Since the start of the year, the Burrill Biotech Select Index has risen 59%, outperforming both the DJIA (up 17% YTD) and the Nasdaq (up 47% YTD). "But as fine as the industry's performance was in 2003, we have reason to believe that 2004 will be better still," he noted. "For one, there are no more of these 'boxcar' size issues looming in the wings that could get the industry off track. We've had the dot-com disaster, the technology bubble, the 9-11 bioterrorism phenomenon, the 'headless' FDA, the ImClone debacle and its ensuing ramifications, and the war with Iraq," he noted. "Now, as the economy continues in a positive direction and the industry is firmly on its feet, we'll see a very strong performance from biotech in the year to come," said Burrill. "Although we expect the IPO market to continue to be somewhat choppy during '04, we're nonetheless anticipating that 2004 will be the second biggest IPO year in the industry's history with 25-30 deals getting done," Burrill added.

"Although 2003 got off to a slow start with the clouds of war and the threat of SARS obscuring progress in the first quarter, Q2 03 was impressive for biotech. Eight new biotech drugs were approved in Q2 03, confirming FDA Commissioner Mark McClellan's leadership prowess and whetting the appetite of the investment community once again," explained Burrill. "By mid-year, the industry was clearly back on track," noted Burrill. "You could feel the intensity of the enthusiasm at the BIO 2003 convention in Washington, D.C. in June when President George W. Bush, the first president ever to address a BIO conference, said, 'My administration is committed to working with your industry so that the great powers of biotechnology can serve the true interests of our nation and mankind'. Also speaking to the 15,000 attendees at this year's BIO were Mark McClellan, HHS Secretary Tommy Thompson, Homeland Security Secretary Tom Ridge and Senate Majority Leader Bill Frist...a pretty spectacular line-up," noted Burrill.

The momentum continued and Q3 03 was the biotech industry's strongest quarter in three years with more than $8 billion raised. Then in October, after five consecutive quarters without a single traditional IPO (Neurochem began trading on Nasdaq in September but it was already listed on the Toronto exchange), Acusphere (ACUS), Advancis (AVNC), Myogen (MYOG), CancerVax (CNVX) and Genitope (GTOP) made their debut on Nasdaq. In November, NitroMed (NTMD) and Pharmion (PHRM) also went public. "Although both Neurochem and Genitope have done very well in their performance on the market, the rest of these companies are trading at discounts which has definitely dampened investors' spirits," noted Burrill.

"This situation also puts pressure on the rest of the companies lining up on the IPO runway. Indeed, since this somewhat fragile IPO window opened, three companies -- Aderis, Tercica, and TolerX have pulled their deals," said Burrill. "This is not to say that the biotech IPO market won't remain vital for some months to come, but the bar has been set significantly higher than in 2000 when some 67 biotech firms went public," explained Burrill. "The companies that have managed to go public in 2003 either have a product on the market or in late stage clinical trials. We'll see this kind of selectivity continue into 2004 ... the markets are not buying uncertainty but, rather, predictability," he said.

BIOTECH IPOs 2003

Company Ticker Pricing Issue Current % Change Post IPO Post IPO

Date Price Price to date Low High

Acusphere ACUS 10/8/03 14 $8.35 -40% $6.76 $16.25
Advancis AVNC 10/17/03 10 $7.52 -25% $6.76 $10.30
Genitope GTOP 10/30/03 9 $11.80 31% $10.00 $14.60
CancerVax CNVX 10/29/03 12 $8.95 -25% $8.82 $13.24
Neurochem NRMX 9/18/03 10.87 $19.40 78% $11.25 $20.95
NitroMed NTMD 10/29/03 14 $7.33 -48% $7.25 $11.55
Pharmion PHRM 11/6/03 14 $13.98 0% $11.00 $14.72
Myogen MYOG 10/29/03 14 $12.69 -9% $11.18 $17.20

"In all, 2003 was a banner year for biotech and while this month was challenged by profit taking, there is still enormous upside to be had," said Burrill. "By our best estimate, about $200 billion has been invested in this industry to date and the market cap at the end of November was only $330 billion. That's only a 65% return in 25 years (CAGR 2%) -- not very attractive," he noted. "On the other hand, with 80% of the capital that biotech needs to be self supporting already invested, the next 20% of the capital is going to get 80% of the returns. The accelerators all are in place today and the value build should be substantial," added Burrill.

