2003 BIOTECH'S 2ND BEST YEAR AND 2004 LOOKS BETTER.

"Rising like a phoenix from the ashes, the biotech industry re-emerged in 2003 recovering from the massive devaluation that took place during the last three years," said G. Steven Burrill, CEO of Burrill & Company, a San Francisco-based life sciences merchant bank. While still way off from its market capitalization of nearly $500 billion at the height of the genomics bubble (spring 2000), the biotech industry's market cap at the end of November 2003 was $330 billion, up 32% since the start of the year. "The industry turned in a stellar performance on Wall Street, not only seeing dramatic price recovery but also raising more than $16 billion in financing. We also saw seven new companies enter the public equity markets," noted Burrill. "The FDA also approved more than 19 biotech drugs and, with the passage of the $400 billion legislation overhauling the nation's healthcare coverage, biotech has a new Medicare partner."

Since the start of 2003, 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.

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.

"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.

Burrill's outlook for 2004:

-- Biotech will have a big year in 2004 with Medicare resolved in the industry'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.

-- 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 the manufacturing 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 naive 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

Burrill & Company is a life sciences merchant bank, focused exclusively on companies involved in biotechnology, pharmaceuticals, diagnostics, human healthcare and related medical technologies, wellness and nutraceuticals, agricultural technologies, and industrial biotechnology (biomaterials/bioprocesses).

Venture Capital

The Burrill family of venture capital funds, with over $485 million under management, includes the Burrill Life Sciences Capital Fund, the Burrill Biotechnology Capital Fund, the Burrill Agbio Capital Fund and its successor -- the Burrill Agbio Capital Fund II, and the Burrill Nutraceuticals Capital Fund.

Strategic Partnering

Burrill & Company assists life science companies in identifying, negotiating and closing strategic partnerships between large and small companies providing access to resources, technologies or collaborations essential for executing their business plans.

Burrill & Company also works with major life science companies to spinout internal assets and capitalize on their value, ranging from the outright sale of products or businesses to creation of new companies to exploit these assets. Burrill uses its extensive network to help companies identify, assess and capture ("spin-in") products and companies strategic to building their businesses.

Burrill & Company's BioStreet(TM) is an internet-based life sciences transaction service which enhances dealmaking capabilities by offering a broad range of services designed to streamline and facilitate deals. BioStreet combines the efficient distribution power of the worldwide web with the scientific skills and strategic relationships necessary for concluding successful transactions.

We have completed more than 25 strategic partnerships with a value in excess of $1.5 billion.

For more information, visit http://www.burrillandco.com or call 415/591-5405.