Granite Financial analyst sees biotech financing activity in 2005 surpassing 2004, except in IPO arena

By Ronda Fears

Nashville, Aug. 25 - Financing activity for the biotech industry this year is trending toward topping 2004 levels, except in the initial public offering arena, said Granite Financial Group Inc. analyst Adam Noah, keynote speaker at an Informed Investors Forum conference Thursday.

Merger and acquisition activity will drive much of the growth in biotech funding, he said, particularly in regard to Big Pharma investing in biotech because of the Repatriation Act of 2004.

Outside of the IPO market, Noah said, investor interest in biotechs remains strong albeit more cautious than in go-go years of yore. He noted, too, that "the lines are blurring" when it comes to defining biotech.

"I think the sector is making a full circle" back to focus on basic science and novel therapeutics, he said. Yet, he observed that economics are outweighing technology in terms of investor interest.

"The venture capital community continues to look favorably on the health care industry and biotech has garnered a big share of that lately, but biotech allocations have been modified and are more selective," he said. "The investors are more cautious and expect more realistic and short-term exit strategies."

Economics outweigh science

"It's becoming less and less important how each biotech company is producing its drug candidates compared to how these candidates will fare in the real world," Noah said.

"In the end, it is the basic economics of each company's lead candidates" that are driving investor interest.

Thus, he said, on one front investors are looking for late-stage biotechs to put money to work. By Ernst & Young's estimates, U.S.-based biotechs in 2004 lost $6.4 billion. But Ernst & Young estimates the industry could reach profitability by 2008.

Pricing pressures, from generic drugs and other forces, he said, has caused another set of investors to focus on early-stage biotechs. From that angle, he said there are a couple of exciting areas that could be promising growth prospects.

Obesity, hepatitis new frontiers

Research for new drugs to address obesity and hepatitis are two areas where there could be potential growth opportunities in the new drug front, Noah said.

Novel approaches to treating hepatitis would boost the potential market for those drugs, he said. Many patients have been reluctant to enter into a treatment regimen until the disease is in the latter stages because existing methods are painful or uncomfortable. Thus, the market could be multiplied by extending the treatment period if new drugs were more appealing to patients.

Obesity is particularly exciting, he said, because it was just recognized as an indication for heart disease and diabetes last year.

Sanofi-Aventis' drug Acomplia is a frontrunner in that area, he said, and may turn out to be "the same to obesity as Viagra was to erectile dysfunction."

"The success of Viagra is proof that even the taboo topics can gain mainstream support," Noah said.

Big Pharma has deep pockets

Already M&A activity so far in 2005 has exceeded all of 2004, the analyst said, and the pace is expected to continue throughout the remainder of the year. While there have been some mergers between biotechs, such as OSI Pharmaceuticals Inc.'s $935 million purchase of Eyetech Pharmaceuticals Inc. last week, he said Big Pharma will be the most active.

The Repatriation Act is a big stimulant for Big Pharma to make acquisitions, because of tax advantages to putting foreign profits to work in the United States.

Pfizer Inc. is among the most active of the Big Pharma names, and Noah said he understands the company plans to proceed along those lines.

"Pfizer has $40 billion in repatriated profits," Noah said. "They have a lot of shopping left to do."

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