"Investors are more discerning," admitted Burrill. "They are no longer funding passion and dreams but they are backing companies that have, or are very close to having, products and revenue streams...testimony to biotech's maturity. There is still plenty of altruism and innovation in this industry too. We're in for an intensely exciting and rewarding future," said Burrill.

Highlights from 2003:

-- After a tentative first quarter, the biotech industry took off,outperforming both the DJIA and the NASDAQ for much of the year.

-- In November and December, many investors -- including mutual funds and buyside investors -- "banked" some of their profits, making the last part of the Q4 03 more challenging on Wall Street.

-- By mid-December, the U.S. biotech industry raised more than $16 billion YTD with approximately $7.2 billion coming from convertible debt offerings, $3.4 billion from follow-on offerings, and $2 billion from PIPEs. By the end of November, there were eight new biotech companies trading on Nasdaq, raising a total of $453 million, but most trading below their issue price.

-- VC investment in biotech topped $2.7 billion by the mid December and it's likely that 2003 will be one of the biggest years for venture capital investment in the industry's history. 

BIOTECH FINANCING HISTORY (through mid-December 2003):

1996 1997 1998 1999 2000 2001 2002

Public

IPO $1,465 $688 $369 $670 $6,490 $440 $440
Follow-on 2,414 1,601 521 5,805 12,651 2,539 979
PIPEs 537 1,283 977 1,433 4,061 1,741 907
Debt/Other 352 1,288 1,262 1,520 5,728 4,848 5,251

Private

VC 449 569 800 1,084 2,872 2,397 2,688
Other 103 184 84 184 203 9 178
Total 5,320 5,613 4,013 10,696 32,005 11,974 10,443

2003 2003 YTD

Q1 Q2 Q3 Q4 to date

Public

IPO $0 $0 $0 $453 $453
Follow-on $517 $130 $1,340 $1,213 $3,380
PIPEs $204 $522 $676 $544 $2,008
Debt/Other $152 $2,487 $2,764 $1,583 $7,164

Private

VC $549 $628 $670 $431 $2,704
Other $217 $12 $15 $0 $294

Total $1,639 $3,779 $5,465 $4,224 $16,003

-- The President signed into law the Medicare Prescription Drug and Modernization Act of 2003 on December 8, 2003. Carrying a $400 billion price tag over the next ten years, the new law provides a prescription drug benefit for older Americans and provides federal reimbursement of biotechnology products and other drugs. The measure also prohibits the future application of the controversial "functionally equivalent" mechanism for novel drug reimbursement and it will mitigate the cuts that were made to the use of biotech products in outpatient settings earlier in 2003.

-- Priorities changed at the FDA in 2003 with a talented new commissioner, Mark McClellan at the helm. McClellan made it clear early on that the agency would reduce the number of cycles required to review a product. He vowed to improve the quality and efficiency of the review process and to use PDUFA funds to hire consultants to design and implement improvements in its review operations. McClellan also facilitated new product development by drafting new guidance documents for particular diseases and emerging technologies.

