Financing in 2003 got off to a painfully slow start – and given the fact that the biotech sector had already suffered through two miserable years of tight money, the future looked bleak. But, thanks to a stunning series of product developments – especially Genentech’s demonstration that anti-angiogenesis therapy can and does provide a clinical benefit in colorectal cancer patients – coupled with clear evidence that FDA Commissioner Mark McClellan is making good on his pledge to speed up the drug-approval process -- investors returned to biotech with great enthusiasm, making 2003 a banner year.
Despite its inauspicious beginnings, 2003 turned out to be a great year for the biotech sector. In fact, it was the industry’s second-best financing year in history – and a remarkable turnaround.
Biotech companies in the U.S. and abroad raised more than $16.7 billion in 2003 (not counting revenues and payments coming from corporate collaborations). That’s up 53 percent from the $10.9 billion raised in 2002 and about 14 percent more than the $14.7 billion raised in 2001. Of course, it’s only about half of what the sector raised in 2000 during the genomics bubble, but 2003’s haul is still impressive – and should be enough to keep most firms afloat.
And if we add in the venture money raised by privately held specialty pharmas ($668 million) and funds garnered by already-public specialty pharmas ($104 million) -- both of which we tracked separately in 2003 -- the year’s total comes to nearly $17.5 billion.
It was about time for a windfall, too: Coming off a two-year bear market, biotech firms were in dire need of cash. By the end of 2002, eight public companies and two private firms had filed for bankruptcy protection or liquidation and another five found themselves in serious danger. Moreover, the stocks were so beaten down in 2002 that 37 companies received noncompliance warnings and/or delisting notices from the Nasdaq Stock Market or the American Stock Exchange. Scrambling to conserve what little cash they still had, 68 firms initiated restructuring moves – and a few had to make those always painful cuts in research programs and personnel more than once over the course of the year.
The first quarter of 2003 wasn’t any better, either – in fact, the sector raised less money then than it had in the fourth quarter of 2002. The investing environment was downright gloomy – in large part due to the Iraqi war coupled with a very questionable outlook for the recovery of the U.S. economy. At the end of March 2003, the biotech stocks as a group were still hurting: The average stock was trading 46 percent below its year-ago price – although select stocks had already started to reclaim lost territory.
Two months later, the scenario was completely different. It became quite clear that recovery was underway – in fact, the stocks took off like a rocket in mid-April, and extended their gains right through late September. For the first time in years, the average biotech stock was trading above its year-ago price and money from newly confident investors started flowing into the sector again.
Some of this can certainly be attributed to a rosier outlook for the U.S. economy, but there were more important factors at work. May was filled with stunning news on the product-development front – especially Genentech Inc.’s revelation that its cancer therapy Avastin, which is designed to cut off the blood supply to tumors, performed remarkably well in a Phase III trial in patients with metastatic colorectal cancer. These results were all the more dramatic because they were totally unexpected: Avastin had previously failed to work in patients with metastatic breast cancer. Plus, the colorectal cancer trials provided the first solid clinical evidence that anti-angiogenesis therapy – long one of biotech’s many Holy Grails – actually provides a clinical benefit. Genentech’s announcement electrified the biotech community – and its investors.
There was more encouraging product news in May, too – all pointing to the fact that FDA Commissioner Mark McClellan was making good on his promise to speed the pace of drug approvals and facilitate the introduction of new therapies that address unmet medical needs and treat serious or life-threatening conditions. Millennium Pharmaceuticals Inc., for instance, won coveted FDA approval for the first anti-cancer drug that interferes with the activity of a housekeeping enzyme complex (proteasome) that’s present in all cells. Importantly, Millennium’s Velcade flew through the FDA review process: The product was approved in four months (two months ahead of schedule) based on Phase II clinical trial data.
Moreover, The FDA approved AstraZeneca plc’s Iressa -- the first small molecule inhibitor of a receptor involved in signaling pathways critical for tumor growth – based on Phase II data, too. It also gave its stamp of approval to Aldurazyme, the first drug for patients with the rare disease mucopolysaccharidosis I, developed by BioMarin Pharmaceutical Inc. and Genzyme Corp. What a month.
June held its share of upbeat events, too. During the month, the FDA finally approved Corixa Corp. and GlaxoSmithKline plc’s non-Hodgkins lymphoma drug Bexxar and MedImmune Inc.’s intranasal flu vaccine FluMist. As well, the agency gave its nod to Xolair, the antibody-based therapy for asthma developed by Genentech, Novartis Pharmaceuticals Corp. and Tanox Inc. And in early July, Gilead Sciences Inc.’s HIV drug Emtriva joined the ranks of approved biotech therapies. The FDA was on a roll.
