Merrill Lynch sees biotech supply at all-time high, says fund flows turn positive

By Elaine Rigoli

Tampa, Fla., June 2 - Merrill Lynch analyst Eric Ende said biotech pipeline supply is at an all-time high of $9.9 billion.

He also noted that $1.2 billion of deals priced in May.

Fund flows have turned positive for the last two weeks, Ende added, and the Merrill Lynch Large Cap Biotech index was up for the month, suggesting that money may be flowing back toward biotechs.

Merrill Lynch said total supply in the pipeline is approximately $9.9 billion, versus last month's pipeline supply of $9.6 billion.

Currently, there are six IPOs filed representing $504 million of new supply. The balance represents shelf filings and follow-on offerings.

During May, $1.2 billion of new supply came into the market - $825 million due to convertibles - as compared to April when there was $1.9 billion of new supply, $1.2 billion due to Gilead Sciences Inc.'s convertible notes sale.

Year to date, $10.4 billion of new supply has come into the market versus comparable figures of $7.8 billion in 2005, $10.8 billion in 2004, $12.7 billion in 2003, $6.8 billion in 2002 and $10.4 billion in 2001.

Merrill Lynch noted that for Fund Flow Data, the current four-week moving average funds flow is $87 million, including an inflow of $22 million for the week ending May 31. That compares with the prior month's moving average of negative $135 million.

Merrill Lynch said flows out of health care and biotech funds are $1.7 billion year to date against comparable figures of an inflow of $1.7 billion for 2005, an inflow of $1.0 billion for 2004, an outflow of $1.0 billion for 2003 and an outflow of $3.0 billion for 2002.

Looking at index monthly performance figures during May, the Merrill Lynch Therapeutic index decreased 1.6% and the Merrill Lynch Genomics/Tools index decreased 5.0%. The Merrill Small-Cap Biotech index lost 10.0%, the Merrill Mid-Cap Biotech index was down 9.1% and the Merrill Large-Cap Biotech index was up 1.5%.

By comparison, during May the S&P 500 and Nasdaq composite indexes decreased by 3.1% and 6.2%, respectively.

The top monthly and yearly performers include Large Scale Biology Corp., which recorded the best return of 143.9% for May, while Threshold Pharmaceuticals, Inc. recorded the worst at a loss of 72.2%. For the year so far, Large Scale Biology has posted the highest return of 900.0% and DOV Pharmaceutical, Inc. has had the poorest return of negative 79.0%. Large Scale Biology shut down operations in December.

Examining firm's funding needs, 71% of biotech companies have less than two years of cash and 40% have less than one year of cash, Merrill said, suggesting that additional financings are likely. Ende also noted that 17% of biotech companies are trading at less than two times cash and 5% are trading at less than one times cash, which is toward the low end of historical norms.

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