-- McClellan Accomplishments in 2003:

- Established new regulations and review procedures to streamline the process for making safe and effective generic drugs 

- Developed new Security Guidance as Part of Operation Liberty Shield To Protect the Food Supply -- established a 10-Point Program for ensuring the safety and security of the food supply

- Announced a series of actions designed to protect Americans from potentially serious risks of dietary supplement products containing

ephedra

- Took action to help consumers get accurately labeled and unadulterated dietary supplements by proposing a new regulation to require current good manufacturing practices in their manufacturing, packing and holding 

- Proposed bar codes for drugs and blood as well as new adverse drug reaction reporting

- Announced a change in industry food labeling standards for manufacturers who want to make claims that their products help prevent diseases

-- Among the biotech drugs approved by the FDA in 2003 were a number of 

firsts:

- Aldurazyme is the first drug approved for Mucopolysaccharidosis-1 - Amevive is the first biologic approved for psoriasis - Fabrazyme is the first drug approved for Fabry's disease

- Fuzeon is the first fusion inhibitor approved for HIV/AIDS

- Namenda is the first drug for mild to moderate Alzheimer's

- Velcade is the first-in-class proteasome inhibitor for relapsed and refractory multiple myeloma

- Xolair is the first biologic approved for asthma Important FDA Approvals during 2003 (through end of November 2003): 

Date

Drug Sponsor Description Approved Aldurazyme BioMarin/Genzyme Enzyme replacement therapy 4/30/03 for use in patients with Hurler-Scheie forms of mucopolysaccharidosis I and for patients who have the Scheie form with moderate to severe symptoms Aloxi MGI Pharma and Prevention of acute nausea 7/25/03 Helsinn Healthcare and vomiting in chemotherapy patients  Amevive Biogen Immunosuppressive dimeric 1/30/2003 fusion protein for the treatment of adult patients with moderate to severe chronic plaque psoriasis who are candidates for systemic therapy or phototherapy Bexxar Corixa and Treatment of CD-20-positive 6/30/03 

GlaxoSmithKline follicular non-Hodgkin's lymphoma whose disease is refractory to Rituxan Cialis Lilly/ICOS Treatment of erectile 11/21/03 dysfunction (ED) Cubicin Cubist Treatment of complicated skin 9/12/03 infections caused by gram- positive microorganisms Emtriva Gilead For the treatment of HIV 7/2/03 infection in adults Fabrazyme Genzyme Enzyme replacement therapy 4/24/03 for use in patients with Fabry disease Factive GeneSoft Treatment of mild to moderate 4/4/03 Pharmaceuticals community-acquired pneumonia and acute bacterial exacerbation of chronic bronchitis FluMist MedImmune Intranasal influenza 6/17/03  vaccine Ganite Genta Treatment of cancer-related 9/18/03 hypercalcemia Lexiva Vertex Treatment for IV/AIDS 10/21/03

Namenda Neurobiological Treatment of mild to moderate 10/17/03 Technologies and Alzheimer's disease Forest Laboratories Plenaxis Praecis Treatment of advanced prostate 11/25/03 Pharmaceuticals cancer for patients who have no alternative Raptiva Xoma and Treatment of chronic moderate 10/27/03 

Genentech to severe plaque psoriasis in adults Velcade Millennium Proteasome inhibitor for use 5/13/03 in the treatment of multiple myeloma patients who have received at least two prior therapies and demonstrated disease progression on the last therapy Xolair Genentech/ Antibody-based treatment for 6/20/03 Novartis/Tanox asthma which works by disabling a naturally occurring antibody called lgE that triggers inflammation Zavesca Celltech and Type 1 Gaucher's disease 8/1/03 Actelion

-- Big Pharma continued to have its share of woes in 2003 with yet more blockbusters coming off patent and a new FDA rule that is expected to speed the approval of generic drugs while limiting the number of  automatic 30-month stays that can delay generic drug availability. 

-- Pharma giant Merck made headlines in November as four of eleven drugs in its pipeline dropped by the wayside and its profits fell. On the other hand, GlaxoSmithKline's pipeline expanded in 2003 due to the  redesign of its R&D organization into flexible biotech-like business units. Entering December, the company had 147 projects in clinical development, including 82 NCEs and 20 vaccines. The number of partnered projects at GlaxoSmithKline has grown in the last 12 months as well -- from 35 to 48.

