From most indications, the industry is on the march again after a solid 2003, and the coming year promises even more excitement - which means more competition, especially in key therapeutic areas.
The year, after a lackluster 2002, was marked by consolidation. Witness Biogen Inc.'s merger with IDEC Pharmaceuticals Corp., valued at $13.7 billion when it was disclosed in June; Chiron Corp.'s $880 million purchase of PowderJect Pharmaceuticals plc; and Genzyme Corp.'s acquisition of SangStat Medical Corp. for $600 million.
Also picking up speed were initial public offerings, with a spate of filings, mostly in the second half of the year, and a satisfying round of IPO pricings - which may or may not prove meaningful for the coming year, said Standish Fleming, co-founder of Forward Ventures.
"It's kind of on the knife edge," Fleming told BioWorld Financial Watch. "There's a very good chance we'll see a public market in the new year, following H&Q, but it could go the other way. My guess is, we'll see a nice window."
The annual JPMorgan Healthcare Conference, formerly known as the Hambrecht & Quist (H&Q) conference, is slated for Jan. 12-15 in San Francisco and is widely considered a bellwether for the industry.
One indicator of a loosening public market is a movement toward increased buyouts of biotechnology companies by pharmaceutical firms, Fleming noted. As historical examples, he cited the $650 million acquisition by Pharmacia & Upjohn (now Pharmacia) of Sugen Inc. in June 1999 and DuPont Pharmaceuticals' purchase of CombiChem Inc. for $95 million later the same year.
"The needle's not off the scale by any means, but in the last 12 months - this is a gut feel - my opinion is that there's been a pickup in pharma acquisitions."
Fleming once served as acting president for CombiChem and has occupied the same role with Triangle Pharmaceuticals Inc., Actigen Inc. and Genquest Inc. The latter two companies now are both part of Corixa Corp. Triangle merged with Gilead Sciences Inc. at the start of 2003 in a $464 million deal.
Whether the buyout is done by a pharma company or a biotech firm doesn't matter much in terms of its meaning for the public markets, Fleming said.
"The pharma guys have to do what they have to do, and I certainly understand the logic," he said. "Mergers and acquisitions represent change, and the venture industry thrives on change. When we see the big biotech guys moving in to fill those spaces, that's positive for us as well."
Activity in both realms has been reason for cautious optimism, he added.
"In the case of Pfizer/Esperion, a lot of people are saying Pfizer is protecting its franchise, so that may be a unique situation," Fleming said. Pfizer Inc. disclosed in December plans to buy Esperion Therapeutics Inc. - with its lineup of cholesterol drugs - for $1.3 billion.
Lively Year Could Stress Thin-Pipeline Firms
Venture investors and pharmaceutical companies "have similar tastes" in biotechnology companies, Fleming said. "We just about have to. Venture investors can't afford to get too far afield, because pharma is a major liquidity source."
Forward Ventures has invested in 46 companies since it was founded in 1993, and has $440 million in capital under management. The most recent fund, Forward IV, closed in April 2001 and totaled $256 million. One of the firms in Forward's portfolio, CancerVax Corp., priced its IPO this fall, raising $72 million.
"When we're making our investments, we're generally three to five years away from the public markets," Fleming said. "We track it with kind of a weather eye."
Naturally, it's more often the big biotechnology firms that make acquisitions - and those firms are largely the focus of a report by Henry Dummett, research analyst with London-based World Markets Research Centre.
Titled "Biological Warfare: Competition Will Bite for Big Biotech," the report predicts "top-end biotechs will increasingly resemble big pharma in their behavior" during 2004, with "increased financial clout and pipeline gaps [causing] greater urgency for consolidation."
Dummett allowed that "productivity in the sector as a whole is not in question, but that of several major biotechs may be so as they combat fallow periods in terms of new FDA approvals." Companies in such a predicament, he said, include Chiron, Gilead and MedImmune Inc.
"Biogen, for all its strengths, remains overwhelmingly reliant on its multiple sclerosis therapy Avonex (interferon beta 1-a)," the report notes, calling the firm "short on alternative growth drivers," thanks partly to a "muted response by purchasers and reimbursers to the psoriasis drug Amevive (alefacept)."
Other important approvals for certain companies are due in 2004, though. Among them: Erbitux (cetuximab), the drug for metastatic colorectal cancer from ImClone Systems Inc. and Bristol-Myers Squibb Co.; cinacalcet, for secondary hyperthyroidism from Amgen Inc. (in-licensed from NPS Pharmaceuticals Inc.); Avastin (bevacizumab) for front-line colorectal cancer from Genentech Inc.; Estorra (eszopiclone) for transient and chronic insomnia, from Sepracor Inc.; and the antisense drug Genasense (oblimersen sodium) plus dacabazine from Genta Inc. and Aventis SA.
"Ironically, the very productivity that is driving growth across the biotech sector as a whole will exacerbate the vulnerability in many company portfolios in 2004," Dummett predicted in his report.
Defense Spending Eases SBIR Rule Problems
Still, venture investors seek to keep the ball rolling, Fleming said, even if their willingness is largely dependent on what happens with the bigger public firms.
"The action in the private markets is in the funding from preclinical into the clinic, Phase I or preferably Phase II data, or anything from there on," he said. "If the public markets remain closed, you'll see the focus continue to go later and later. Investors will want to see Phase II or Phase III data before they will write a check."
What about new companies with potentially fat pipelines down the road? Start-ups, typically of interest to venture capitalists, have not been abundant in 2003, but those keeping afloat have weathered a difficult year fairly well, Fleming said, thanks in part to funding from the government for biological defense.
"One of the nice things about those [grants] is they tend not to be correlated with pharma or even the markets," he said. "It's also been very important in filling the space left by the SBIR confusion."
He referred to Small Business Innovation Research grants. SBIR and Small Business Technology Transfer programs award grants to companies that meet two main conditions: They must list fewer than 500 employees and they must be at least 51 percent owned and controlled by one or more individuals (in other words, be "independently operated").
If a subsidiary of a large company applies for an SBIR, even a subsidiary with fewer than 500 employees, it is disqualified because of ownership by a "non-individual," - that is, by the parent firm. Ditto if the small company applying for the SBIR is more than half-owned by a venture capital firm, as often is the case. For early stage biotechnology, the trouble is due to a new and more careful enforcement of a long-standing rule. (See BioWorld Financial Watch, Aug. 18, 2003.)
Politicians and lobbying groups are working on the situation, "but it's still a problem, still plaguing companies," Fleming said. "It's inflicting serious damage."
Meanwhile, the industry overall is "obsessively interested in clinical opportunities, and that means the start-ups [that get venture funding] are going to be in that space," he said.
"The big venture guys spent more time in later financings than in start-ups during the last 12 months, and as long as the [public] window stays closed, that's going to be the case," he added. "In essence, the industry is eating its seed corn, and that can't go on forever."