Needless to say, investors were beside themselves with glee – and they began pumping money into biotech firms. Companies raised almost as much cash in June 2003 as they had for the preceding five months combined.
Convertible Debt Financings 2Q 2003
|
Company
|
Money Raised
(including overallotment, if applicable)
(Date)
|
Term
|
Conversion Price/Share
|
Annual Interest Rate
|
|
Amylin Pharmaceuticals
|
$175M
(6/03)
|
5 year
|
$32.55
|
2.25%
|
|
BioMarin Pharmaceutical
|
$125M
(6/03)
|
5 year
|
$14.01
|
3.50%
|
|
Celgene
|
$400M
(5/03)
|
5 year
|
$48.45
|
1.75%
|
|
Cell Therapeutics
|
$75M
(6/03)
|
7 year
|
$13.50
|
4.00%
|
|
Cephalon
|
$750M
(6/03)
|
1) $375M, 30 year (putable 6/08)
2) $375M, 30 year (putable 6/10)
|
1) $59.50
2) $56.50
|
0%
|
|
Connetics
|
$90M
(5/03)
|
5 year
|
$21.41
|
2.25%
|
|
Corixa
|
$100M
(6/03)
|
5 year
|
$9.175
|
4.25%
|
|
CV Therapeutics
|
$100M
(6/03)
|
20 year
|
$47.58
|
2.00%
|
|
DURECT
|
$60M
(6/03)
|
5 year
|
$3.15
|
6.25%
|
|
Guilford Pharmaceuticals
|
$69.3M
(6/03)
|
5 year
|
$6.24
|
5.00%
|
|
ICOS
|
$278.7M
(6/03)
|
20 year
|
$61.50
|
2.00%
|
|
Nektar Therapeutics
|
$110M
(6/03)
|
7 year
|
$11.35
|
3.00%
|
|
NPS Pharmaceuticals
|
$192M
(6/03)
|
5 year
|
$36.59
|
3.00%
|
The big winners, though, were the lucky handful that tapped into the red-hot convertible debt market. In May and June, 13 companies garnered more than $2.5 billion through debt financings. They seized the moment, taking advantage of low interest rates and rising stock prices to raise considerable sums of money almost overnight.
Convertible Debt Financings 3Q 2003
|
Company
|
Money Raised
(including overallotment, if applicable)
(Date)
|
Term
|
Conversion Price/Share
|
Annual Interest Rate
|
|
Alkermes
|
$125M
(8/03)
|
20 year
|
$13.85
|
2.50%
|
|
AtheroGenics
|
$100M
(8/03)
|
5 year
|
$15.34
|
4.50%
|
|
Chiron
|
$500M
(7/03)
|
30 year
|
$68.44
|
1.625%
|
|
Ciphergen Biosystems
|
$30M
(8/03)
|
5 year
|
$9.19
|
4.50%
|
|
Indevus Pharmaceuticals
|
$72M
(7/03)
|
5 year
|
$6.66
|
6.25%
|
|
Invitrogen
|
$350M
(7/03)
|
20 year
|
$68.24
|
2.00%
|
|
Medarex
|
$125M
(7/03)
|
7 year
|
$6.72
|
4.25%
|
|
MedImmune
|
$500M
(7/03)
|
20 year
|
$68.18
|
1.00%
|
|
OSI Pharmaceuticals
|
$135M
(9/03)
|
20 year
|
$50.02
|
3.25%
|
|
Protein Design Labs
|
$250M
(7/03)
|
20 year
|
$20.14
|
2.75%
|
|
QLT
|
US$172.5M
(8/03)
|
20 year
|
US$17.80
|
3.00%
|
|
Quintiles Transnational
|
$450M
(9/03)
|
10 year
|
N/A
|
10.00%
|
|
Serologicals
|
$130M
(8/03)
|
30 year
|
$14.79
|
4.75%
|
But even after that spree, the funds that specialize in this type of financing still had plenty of money to spend: In the third quarter, 13 more biotech firms raised an additional $2.9 billion through debt financing.
