2005 was a tough year for U.S. biotech financing

2005 was a tough year for U.S. biotech financing

As we are still in January, it is appropriate that we continue to review biotech results for 2005 and try to find lessons learned that might help us discern trends for 2006.
Another research tool I have always found useful for this analysis is Burrill & Co.‘s financial tracking information on the biotech industry. One of the things I like about Burrill is that he continues over the years to be one of the biotech industry’s biggest cheerleaders.
Another aspect is that he is usually a very good crystal ball-gazer to see what is coming down the road. He also demonstrates, via well-documented information, the main-streaming of biotech into our society, in other words how the science of biotech is finding its way into industrial and environmental applications, beyond just medicine and agriculture.
A final aspect of Burrill that I like is that he may live and work in San Francisco, but he hasn’t forgotten his Midwestern roots (Wisconsin, if I recollect) and he is frequently back here to participate in meetings as well as invests in Midwest life science companies.
So what does Burrill have to say about 2005? Many things! But let’s start with the IPO market. According to Burrill, there were only 17 biotech IPOs in 2005 which raised $815 million. This level was 52 percent below that of 2004, but 78 percent above that of 2003 (remember however that the 2003 IPO market really only kicked in during the 4th quarter of that year). The average amount raised per IPO in 2005 was $45.6 million. At the end of the year, 14 of the 17 IPOs’ stock prices were down from the IPO price at the time of launch, with only 3 showing a positive return. A tough market!
The Midwest had one of those IPO companies, Advanced Life Sciences, which went public at $5/share and ended the year at $3.92/share (note that two other Midwest medical device companies went public in 2005, not included in Burrill’s review, as Burrill focuses principally on drugs versus medical devices).
Another interesting trend that Burrill notes is M&A activities. We have all been filing the high profile bidding war in the beginning of 2006 (which actually started in 2005) between Boston Scientific/Abbott Labs and J&J to acquire Guidant; at this writing, it appears that Boston Scientific/Abbott Labs are the winners, but until the deal actually closes, it ain’t over, and the fat lady hasn’t sung yet (no aspersions being cast). Some of the high profile deals highlighted by Burrill include the following:
Selected Biotech M&A 2005

Acquirer Acquired Value $ Millions
Novartis Chiron $5,100
Allergan Inamed $3,200
Amgen Abgenex $2,200
Crucell Berna Biotech $448
Cephalon Zeneus Pharma $360

Source: Burrill & Co.
Of note here are a couple of points:
Novartis already owned a good chunk of Chiron and was acquiring the piece it didn’t own to consolidate its interests. The value of Chiron declined in 2005 due to the problems with its vaccine business, making it an opportune time to acquire this company for a relatively cheap price. Now Novartis must fix the vaccine business; on the other hand it provides Chiron with a worldwide marketing and distribution organization it didn’t have.
Not mentioned above was the fact that Serono, another Swiss biotech company which although it is publicly-traded, is mostly family-owned, put itself on the block for sale and was passed over by several Big Pharmas including Pfizer, Novartis and GlaxoSmithkline.
Other than the Guidant activity, it was a fairly quiet year for pharmaceutical/biotech M&A in 2005. No big action in spite of the decline in value of several major Big Pharma companies, struggling with their pipelines and potential generic intrusion as patents come to an end on key products.
Let’s look at Burrill’s information on the different channels of biotech financing in 2005:
U.S. biotech financing in 2005 ($millions)

Type of Financing 2004 2005 % Change
IPO $1,701 $813 <52%>
Secondaries $3,388 $4,173 +23%
PIPEs $2,417 $2,351 <3%>
Debt $8,418 $5,556 <34%>
Sub-total $15,924 $12,893 <19%>
% of Total 52% 37%
VCs $3,733 $3,480 <7%>
% of Total 12% 10%
Other $269 $912 +239%
Total Financing $19,927 $17,285 <13%>
% of Total 65% 50%
Partnering $10,933 $17,268 +58%
% of Total 35% 50%
TOTAL $30,860 $34,553 +12%

Source: Burrill & Co.
Wow! Although the overall increase in financing, $34.6 billion was up 12 percent, or $3.7 billion, in 2005, it came entirely from an increase in partnering activities. Traditional biotech financing was down 13 percent, or a $2.6 billion decrease.
The great majority of financing, almost $13 billion in 2005 (down from almost $16 billion in 2004) was for publicly-traded biotech companies in the U.S. Remember that this applies to a little more than the 300 publicly-traded biotech companies in the U.S.
VC financing of $3.5 billion in 2005 was down 7 percent. This result is bad news for the 1200+ privately held biotech companies in the U.S. that depend mostly on VC financing. Assuming the number of 1200 companies, the average raise-up per company was less than $3 million in 2005, versus about $37 million/company for publicly-traded companies.
One question I have for Burrill is: what about the whole category of angel financing? I don’t think his numbers include this trend. While VC financing is on the decline, I am willing to bet that angel financing is on the rise as more investors jump into this vehicle for investing. More and more little early stage companies depend on this avenue of financing, particularly as VCs get tougher in their financing decisions (as well as their own ability to raise new funds).
Burrill’s numbers also don’t include another source of biotech financing: government and state grants (not reported in Burrill’s report). My bet is that this latter category is on the decline due to overall cuts in the NIH budget.
The amazing trend is the huge increasing in partnering funding from almost $11 billion in 2004 to $17.3 billion in 2005 or more than a $6 billion increase. This result means, to my mind, that Big Pharma is really getting desperate for new products and spending more and more on products and technology.
One other anomaly is the “Other” category of financing in Burrill’s chart which, while small, seems to have jumped substantially in 2005.
All in all, 2005 was a very tough year for biotech companies unless you found a deep-pocketed Big Pharma partner!
See you next week!

Michael S. Rosen is president of Rosen Bioscience Management, a company that provides CEO services including financing, business and corporate development to start-up and early stage life science companies such as Renovar, a Wisconsin-based in-vitro diagnostics company. Rosen is also a founder and board member of the Illinois Biotechnology Industry Organization. He can be reached at rosenmichaels@aol.com

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