Companies Give Back Q1 Gains - What Could Spark Q3?

by: The Burrill Report

By Marie Daghlian

Financial markets whipsawed life sciences companies in the first half of 2010, driving up impressive gains during a robust first quarter, only to be pulled back to harsh reality during a turbulent second quarter.

Access to capital grew difficult in the public markets during the second quarter as global follow-on offerings fell to $732 million from $1.6 billion in the first quarter. Global PIPEs shrank to $809 million compared to $1 billion first quarter.

Investors seem to be taking a wait and see attitude as they worry about what effect newly passed healthcare reform legislation and recent decisions in Europe to implement drug price reductions will have on companies’ bottom lines.

This risk-aversion is shutting the narrowly open IPO window. After an initial flurry of offerings, including four in April, the life sciences IPO window has effectively closed, as companies wait for more positive market conditions before making a debut. For the companies that have gone public this year, returns have been disappointing, with their average share price trading at 18 percent below the initial offering price for the class of 2010 life sciences IPOs. Of the 12 U.S. life sciences companies that have gone public since January, Ironwood Pharmaceuticals (NASDAQ:IRWD) and DynaVox (DVOX) Technologies are the only companies whose shares have managed to stay above their initial offering price.

At the same time, venture capital investment increased in the second quarter. Privately-held life sciences companies raised $2.8 billion during the quarter, a 43 percent increase over the $2 billion raised in the first quarter of the year. Most of the increase came from U.S. companies, which raised $2.2 billion in the second quarter compared to $1.5 billion raised in the first quarter.

U.S. Companies developing novel therapeutics, including discovery platforms and new methods of drug delivery, garnered the most dollars. As a life sciences category, however, the dollar amounts have dropped compared to the first half of 2009. Developers of antibiotics were among the top venture financings during the second quarter 2010. San Francisco-based Achaogen raised $56 million in a series C round in April in part to advance a mid-stage trial of its lead candidate targeting multi-drug resistant bacterial infections. Tetraphase Pharmaceuticals, a Massachusetts-based company that uses a synthetic chemistry platform to design novel tetracyclines as next-generation antibiotics, raised $45 million in a series C financing to advance its pipeline into early and mid-stage studies.

While VCs are more likely to invest their capital in tranched rounds based on the achievement of specific milestones, they have continued to fund innovation. Of the 117 companies that disclosed their financing round in the second quarter, 80 of them were earlier stage rounds—seed stage or series A and B.

M&A and Partnering
Second quarter deal activity continued to advance at the strong pace set during the first quarter with nine deals valued at more than $1 billion. Biggest among them was Astellas’ (OTCPK:ALPMF) $4 billion acquisition of OSI Pharmaceuticals (OSIP), bringing a long deal-in-the-making to an end. The Japanese pharma closed the deal after sweetening its offer to $57.50 per share from its original $52.50 per share. For its money, Astellas will get revenues from cancer drug Tarceva and OSI’s pipeline of metabolic and oncology candidates, including late-stage cancer drugs Erlotinib and OSI-906.

Revenue from Tarceva, Astellas' first cancer drug, will help replace declining profits from its top-selling organ-rejection preventative Prograf and the prostate drug Flomax. The deal also secures Astellas a substantive stake in the U.S. oncology market diversifying its geographic base at a time when Japan is embracing less-profitable generic medicines.

Oncology was also at the center of Celgene’s (NASDAQ:CELG) $2.9 billion acquisition of Abraxis Bioscience (ABBI), diversifying its focus from blood cancers into solid tumors. Through the deal, Celgene acquires the breast cancer drug Abraxane, which is approved in 40 countries, and is in late-stage testing for non-small cell lung cancer and pancreatic cancer.

Emerging markets acquisitions continue to be an important pharma strategy for dealing with lost revenues from upcoming patent expiries. Abbott Laboratories (NYSE:ABT) wasted no time after creating its Established Product Division to expand its branded generics market share, especially in emerging markets. The company announced a definitive agreement with Piramal Healthcare to acquire full ownership of Piramal's Healthcare Solutions business, one of India’s top branded generics companies, for an upfront payment of $2.1 billion, plus $400 million annually for the next four years. The $3.7 billion deal will make Abbott the leader in the Indian pharmaceutical market. Piramal’s Healthcare Solutions will become part of Abbott’s newly created Established Products Division.