Convertible Debt Financings 4Q 2003
|
Company
|
Money Raised
(including overallotment, if applicable)
(Date)
|
Term
|
Conversion Price/Share
|
Annual Interest Rate
|
|
Affymetrix
|
$100M
(12/03)
|
30 year
|
$31.01
|
0.75%
|
|
Genzyme
|
$690M
(12/03)
|
20 year
|
$71.24
|
1.25%
|
|
Sepracor
|
$600M
(12/03)
|
5 year; 8 year
|
$31.89;
$29.84
|
0%
|
By the time the fourth quarter was upon us, however, the convert market had apparently had enough of biotech. But not quite, for three more biotechs pulled off debt financings in December, hauling in an additional $1.4 billion.
All told, 29 biotech companies managed to amass more than $6.8 billion in debt during 2003. These financings accounted for about 41 percent of all the money raised by biotech companies from all sources (save corporate partners) in 2003. It’s a huge chunk of change – and a big burden to carry, but as long as their stock prices keep rising over the long haul, those firms should theoretically be in good shape.
Unfortunately, biotech stock prices did not maintain their ascent through the end of 2003. They peaked in late September and then established a plateau for the remainder of the year. But at least they didn’t plummet back to earth.
Rising stock prices for much of the year made it easier for already-public biotechs to raise money in follow-on offerings, too, which they did with a vengeance. For the year, biotechs raised $3.4 billion through 43 individual follow-on offerings. Importantly, 37 percent of the entire year’s haul was raised in the fourth quarter, when the stocks as a group had already leveled off. Investors in general may have been exercising a renewed sense of caution in late 2003, but they clearly were more than willing to line the coffers of established biotech firms with compelling product stories.
Shelf Registrations 4Q 2003
|
Company
|
Number Of Shares Or Total $ Value (Date Filed)
|
|
Alexion Pharmaceuticals
|
$150M (common stock, preferred stock, debt securities and warrants)
(11/03)
|
|
Amylin Pharmaceuticals
|
$300M (common stock, preferred stock, depositary shares, stock purchase
contracts, stock purchase units, debt securities and warrants) (12/03)
|
|
Aphton
|
$100M (common stock) (12/03)
|
|
ARIAD Pharmaceuticals
|
7M shares common stock (12/03)
|
|
ArQule
|
$50M (common stock, preferred stock and warrants) (12/03)
|
|
Avant Immunotherapeutics
|
15M shares common stock and warrants to buy 2.25M shares common stock
(10/03)
|
|
BioCryst Pharmaceuticals
|
$60M (common stock) (12/03)
|
|
Cel-Sci
|
$50M (common stock) (12/03)
|
|
Curis
|
$40M (common stock, preferred stock and warrants) (12/03)
|
|
CV Therapeutics
|
$252.5M (common stock, preferred stock, debt securities and warrants)
(10/03)
|
|
Cypress Bioscience
|
$60M (common stock) (10/03)
|
|
Cytogen
|
$60M (common stock) (10/03)
|
|
Dendreon
|
$125M (common stock) (10/03)
|
|
Discovery Laboratories
|
6.5M shares common stock (12/03)
|
|
Gilead Sciences
|
$500M (common stock, preferred stock, debt securities and warrants)
(12/03)
|
|
GTC Biotherapeutics
|
$40M (common stock) (12/03)
|
|
Kos Pharmaceuticals
|
$200M (common stock, preferred stock and warrants) (10/03)
|
|
Maxim Pharmaceuticals
|
$75M (common stock, preferred stock, stock purchase contracts, stock
purchase units, depositary shares and warrants) (12/03)
|
|
Nastech Pharmaceutical
|
$30M (common stock and warrants) (12/03)
|
|
NeoPharm
|
$125M (common stock and preferred stock) (10/03)
|
|
Onyx Pharmaceuticals
|
$150M (common stock) (12/03)
|
|
OXiGENE
|
$50M (common stock, debt securities and warrants) (10/03)
|
|
Peregrine Pharmaceuticals
|
12M shares common stock (10/03)
|
|
Pharmos
|
$50M (common stock, preferred stock, debt securities and warrants)
(11/03)
|
|
Seattle Genetics
|
$75M (common stock) (12/03)
|
|
Vasogen
|
$100M (common stock) (10/03)
|
Public biotech firms are betting heavily on this attitude in the months to come, too: In the fourth quarter of 2003 – and especially in December – 26 separate companies filed shelf registration statements, a now-proven strategy for opportunistic fund-raising efforts. If all these deals come to fruition, they will generate a minimum of $2.6 billion in new financing in 2004.
