By Jennifer Van Brunt
The new year is a time of promise and hope — and for the companies comprising the beleaguered biotechnology sector, it couldn't have come a minute too soon. For January has traditionally been a good month for small-capitalization stocks across all industries and, more often than not, for biotechs as well. In addition, biotech and healthcare companies can look forward to increased exposure and media attention during the annual Hambrecht & Quist Healthcare conference, which starts today in San Francisco.
There are already signs that the biotech sector is mending. The Nasdaq Biotech Index, for instance, has been rising steadily 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. The Nasdaq Biotech Index, which is market-valued weighted, comprises 142 biotech stocks that are listed on Nasdaq. The companies must have a minimum market cap of $50 million to be included on the list.
Much of the credit for this recovery is due to the impressive performance of the large-capitalization biotech stocks. For instance, Amgen Inc.'s stock (NASDAQ:AMGN) gained 93 percent in value between 12/31/97 and 12/31/98, Immunex Corp. (NASDAQ:IMNX) rose by 133 percent, Biogen Inc. (NASDAQ:BGEN) soared 128 percent and Agouron Pharmaceuticals Inc.'s stock (NASDAQ:AGPH) gained 100 percent in value.
But while these companies — all of which have products on the market — did well in 1998, the vast majority of the biotech stocks fared poorly. In fact, the average percent change in value over calendar year 1998 for the 295 biotech and biotech-related stocks listed on the last two pages of this publication was almost 12 percent. With the traditional capital markets virtually closed to biotechs, many companies have turned to private placements of stock to raise enough cash to keep business running and product development on schedule. In fact, the money raised by public biotechs from alternate sources of financing has compensated almost entirely for the lack of cash from traditional public offerings. While biotech firms raised just slightly more than $1 billion from the public markets in 1998, they raised just over $3 billion by alternate means (which include not only private placements, but also exercises of warrants, debt offerings, loans and other types of financing). In 1997, which was a far better year for stock offerings, biotechs raised about $2.3 billion from initial and follow-on offerings and $2.1 billion from other sources. The totals, year to year, are almost the same; the balance is different.
But not all biotech companies have been so fortunate. Many have watched their limited financial resources dwindle to the point where they can no longer meet the listing requirements on the Nasdaq National Market. Some have opted to resolve this situation by merging with or being acquired by another company with deeper pockets. A few have even chosen bankruptcy, a rare event in the biotech world.
But for many, the saving grace has come from the partnerships they have negotiated with the major pharmaceutical houses. For through those deals, when structured appropriately, biotech companies are assured of enough money to support at least some of their research projects. They might also have received hard cash up front or an equity investment from the big pharma partner.
Unlike financing from all other sources, however, the money coming to biotech companies from their big pharma partners is harder to quantify. While the up-front cash payments, equity investments or licensing fees are "hard" numbers, the remainder of the monetary value of these alliances is tied to goals and thus intangible. While one single collaboration could be worth as much as $200 million in precommercialization payments to the biotech partner, for instance, that total will only be reached if all milestones are met on schedule and to the big pharma's satisfaction. At some point, the big pharma company may decide to restructure its research priorities — to the exclusion of its ongoing biotech alliances. Or, a product in the clinic could fall far short of expectations, thus negating the whole point of the collaboration. There are a number of other conditions that could also prevail to change the original terms or scope of the agreement.
Still, if one looks at the total announced, precommercialization value of these collaborations to biotech companies, it's easy to see that they represent a substantial source of financing for the biotech industry. In fact, the major pharmaceutical houses have demonstrated unflagging support for biotech companies and their technologies for at least the last five years.
In 1998, there was a total of 224 new, pharmaceutical R&D-based agreements signed between biotechs and big pharmas. (The collaborations focused on agbiotech are not included in this sum.) Together, these had a precommercialization value of almost $3.8 billion — not so different from the $4 billion that public biotech companies raised from other sources in 1998, as cited above.
Although the amounts attributed to big pharma alliances may reflect best-case scenarios, they also only represent about half the new deals. The other half of the new deals never disclose the financial details of their transactions. (For a chart detailing the new biotech-big pharma collaborations for the fourth quarter of 1998 [through Dec. 24], see the Jan. 4, 1999, issue of BioWorld Financial Watch.)
Renewals, Marketing Deals
These numbers also don't include the large number of ongoing collaborations that were modified in some way during the course of the year. Most modified alliances were either expanded in scope — to include more targets — or renewed for another year or two — some for the second, third or even fourth time. In all, 80 alliances fit this category in 1998, up from 69 in 1997.
But there are always a few collaborations that come to an end for one reason or another. In 1998, 24 deals were terminated. This compares to 26 in 1997. But year after year, the attrition rate remains fairly constant, at 10 to 11 percent. (See the chart on p. 3 for details of the modified and terminated collaborations for the fourth quarter of 1998.)
And, as biotech companies and their products mature, many more are forging marketing, sales and distribution or manufacturing agreements. In 1998, biotech companies signed a total of 104 agreements in this broad category, as compared to 83 in 1997. Not all the deals center on the biotech product, however, as some firms are gaining co- or exclusive marketing rights to a traditional pharmaceutical product. (See the chart on p. 8 for details of the marketing and manufacturing collaborations for the fourth quarter of 1998).
The landscape for biotech-big pharma alliances continues to evolve, however, and there may be some big changes coming in 1999. For one thing, the merger activity in the traditional pharmaceutical industry shows no sign of abating. As those huge companies undergo restructuring, their priorities will change — including alliances with biotech companies. Also, it's becoming apparent that many big pharmas are looking for alliances with biotech firms that can offer them a range of discovery and development technologies and services under one corporate umbrella. If so, then many of the small, sharply focused biotech companies could find themselves coming up short in the partnering game — and in search of a new sort of shelter. *