4
BioTech Sage Report, April 2002
elderly and young, and did not recom-
mend approval on this basis. However,
Aviron has accumulated a significant
amount of safety data, and it will sup-
plement the application with this infor-
mation. As you know, we've been high
on FluMist for years and think that
this is the year it will receive FDA ap-
proval. If it does, Medimmune will reap
significant revenue from sales of Flu-
Mist alone. Not too bad for a biotech
that already has five products on the
market.
We provided you with these three
successful biotech stories, because
they serve as benchmarks of what can
be achieved by biotechs. There are
other biotechs with equally successful
stories, but we thought that these
companies were especially good exa m-
ples, as they have products in late-
stage development that we are confi-
dent will get FDA approval. Products
that reach the market are drivers of
consistent revenue streams, and these
products can be classified as that.
Mergers and Acquisitions,
and Alliances
The patterns of merger and acqui-
sition (M&A) activity and alliances
within biotech reflect a sea of change.
In the past, most M&As consisted of
Big Pharma companies acquiring bio-
tech firms. However, biotech-biotech
M&A has been growing for some time,
and in 2000, the lines finally crossed:
biotech-biotech M&A actually ex-
ceeded Big Pharma-biotech M&A.
Similarly, in the past, most alli-
ances (like licensing, codevelopment,
joint venture, comarketing, or other
forms of deals) were Big Pharma-
biotech, not biotech-biotech deals.
They typically took place at an early
stage of development of the biotech
companies' products (preclinical or
Phase I clinical trials), and were a fi-
nancing method of last resort when
other sources of funding were not
available. Today, much of this picture
has changed. For example, in 1999, bio-
tech-biotech alliances surpassed Big
Pharma-biotech deals in total dollar
volume and have continued to do so,
reflecting the fact that biotech comp a-
nies now often offer better value and
terms for alliances than Big Pharma
companies do. In addition, biotech
companies are increasingly waiting
until later stages of development
(Phase II clinical trials and sometimes
beyond) to enter into alliances, and are
treating these deals as strategic steps
rather than as unavoidable necessities
for funding.
Secondly, Big Pharma is shying
away from buying biotech companies
because of the need to maintain earn-
ings stability. Big Pharma wants to
keep its current business model of li-
censing or collaborating with biotechs.
This course of action is preferred, as
Big Pharma fears that acquiring bio-
techs will dilute their earnings, causing
Wall Street analysts to downgrade the
company. Adding to this is the fact
that Big Pharma does not want to pay
a premium for a biotech, even though
Big Pharma is faced with the antici-
pated loss of patent protection for ma-
jor drugs and pipelines that are lacking
new drugs with blockbuster potential.
Biotechs, on the other hand, are more
willingly to ante up for M&As, espe-
cially when there is no fear of earnings
dilutions, since most biotechs don't
have earnings.
Planning Ahead
As it was demonstrated in the
early part of the year, investors will
pound on the entire sector every time a
few companies suffer a setback, [e.g.,
Elan Corp. (NYSE: ELN) and Imclone
Systems]. Often the punishment is
handed out indiscriminately, ignoring
critical, if not glaring differences in
products and programs. Acting on
rational premises would make sense for
investors, but emotions usually win
over. Compounding the situation is the
FDA. The general slowdown in FDA
activity can be attributed to the fact
that the FDA has been without a new
commissioner for some time. This lack
of leadership has tremendous impact
on the agency's decision process. The
political climate for the FDA has be-
come more conservative and is moving
towards a risk/benefit analysis, in light
of past problems of drugs that were
deemed safe by the FDA. These forces
are behind the roller-coaster ride when
investing in biotech stocks. Undoubt-
edly, it would be a smart strategy, if
investors could rationally predict or
anticipate a sell momentum. In reality,
buying and selling gets done with a
combination of hope and hype. But it
need not be this way, and it's never
too late.
Thus, there is no better time than
now, to use some due diligence and
"Usually, biotech
stock prices begin to
rise by spring and
reach their peak by
the end of the sum-
mer. "
