International Biotechnology Trust (IBT) 22 sept 2003 Page 8
pharmaceutical companies have tended to avoid depressing earnings by buying unprofitable
biotech companies.
As patent expiries loom, the reliance of pharmaceutical companies on biotech to replenish
dwindling pipelines has increased the price that these companies are willing to pay for
synergistic assets. This has continued to be demonstrated through a variety of deals,
although the number of collaborations has not increased noticeably. Within the portfolio, in
December 2002, EyeTech announced a major deal with Pfizer for Macugen, which is in
Phase II/III trials for age-related macular degeneration (AMD), and Phase II trials for diabetic
macular edema. EyeTech received a $100m upfront payment and could receive a further
$645m in milestones, contingent on regulatory approvals and successful commercialisation.
An unquoted IBT portfolio company, Sunesis, announced deals with both Merck & Co. and
Biogen during the year under review. With Merck, Sunesis entered a research collaboration
to discover oral therapeutics for Alzheimer's disease and with Biogen, a collaboration was
initiated to discover therapeutics for inflammatory and auto-immune diseases.
Another example of a licensing deal by an IBT portfolio company, although with a larger
biotech rather than a pharmaceutical company, was the co-development agreement between
Micromet and Medimmune for the Phase I stage anti-cancer agent MT103. MT103 is the
most advanced of Micromet's novel class of antibody derivatives, Bi-Specific T Cell Engagers
(BiTEs). Micromet will receive milestone payments based on successful development and
commercialisation, as well as royalties on North American sales. In addition, the parties will
collaborate to develop up to six new BiTE drug candidates.
The combination of solid earnings, product approvals, strong clinical data and partnering has
meant that momentum has continued to build in the biotech market. This has allowed issuers
to aggressively tap both the secondary and convertible markets in order to bolster cash
reserves. Many of the convertible debt financings have incorporated attractive terms for
issuers due to the low interest rate environment and volatility of the sector.
The surge in financing activity has allowed many of IBT's portfolio companies to extend their
cash runways including Alexion Pharmaceuticals, Aradigm, Esperion Therapeutics, Indevus
Pharmaceuticals, Inspire Pharmaceuticals, Nektar Therapeutics, OSI Pharmaceuticals, Sirna
Therapeutics (formerly Ribozyme Therapeutics) and Targeted Genetics.
Despite the flurry of secondary financings there have not been any biotech IPOs since April
2002. Only one healthcare company has gone public this year, a profitable managed care
company called Molina Healthcare. It is possible that an IPO window for biotech companies
may open in the USA later this year, market conditions permitting. The later stage, higher
quality private companies with nearer term revenue/profit opportunities are best positioned to
be able to take advantage of any such opening. At the time of writing a number of biotech
companies have filed to try and go public on the NASDAQ market. Examples from IBT's
portfolio include Aderis Pharmaceuticals, CancerVax and Eyetech Pharmaceuticals.
Aderis has four product candidates in development for six indications. The most advanced of
these is a transdermal patch partnered with Schwarz Pharma, in Phase III trials for
Parkinson's disease and in Phase IIb for the treatment of Restless Legs syndrome.
CancerVax has a therapeutic cancer vaccine, in Phase III trials for the treatment of advanced
stage melanoma and EyeTech has been described previously.
Financing of unquoted biotech companies has held up relatively well, despite the correction
in the market since 2000. With the biotech IPO window being closed for the last year, private
equity funds have had to fund existing portfolio companies for longer and new investments
have tended to be made in later stage companies closer to a potential revenue stream.
Financing rounds have generally been larger in size in order to fund companies for longer
and deals are taking longer to complete as investors have become more valuation sensitive.