-- In 2003, several sizable M&A transactions changed the biotech landscape. On November 13, Idec Pharmaceuticals Corporation and Biogen, Inc. completed their $6.8 billion merger, creating a new global biotechnology industry leader

 -- Biogen Idec. Another marquee transaction -- GE Medical Systems' $9.5 billion purchase of Amersham -- is expected to help GE in its quest to become a personalized medicine play from the diagnostic imaging side of the equation. 

-- Although fewer partnering transactions were completed in 2003 compared to 2002, in general deals got done on earlier stage developments with more value. The biggest value discovery deal in 2003 was one involving Amgen and Tularik. Under the terms of the 5-year co-development deal, Tularik receives $50 million in committed funding and up to $21 million for each new target. The largest Phase I deal in 2003 was struck between Aventis and Regeneron to develop and globally commercialize Regeneron's VEGF Trap. Under the terms, Regeneron receives an $80 milling upfront payment and Aventis will invest $45 million in newly issued Regeneron stock. Regeneron makes another $25 million on completion of an early clinical milestone.

-- Great strides were made in the battle against cancer in 2003. In addition to the approval of Iressa-AstraZeneca's first-in-class epidermal growth factor receptor blocker for lung cancer, four biotech drugs for cancer were approved in 2003 -- MGI Pharma's Aloxi to prevent chemotherapy induced nausea; Corixa's Bexxar for non-Hodgkin's lymphoma; Preaecis Pharmaceuticals' Plenaxis for prostate cancer; and Velcade for multiple myeloma. According to the latest industry figures, biotech and pharma now have 395 new medicines for cancer in development.

-- The technologies supporting the life sciences -- RNAi, whole genome scanning, stem cells and the rest -- advanced in 2003. Indeed, Craig Venter received approval and a government grant to build the first artificial bacterium. Efforts to catalogue the "proteome" continued apace in 2003 as well. Four separate public international proteomics initiatives were launched in 2002-2003, HUPO (The Human ProteomeProject) being the biggest. Three focus on mapping all the proteins in human blood plasma, the brain, the liver, respectively. The fourth aims to create antibodies against thousands of human proteins. 

-- Project BioShield, President Bush's $6 billion initiative to develop methods to protect Americans against biological, chemical and radiological threats sailed through the House of Representatives this summer, however, the plan has gotten bogged down in the Senate and is not expected to gain approval this year. It's hoped that, once passed, Project BioShield will provide the incentive for companies to develop a medical arsenal to combat bioterrorism.

-- Nature's bioterrorism was evident in 2003 with the emergence of SARS (severe acute respiratory syndrome). Biotech's big story was the swiftness with which the scientific community was able to isolate the corona virus responsible for SARS and to develop an appropriate diagnostic for the illness. It took less than eight weeks -- a tribute to today's incredible technology and infrastructure.

-- Also impacting the diagnostics scene was the FDA's draft guidance on  pharmacogenomics (November 3, 2003), which proposes a mechanism for comfortably sharing exploratory data without stalling on-going diagnostic and drug development. The move underscores the validity of "personalized medicine" whereby genetic analysis guides prescribing decisions and treatments are tailored to treat genetically defined subsets of the population.

-- Progress in biotech diagnostics was very evident in 2003 -- there are now genetic tests for 1,004 diseases -- more than three times as many as six years ago and most health insurance plans will cover them when they are requested by a physician. Among the most commonly used genetic tests are those used to detect Alzheimer's disease, breast and ovarian cancer, colon cancer and diabetes.  

-- 2003 also was a year of post-consolidation transition for the agbio industry with the market leaders shifting their emphasis from input traits to the more highly valued output traits (such as oilseed crops with improved consumer nutritional profiles to enhance livestock feed efficiency.) It was also the year that the Brazilian government sanctioned the use of GM soybean seeds for the 2003-2004 season.  Another big success story for GM crops was the adoption of Bt Maize in the Philippines, the first country in Asia to approve a biotech food crop for commercial planting. Biotech continues to make a great contribution to the ag world.

