By Jennifer Van Brunt

It's as predictable as rain: With the coming of the new year, analysts and market forecasters get out their crystal balls to peer into the future for the biotechnology industry. And they say that 1999 will be a great year for this battered sector. Let's hope they're right, for the biotech stocks could certainly use a lift.

In fact, they are already starting to rise from the deep. The Nasdaq Biotech Index, for instance, has been gaining since Labor Day, when it hit a low of 268.96. By Dec. 31, 1998, the index had climbed to 437.31, a gain of nearly 63 percent. Since the turn of the year, it has gained another percent or so, hitting a value of 441.84 on Jan. 13, 1999. The BioWorld Stock Indicator, which measures the average percent change in price for the 295 biotech and biotech-related stocks listed on the last two pages of this publication, has also risen since Dec. 31, 1998. On Jan. 13, it was up 7.2 percent. This is a hopeful sign, for last year the average stock lost almost 12 percent in value between Dec. 31, 1997, and Dec. 31, 1998. (See the graphs on p. 4 for details of stock performance in 1998, measured by both methods.)

Public Offerings Perspective

The biggest boost to the biotech sector, of course, will come if the public markets open up once again. Two initial public offering (IPO) hopefuls are betting on it: The first of these, Invitrogen Corp., of Carlsbad, Calif., filed its preliminary prospectus with the Securities and Exchange Commission on Dec. 10, 1998. Invitrogen, which develops, manufactures and sells products and provides services for molecular biology research, is hoping to sell as many as 3 million shares at $15 each. Then, on Jan. 7, Albany Molecular Research Inc. reactivated its IPO prospectus. The Albany, N.Y., company, which offers a broad range of chemistry R&D services to pharmaceutical and biotech companies, had first filed for its IPO in July 1998. By September, however, it had bowed to poor market conditions and postponed the offering. Now, it's back in the game, and plans to raise as much as $42 million through the sale of 2.2 million shares at $17 to $19 each.

On the other hand, Sensus Drug Development Corp., which is developing drugs to treat endocrine and metabolic diseases and disorders, withdrew its IPO prospectus at the end of December. Although the Austin, Texas, company did not cite a reason, it was no doubt the dismal environment surrounding the majority of biotech stocks.

The past year was not without its biotech IPOs, however. In 1998, 22 biotech and biotech-related companies came public, grossing about $622 million. In 1997, surprisingly, the record was not that much better: 24 companies completed IPOs, grossing a total of $781 million in the process. The banner year was 1996, when 50 biotech and biotech-related firms raised a total of $1.6 billion in IPOs.

Of the 22 members of the class of 1998, 11 made their public debuts outside the U.S. In December, Antisoma plc, located in London, completed an IPO on the Easdaq Pan-European exchange. The company raised $16.8 million in the process to spur its development programs in tumor-targeting cancer therapies.

Other 1998 IPOs that occurred in Europe or Canada include: Sunnyvale, Calif.-based Centaur Pharmaceuticals Inc.'s October IPO in Switzerland; Leiden, the Netherlands-based Pharming Group NV's July IPO on Easdaq; London, Ontario-based Procyon BioPharma Inc.'s July IPO in Canada; Paris-based Chemunex SA's June IPO on Paris' Le Nouveau Marche; Stockholm-based Karo Bio AB's April IPO in Sweden; Abingdon, U.K.-based Oxford GlycoSciences plc's April IPO in London; Abingdon, U.K.-based Oxford Asymmetry International plc's March IPO in London; Strasbourg, France-based Transgene SA's March IPO in Paris; Paris-based Cerep SA's February IPO in Paris; and Cambridge, U.K.-based Quadrant Healthcare plc's IPO in February in London.

In contrast, only two of biotech's 1997 IPOs took place on non-U.S. exchanges. These included Melbourn, U.K.-based Cambridge Antibody Technology Group plc's March 1997 IPO in London and Vancouver, British Columbia-based Angiotech Pharmaceuticals Inc.'s December IPO on the Toronto Stock Exchange.