While investors readily backed follow-on offerings, they exercised considerable restraint when it came to 2003’s IPOs. Even as biotech stock prices were leveling off, eight firms managed to squeeze through the financing window and complete their initial public offerings in the U.S. Two more made their public debuts abroad – Alchemia Ltd. in Australia and OncoTherapy Science Inc. in Japan, bringing the IPO total to $605 million. (For details of 2003’s public offerings – initial and follow-on, as well as postponements and withdrawals – see the Signals article, “Eye On Wall Street.”)
Following the November 5 IPOs by NitroMed Inc. and Pharmion Corp., however, the U.S. markets cooled off, forcing three IPO-hopefuls – Acorda Therapeutics Inc., Tercica Inc. and TolerRx Inc. – to postpone their offerings, and two more – Aderis Pharmaceuticals Inc. and ViaCell Inc. – to withdraw entirely.
It’s probably just as well, for the after-market performance of the IPOs that did price in the fall has been lackluster, at best – with the exception of Canadian firm Neurochem Inc., which was already public in its home territory before it debuted on Nasdaq. Neurochem’s stock gained 117 percent by the end of 2003. None of the others even came close. Only three firms – Pharmion, Genitope Corp. and Myogen Inc. – closed out the year above their IPO prices (gains of nine percent, two percent and two percent, respectively). The others ended up in negative territory – with the biggest loser being Acusphere Inc., whose stock dropped 37 percent from its IPO price.
This is not good news for the 13 companies that are queued up to go public in 2004. But then, the Nasdaq Composite Index has continued to reach new heights in the early days of the New Year, and if investors remain upbeat they may warm up to a new crop of biotech IPOs in the coming months.
Despite the hitch in the IPO market, public financing overall was vastly superior to the levels reached in 2002 – initial and follow-on offerings accounted for 24 percent of the $16.7 billion raised in 2003, a 276 percent increase over 2002’s levels. Plus, private financings of public companies reached almost $9.6 billion, a 51 percent jump from the previous year. However, as we’ve noted, the bulk of that money (72 percent) came from debt financing.
The only financing category that fell short in 2003 was venture capital, which was 10 percent lower than it had been in 2002. This drop in venture funding of biotech companies mirrors the slowdown observed across all sectors, but it’s not as severe: According to VentureWire, U.S. venture investing in 2003 totaled $15.3 billion, down about 26 percent from 2002 and the lowest level since 1998.
But there’s a good chance that VCs will loosen their purse strings in the coming year. Domain Associates, for instance, just closed it sixth fund at $500 million. According to general partner Arthur Klausner, this newest fund “was the smoothest to raise of any of Domain’s funds.” Domain VI’s limited partners, which included current investors as well as new ones, “are doing more due diligence than before,” he explained. As well, many of them are “underalloted in healthcare and they want to increase their exposure to the sector.” Their philosophy is “to invest more money in a smaller number of funds” than previously.
Domain Associates is likewise being selective about where it puts its money. “We do much less investing in discovery-stage companies than we used to,” Klausner explained. Today, “we invest about 50 percent in drug companies and 30 percent in devices.” And some of those drug companies are self-proclaimed specialty pharmas – including Somaxon Pharmaceuticals Inc., a San Diego-based start-up that’s focused on the acquisition, development, and marketing of products to treat psychiatric and related conditions, including a drug for treating insomnia. (For more on specialty pharmas, see the Signals article, “Specialty Pharmas Reduce The Risk.”)
According to Jonathan MacQuitty, managing director of Abingworth Management Ltd., the various venture funds are much larger in size today than they used to be. As well, the average size of a venture round is going up, “but the money is going into a smaller number of companies,” he said. “There’s a huge flight to quality.”
And that flight to quality may prevail across the board in the coming year. But will overall financing in 2004 break the record? Well, it probably won’t reach the $31.4 billion raised by the biotech sector in 2000 – nor may we ever see that level again. Investors are still recovering from the excesses of the genomics bubble (and the dot com frenzy before it) and the lessons they learned remain fresh.
That a financing window opened at all in 2003 is somewhat of a miracle, given the fact that the biotech sector’s financing droughts have historically stretched for 12-13 quarters, while the financing sprees in between have lasted 4-5 quarters. Contrarily, the most recent drought lasted but four (miserably long) quarters -- from the second quarter of 2002 through the first quarter of 2003 (although the first and third quarters of 2001 were just as dry).
For the last three quarters, though, we’ve been on an upswing. If the historical trends hold, new financing will be plentiful for the current quarter, and perhaps the next – after which the well will start to dry up again. But then, history may not repeat itself this time around.
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