-- The showdown between the U.S. and the European Union over the labeling of GM crops intensified in 2003 with the U.S. launching a WTO challenge to the EU's de facto moratorium on authorizing GM crops. Meanwhile, Australia, Argentina, Brazil, Canada, Chile, Colombia, India, Mexico, New Zealand and Peru joined the U.S. request as third parties. But with the three month postponement of a decision on allowing the import of a type of GM sweetcorn, it looks like the moratorium will continue into 2004.

-- Alarm over skyrocketing rates of obesity heightened awareness about the connection between nutrition and disease in 2003. Under the aegis of FDA commissioner McClellan, the agency pursued strategies to address the problems of obesity and diabetes, including new rules to require   that trans fatty acids be declared on conventional food and supplement labels. The agency also issued guidance to encourage the manufacturers of foods, beverages and dietary supplements to present health claims  that are firmly backed by sound science and use a grading system to rank the quality and strength of each health claim. 

-- By 2010 analysts anticipate that industrial biotech or "white biotech," as the Europeans refer to it, will generate about $470 billion worldwide with a $160 billion value impact on chemicals. In 2003, white biotech gained plenty of momentum. The Biotech Industry Organization (BIO) hosted a conference called "The Third Wave in Biotech" that focused on the opportunities and obstacles facing those companies wishing to shift from traditional manufacturings of fuels, textiles, plastics, and the rest to processes based on the exploitation of biotechnology. The President of the United States emphasized the  need for alternative forms of energy such as fuel cells in his 2003 State of the Union address and BIO succeeded in getting legislative language in the new energy bill to support the development biotech processes to make biofuels and bio-based products.

-- Interest in the biotech industry has never been greater. This year, attendance at the BIO annual conference in June welcomed 16,234 attendees with 47 U.S. states and 57 nations represented. More than 500 members of the press covered the event which included keynote addresses from President George W. Bush and FDA Commissioner Mark McClellan. Biotech is everywhere: India, China, Japan, Saudi Arabia, Cuba, Israel, Australia and New Zealand have joined the U.S., Europe and Canada. While there are still concerns regarding safety, ethics, environmental impact and costs, the public is now fully engaged and governments are seeing economic as well as social benefit coming from biotech. In short, we are an industry that's poised for ongoing  success. Burrill's outlook for 2004:

-- Biotech will have a big year in 2004 with Medicare resolved in theindustry's favor, close to 400 drugs advancing through clinical trials, rekindled investor interest and a sizeable sum of money in the war chest. We believe that the equity markets will be robust during the year and that the industry will raise as much as $20 billion through PIPEs, secondaries, convertibles, IPOs, and venture investment.

-- Having said that, we're unlikely to see another year on Wall Street where the industry rises as much as 50% again. However, while the gains in 2003 were mostly in the realm of "recovery," we'll see genuine gains in value in 2004 with industry gains in the realm of 25-40%. 
 
-- Even though the IPO market will be choppy in the first half of 2004, we expect to see between 25 and 30 IPOs getting done in 2004. We'll see a discriminatory period commence right after the JP Morgan healthcare conference in January (formerly Hambricht and Quist) where a very large number of companies will be in the markets (perhaps as many as 50 companies trying to get public financings done)...but not all the deals will fly. Early in the year, the supply of deals will likely overwhelm market appetite ... and the markets will be very challenging. But as the year progresses, the supply/demand situation will equalize and the markets will improve.

-- Although in 2003, the lion's share of fundraising come through convertible debt, we'll see a shift away from that financing device in 2004 and see increased interest in secondaries, PIPEs and IPOs. Convertible debt is generally used when the markets are more challenging and investors are more interested in being "paid to wait." 