In the U.S., another two companies started trading on Nasdaq by alternate means. Cell Pathways Inc., based in Horsham, Pa., came public through a reverse-merger with Tseng Labs Inc. Also in November, Genzyme Corp., of Cambridge, Mass., distributed the tracking stock of its Genzyme Molecular Oncology cancer division to its shareholders, at which time the stock started trading on Nasdaq.

This does not necessarily imply that the markets are more receptive to biotech stock offerings outside the U.S., either, for companies in the U.K. and on the Continent also have experienced a troubled financing environment over the last year or so. It does, however, reinforce the fact that the U.S. markets have been colder than usual this year — especially when you add in the 10 or so companies that had to withdraw their prospectuses or at least postpone their IPOs because the climate was so chilly.

Follow-on stock offerings in 1998 were even rarer than initial stock offerings. All told, only nine follow-on offerings were completed last year, which together raised about $403 million in gross proceeds. The latest, completed in mid-December, was by Salt Lake City-based Anesta Corp. The company raised $59.5 million through the sale of 2.8 million shares at $21.25 each. That had been the first follow-on offering since July. In fact, there were no follow-on or initial public offerings at all in the months of August, September and November 1998. In 1997 and 1996, on the other hand, companies raised considerable amounts of cash through follow-on stock offerings. In 1997, 35 follow-on offerings reaped close to $1.6 billion in gross proceeds. In 1996, 66 follow-on offerings garnered almost $2.9 billion in gross proceeds.

Other Sources Of Funds

Although biotech companies found the public markets less than receptive to their needs, they did manage to round up considerable amounts of cash from other sources. In 1998, public biotechs raised more than $3 billion from private placements, rights offerings, loans, debt offerings, exercises of warrants and PIPE financings. This is significantly more than the $2.2 billion they raised from these sources in 1997. (See the chart on p. 2 for totals of the money raised by biotech firms in 1998, by month and type of financing.)

Due to the harsh financing environment, however, many biotechs had to continue to scramble for money throughout the year, resulting in multiple small deals (on the order of several million dollars or less for each).

As well, big pharma partners provided substantial sustenance to the biotech sector in 1998. A total of 224 new pharmaceutical R&D-based collaborations were signed in 1998. Together, these had a precommercialization value of almost $3.8 billion, not much less than the money that public biotechs raised from public offerings and other sources of financing. On top of that, biotechs received about $260 million in milestone payments and equity investments from ongoing collaborations with the big pharma partners. (See the Jan. 4, 1999, and Jan. 11, 1999, issues of BioWorld Financial Watch for details regarding biotech-big pharma collaborations in 1998.)

Biotech Bargains

All in all, 1998 wasn't a bad year for biotech financing — but then again, it wasn't great either. Companies managed to raise about $5.4 billion from all sources (excluding revenues, both actual and promised, from new big pharma collaborations). This compares favorably with 1997, when companies garnered about $5.5 billion, but very poorly when compared with the banner year of 1996, when biotech and biotech-related companies reaped $7.8 billion from those same sources.

With financing coming in at the low end for two years running, however, it's not surprising that the sector is in dire straits. Midst reflections on the plight of the biotech group in 1998 — when all but the large-cap stocks sank to dismal levels despite significant scientific achievements and a record-breaking year for new product approvals — comes the realization that there are bargains aplenty. Woefully undervalued stocks are ripe for the picking, and in fact, many are trading at such low levels that they have dropped off Nasdaq because they can't meet minimal listing requirements. A substantial number of the companies whose stocks are dragging bottom are actually poised for scientific or regulatory breakthroughs this year — if they can garner enough cash to keep the business running. Others are prime acquisition candidates. If the crystal ball gazers are correct, the merger and acquisition activities that came to the fore in the second half of 1998 will only become more prominent as the sector undergoes a broad consolidation. *

Holiday Notice

BioWorld Financial Watch's offices are closed today in observance of Martin Luther King Jr. Day in the U.S.