While M&A activity was strong with more than $18.5 billion in disclosed deals, second quarter partnering deals were mostly concentrated in June. Oncology was also the focus of several licensing and partnership deals. Many of the deals involve relatively small upfront payments with the prospect of a much bigger payout on the back end.

Looking forward into the third quarter
Second quarter financings may have fallen short of industry hopes, they were a marked improvement from the same quarter a year ago, according to statistics compiled by The Burrill Report. U.S. venture financings totaled $3.7 billion, slightly above the $3.5 billion raised in the first half of 2009. U.S. public financings through PIPEs, and follow-ons totaled $2.8 billion in the first half of 2010, compared to $2.2 billion during the same period last year.

Several factors may spark investor enthusiasm in the coming months. The markets could improve if second quarter earnings reports are positive and Europe stabilizes its credit crisis. This could reopen the IPO window and move companies back into the public markets. As of this report, Trius Therapeutics, which put its IPO on hold in early March, is back in the queue with a debut planned for the end of July.

Investors will also be watching the U.S. Food and Drug Administration, which just reviewed the first of three obesity compounds up for approval in the second half of 2010 and early 2011. Its negative recommendation for Vivus’ Qnexa wiped out more than $500 million from its market cap in a few hours. The FDA was concerned about the lack of safety data beyond one year.

Upcoming positive late-stage clinical data from closely watched drugs in the pipeline, such as Vertex Pharmaceuticals’ (NASDAQ:VRTX) experimental HCV drug, could swing investor sentiment back in life sciences’ favor. Should markets improve, good news could set 2010 back on track.

Category Q1 2010 (USD M) Q2 2010 (USD M) H1 2010 (USD M) H1 2009 (USD M)
Therapeutics 547.0 841.4 1,388.4 1,788.7
Diagnostics 67.0 195.2 262.2 71.1
Tools/Technology 178.0 234.2 412.2 214.2
Medical Devices 376.0 447.5 823.5 1,296.7
Digital Health/ Healthcare IT 200.0 153.3 353.3 14.8
Industrial/Ag 94.0 333.9 427.9 111.1
Total U.S. Venture Financings 1,461.0 2,206.0 3,667.0 3,496.6
Therapeutics 360.8 102.0 462.8 0.0
Diagnostics 0.0 27.6 27.6 0.0
Tools/Technology 0.0 0.0 0.0 0.0
Medical Devices 0.0 140.6 140.6 0.0
Digital Health/ Healthcare IT 0.0 0.0 0.0 0.0
Industrial/Ag 0.0 78.0 78.0 0.0
Total IPO 360.8 348.2 709.0 0.0
Therapeutics 394.1 369.2 763.3 634.7
Diagnostics 11.7 66.6 78.3 21.8
Tools/Technology 18.0 8.1 26.1 49.5
Medical Devices 26.6 24.0 50.6 65.6
Digital Health/ Healthcare IT 0.8 0.0 0.8 0.0
Industrial/Ag 3.0 0.5 3.5 3.1
Total PIPEs 454.2 468.4 922.6 774.7
Therapeutics 1,018.2 602.4 1,620.6 1,310.0
Diagnostics 18.9 18.9 3.1
Tools/Technology 28.6 29.8 58.4 8.3
Medical Devices 45.7 45.7 83.1
Digital Health/ Healthcare IT 96.3 0.0 96.3 0.0
Industrial/Ag 79.3 0.0 79.3 0.0
Total Follow-on 1,222.4 696.8 1,919.2 1,404.5
Therapeutics 76.7 6,140.8 6,217.5 34,523.4
Diagnostics 260.0 0.7 260.7 482.0
Tools/Technology 2,210.3 1.3 2,211.6 507.2
Medical Devices 3,000.0 752.6 3,752.6 2,373.8
Digital Health/ Healthcare IT 0.0 400.0 400.0 2,575.0
Industrial/Ag 62.5 375.0 437.5 0.0
Total Debt 5,609.5 7,670.4 13,279.9 40,461.4
Therapeutics 102.0 242.1 344.1 70.3
Diagnostics 0.0 67.0 67.0 3.6
Tools/Technology 73.0 357.1 430.1 34.6
Medical Devices 7.5 3,006.0 3,013.5 2.5
Digital Health/ Healthcare IT 0.0 0.0 0.0 1,400.0
Industrial/Ag 0.0 0.0 0.0 80.0
Total Other 182.5 3,672.2 3,854.7 1,591.0
Source: The Burrill Report