-- We'll continue to see more big pharma consolidation during 2004. In pharma's desperation to find more innovation, we'll also see more partnerships where the values are greater and the terms more favorable to biotech. We'll continue to see deals done at substantial premiums in the marketplace which speaks to the underlying strength of the biotech industry.

-- As the larger cap biotech companies compete nose to nose with big pharma, we may have one or two "marquee level" biotech mergers in 2004, similar to that of IDEC/Biogen in 2003. 

-- With the resolution of Medicare and some of the associated reimbursement issues behind us, we'll see the focus on Capital Hill shift to other things. Drug reimporation will continue to be a challenging area and Project BioShield has yet to pass muster in the Senate. There's also a full court press in Washington to get the new energy bill passed so that bioenergy research and development will continue to be supported. The biotech industry is also urging congressto restore SBIR eligibility for venture backed biotech companies.

-- We can expect to see numerous important product approvals in 2004 as the FDA finishes streamlining the review process and continues to approve drugs early on signs of efficacy. Lining up on the runway are Genentech's cancer drug Avastin, ImClone's Erbitux, Genta's Genasense and CV Therapeutic's Ranexa, among others.

-- Although we may yet hear a lot about healthcare and healthcare reform with the new Medicare and prescription drug legislation in place, the talk will be about productive ways to get the job done, rather than just the political rhetoric required to get the bill passed. 

-- In the diagnostics sector where there are now well over a thousand genetic tests available, we'll see more of a linkage between the Dx and the Rx side of the equation. Indeed, in 2004, we can expect to see more interest in pharmacogenomics and theranostics driven by the science. Regulators and payors who have a strong interest in trying to screen out adverse reactions and non-responding patients will continue to embrace molecular diagnostics with gusto.

-- The nutraceuticals industry will continue to do well, although it's unlikely that we'll see as spectacular a year as 2003 on Wall Street.Nonetheless, we're seeing more and more companies obtaining better clinical data and better correlation between diet and disease. The nutraceuticals side of biotech will swiftly matriculate into a stronger player in the overall healthcare scene in 2004, one with credentials and good science backing it.

-- With some progress made in the EU GMO front and with Brazil embracing GM soybean seeds at last, agbio will do better in 2004. Still, there are some difficult times ahead as the industry contends with the last of the GM hold outs. Output traits, rather than input traits will be emphasized and people seem more willing to accept and pay where they perceive a benefit.

-- As for biopharming, we see a move towards using non-food crops to get around some of the perceived problems with containment and migration. While biopharming is clearly a longer term play, the economics are often so compelling that we see this as an important component of themanufacturing armamentarium of providing certain lower cost antibodies and proteins.

-- We will continue to develop new tools and technologies to support genomics, proteomics and systems biology. As we move from the Genes 'R Us and SNPs 'R Us models, into a better understanding of proteomics and how our biological systems really work, we will bring protein  medicine further, faster and hopefully cheaper. 

-- Although biogenerics are inevitable, we believe there is still reasonable protection for biotech drugs because of the manufacturing issues. Still, it would be naove to assume that we won't have biogenerics selectively competing with biopharmaceuticals on the world stage in the not too distant future.

-- Biodefense will continue to be a focus in 2004. Although the primary markets for countermeasures will be military, research will discover more understanding about the immune system, and the way pathogens work, or how to detect miniscule amounts of dangerous materials in the air and water. This biodefense "moonshot" for the biotech industry will begin to bear fruit in 2004.

-- Outside the US -- Europe, China, India, Eastern Asia and Australia -- the biotech industry will be more robust. These countries will continue to contribute new technology, increasingly become markets for biotech products and sources of capital, as biotech becomes an increasingly global industry.

Burrill & Company

SOURCE Burrill & Company

Mandy Jones of Burrill & Company, +1-415-591-5405, or fax,

+1-415-591-5401, or mandy@b-c.com

BIOTECH IPOs 2003

Company Ticker Pricing Issue Current % Change Post IPO Post IPO

Date Price Price to date Low High

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