to some of the largest Indian companies about acquisitions. They're shy of risk as the venture capitalists." Australia, he said, is even worse.

For India, the hesitation "may be part of the learning curve on their behalf. They usually have the cash, and they are owned by one family, even if the rest is floated, and those families generally have other businesses that generate cash." Among companies the size IMAP is concerned with, the UK's ideas about risk are more similar to the U.S.

Gautum Jaggi, senior manager with Ernst & Young and author of the Beyond Borders 2009 report on biotechnology, said the economic world is "maybe not at the beginning of the end [of the crisis], but maybe the end of the beginning. It feels different, in terms of the overall market sentiment a few months ago." The return to normal will come, he said, but it will be a "return to a new normal," a leaner one, he said. "There will need to be a broader recovery, and biotech will lag that rather than lead it."

Meanwhile, as onlookers discuss the culling of the herd in biotech, Darwinian metaphors are everywhere. Jaggi pointed out that evolution itself does not proceed smoothly, but is sometimes redirected by cataclysmic events such as meteors and volcanoes. One such game changer could be health reform, the outcome of which is still unknown.

"People still get sick and, at least for now, there's reimbursement for these drugs," said Jaggi's colleague Giovannetti. He recalled the flight of capital in 1992, when the Clinton administration made known its health plan, which never fully materialized. This time around, "industry's at the table. It's a different environment."

Giovannetti cited another way the evolution model doesn't fit what's happening today: Sometimes in nature, the fitter specimens fail to survive. The match will not be perfect between those companies that deserve to keep going and those that actually do. Whatever the decision in Washington, he said, "it's likely there's going to be a cost to this shakeout" - not only for individual firms but for public health, as innovation that might otherwise have materialized is cut off.

Randy Osborne can be reached at randy.osborne@ahcmedia.com.