Life Sciences Industry Confronts Altered Financial Landscape at BIO Conference

by James Cavuoto, editor

A number of new firms in the neurological devices and compounds field participated in the 2003 BIO CEO and Investor Conference, held in New York City February 26-28. Among the participants were Neurobiological Technologies, Inc., of Richmond, CA, Curis, Inc., of Cambridge, MA, Neurocrine Biosciences, of San Diego, CA, and Psychiatric Genomics, Inc., of Gaithersburg, MD.

In an opening breakfast session on February 26, several executives from the biotech and pharmaceutical industries discussed the challenge of drug development in today’s financial and technological climate. Panelists included Roger Perlmutter, executive vice-president of Amgen, Inc., Sean Lance, CEO of Chiron Corp., Richard DiMarchi, group vice president of Eli Lilly and Company, and Vicki Sato, president of Vertex Pharmaceuticals, Inc. Though the panelists were cognizant of the more sober Wall Street outlook facing the industry, compared to years previous, there was also a good deal of optimism about the pace of new bio/pharma product development, particularly in light of the new genomic and drug discovery tools and data sources available today.

One of the more lively sessions at the event was a panel discussion on the topic of how biotech company valuations would be affected by fundamental changes taking place between “sell-side” banking and research, moderated by David Weild of NASDAQ. This issue has taken on increased significance in the past year because of reported irregularities in financial reporting and the sometimes too-cozy relationship between new technology firms in the life sciences sector and the Wall Street analysts assigned to covering them.

This topic was also timely in view of a settlement announced in late December by Securities and Exchange Commission Chairman Harvey Pitt, New York Attorney General Eliot Spitzer, North American Securities Administrators Association President Christine Bruenn, NASD Chairman and CEO Robert Glauber, New York Stock Exchange Chairman Dick Grasso, and several other state securities regulators. The parties announced an agreement with several major investment firms to resolve conflict of interest issues.

Terms of the so-called “Spitzer/SEC” agreement include the insulation of research analysts from investment banking pressure, in an effort to ensure that stock recommendations are not tainted by efforts to obtain investment banking fees; a ban on allowing brokerage firms to allocate lucrative IPO shares to executives and directors in a position to influence investment banking decisions; and an obligation to furnish independent research.

Panelists in this roundtable included Franklin Berger, vice president in the equity research department of J.P. Morgan Securities, Inc., Ted Love, president and CEO of Nuvelo Inc., Deepa Pakianathan, a partner in VC firm Delphi Ventures, Richard Pops, CEO of Alkermes, and Dennis Purcell, senior managing partner of Perseus Soros BioPharmaceutical Fund. The panelists discussed implications of the Spitzer/SEC agreement with respect to research. The agreement specifies that for a five-year period, brokerage firms will be required to contract with no less than three independent research firms that provide research to the firm’s customers. An independent consultant for each firm, with final authority to procure independent research from independent providers, will be chosen by regulators, in an effort to ensure that individual investors get access to objective investment advice. The agreement also requires firms to make publicly available its ratings and price target forecasts.

Moderator David Weild presented data relating the size of a biotech firm—or more specifically, the “float” in terms of its tradable volume—with the number of analysts covering that firm. Firms with less than $100 million float often had no analysts covering them. In his view, having fewer than six analysts covering a firm is “sub-optimal.”

Richard Pops noted that there has been a decline in relevance of sell-side analysts. Whereas at one point he would receive frequent visits from analysts, now they almost never visit. Pops feels that analysts sometimes seem to care more about a stock’s volatility—that’s what they trade on—than the long-term viability of the company.

Richard Berger of J.P. Morgan sees the need to separate the research function from investment banking activity. But he feels the industry is somewhat “compassless” at present, in part because of the question of who pays for research. The panelists were not at all sure in general whether customers would be willing to pay for independent research. On the other hand, if the companies paid for the research on behalf of customers, there’s always the perception that it’s an “informercial.”

During the numerous company presentations, Neurobiological Technologies CEO Paul Frieman briefed attendees on progress with its Memantine product. An NMDA antagonist, Memantine acts as a neuroprotective agent, modulating glutamate leak, which leads to calcium influx and neuronal death. In May 2002, it was approved for treatment of Alzheimer’s disease in the European Union, and the company submitted its NDA to the U.S. Food and Drug Administration in December. NTI is also planning to conduct trials for Memantine as a treatment for diabetic neuropathy. The company has marketing partnerships with Forest Laboratories in the U.S. and Lundbeck A/S and Merz Pharma in Europe.

Neurocrine Biosciences CEO Gary Lyons described his firm’s progress with its indiplon product, which is being investigated as a treatment for insomnia, depression, and eating disorders. The company has entered into collaboration with Pfizer, Inc. to commercialize indiplon, a deal that will bring Neurocrine a $100 million upfront fee plus $300 million in pre-commercial milestones.

In December, Neurocrine announced results from its second trial with IL-4 Fusion Toxin for the treatment of glioblastoma, which showed a safe and well tolerated dose level. The compound is now ready for efficacy trials.