BURRILL'S BIOTECH OUTLOOK FOR 2007 AND LOOK BACK AT 2006.

"The biotech industry finished the year by giving back over half the stellar gains earned by its 'blue chip' companies in 2005, a year in which they increased 22%, with the Burrill Biotech Select Index closing 2006 down 14%," said G. Steven Burrill, CEO, Burrill & Company, a San Francisco based global leader in life sciences with principal activities in Venture Capital, Merchant Banking and Media. "It could have been a lot worse because, by June, the Index was down approximately 20%," noted Burrill, "but thanks to product successes and strong third quarter financials, biotech's leading market cap companies strengthened their share prices and posted strong monthly performances to claw back some of the earlier reversals.

"Overall, it wasn't a great year for biotech and on reflection it will finish the year almost as it started, with the industry's collective market cap at approximately $490 billion. Interestingly, we saw some stellar gains by individual large cap companies such as Gilead and Vertex Pharmaceuticals (up 21% and 40%, respectively year-to-date) that were balanced out by companies that crashed and burned such as Neurocrine Biosciences (down 85%)," said Burrill. "Neurocrine is part of the Burrill Biotech Select Index and it contributed a significant portion to the group's loss in value.

Although, biotech's blue chip companies were unable to sustain their momentum in 2006, with Genentech and Amgen down 12% and 11% year-to-date, it was the mid-cap and small-cap companies that carried the load. The Burrill Mid-Cap Biotech Index was up 15% and the Burrill Small-Cap Biotech Index performing almost as well, up 13% and these increases mirrored the Dow, which was up a respectable 15%, and Nasdaq up 11% for the year. Leading the way for the mid-caps was Illumina, Inc., which has been one of Wall Street's "darlings" all year with its stock value up a massive 186% since January, and New River Pharmaceuticals Inc. up 115%. "Illumina also led the resurgence in the technology, tools and genomics companies. We saw Millennium Pharmaceuticals, Human Genome Sciences, Curagen and Celera Genomics all post high double digit gains in their share prices year-to-date.

"The transition to a more personalized medicine world is creating the need for molecular diagnostics, biomarkers, genotyping assays, etc. and so companies specializing in these areas have received positive investor attention," continued Burrill. "Sequenom, for example, a provider of fine mapping genotyping, methylation and gene expression analysis solutions, has seen its share price rocket 600% since January.

"It has been that kind of year with interesting side bars but no blockbuster stories, but stay tuned 2007 is shaping up to be one of biotech's best if some of the products now near the regulatory goal line get approved.

"While biotech's performance in the capital markets waxed and waned throughout the year, at the mercy of prevailing macro-economic forces, concern for Iraq, elections/politics, and about healthcare cost increases, it was a big year for biotech/life sciences fund raising. Financings and partnering deals brought in a record $40 billion for US companies with over $25 billion through financings and $15 billion in partnering capital."

"There were some bright spots for biotech during the year ... and we saw some notable results from the November election," added Burrill, "with 16 of the 19 Congressional races in which stem cells were a divisive issue won on the stem cell side, and all of the gubernatorial races also settled in favor of this issue."

"Most of our predictions for the industry's 2006 performance were accurate," added Burrill, "except our expectation of a slightly better IPO market during the year, which like 2005 remained lukewarm," added Burrill.

Burrill's Predictions for Biotech in 2007

* Capital markets in the US will be more robust than 2006 and biotech's elite companies will outperform the DJIA and Nasdaq.

* Biotech IPOs will pick up and improve on their lackluster numbers during the past two years and over 30 IPOs will be completed in the US (an increase of 50% over the 2006 number). At 2006 year-end, of the 71 biotech IPOs that completed since the window opened in 2003, 35 of them were underwater. By the end of 4Q 07, most all will be trading above their offer price.

* $40+ billion will be raised by the US biotechs; and the industry's market cap will reach an all time high of $575B (a 15% year-over- year increase)

* The M&A trends, that have been hot in 2005 and 2006 in biotech land, will not slow down with pharma desperate to access pipeline and innovation. Both big pharma and big biotech will be competing for companies with advanced product pipelines, as well as important land grabs of technology such as the $1.1B acquisition of Sirna by Merck announced in November.

* There will be no slow down in partnering deals and a significant portion of the $15 billion raised will be directed at gaining access to technology at an earlier stage in its development as companies strengthen their product indication franchises.

* We will see US biotechs accessing capital overseas...especially on the public side...with Euronext and AIM leading the pack...but also new structures will appear, which allow companies to float in Japan (on Mothers) and other regional exchanges (Singapore, SWX, etc.).

* On the political front, it will be a tough year. The new Congress has drug pricing in its cross hairs aiming to add power to Medicare to negotiate what is pays for drugs. This has significant implications for both biotech and pharma and drives them towards adding more products to their pipelines with better economics...thus increasing their appetite for acquisitions (good for biotechs), but Congress may reduce the capital gains differential (bad for the capital raising side of the industry).

* Drug safety will continue to be a major issue in the wake of the Institute of Medicine's report on the subject. Regulators will take a more proactive stance that will raise the bar for innovation and drug approvals and pharmacovigilence will be the story.

* Other issues, which will dominate the 2007 political agenda include: FDA reauthorization and NIH spending levels. We will see heated debate on healthcare during the early campaign trail for the 2008 presidential election and this could have negative repercussions on the industry in general.

* Sales of products will continue to increase and more biotech companies will become profitable for the first time. In addition, despite stricter regulatory oversight, we will see more companies bring products to the marketplace.

* Stem cell progress will continue, with more funding emanating from both public and private sources. There will be increased activity at the state level as they encourage stem cell development locally.

* Biosimiliars will become more prevalent in Europe and pressure to approve biogeneric pharmaceuticals will increase in the US ... and the industry's protection through the manufacturing process will be whittled away.

* Progress in biofuels will continue, as will the use of biotech in industrialized settings, and significantly more capital will be raised along with more immediate commercialization.

* Biotech will continue to become more global as companies, particularly in the US, look to India and China for their manufacturing needs and to conduct clinical trials.

Overall, biotechnology in 2007 will continue to fuel a major transformation in healthcare -- one that emphasizes earlier disease detection, more targeted treatments, and adjunctive support through enhanced nutrition. We will see further progress on the personalized, predictive, preventative front...with new products targeting the "individualization" of medicine in the marketplace.

A look back at Burrill's Predictions about 2006

Capital Markets

Prediction: A reasonably robust public equity IPO market with 30+ IPOs completed in the U.S. and an even larger number internationally.

Outcome: The IPO market languished once again with only 18 biotech IPOs managing to get done in the US in 2006 (so far ... although several poised on the runway may get done before the end of the year), one more than in 2005, but collectively raising approximately the same amount as 2005 ($800 million). To get done, almost all the offerings priced at the low end of their pricing ranges or considerably lower.

Prediction: Biotech stocks in 2006 will continue to out perform NASDAQ, DJIA and the pharma indices although biotech's performance will be out of its direct control and in the hands of the macro-markets (impacted by the price of oil, inflation, the war in Iraq, rising interest rates, and corporate earnings in the non-biotech sector). This may retard biotech's growth somewhat because overall the world economy will not be as strong as it should be.

Outcome: Although biotech overall kept pace with the market, and the industry's collective market cap finishing the year back to the record level achieved in 2005, at $490 billion, it failed to outperform it with the macro- markets taking their toll on investor confidence, which saw them gravitate away from biotech into other industrial sectors including energy.

Prediction: The industry will be able to raise over $35 billion in 2006, with approximately $25B from the public equity markets capital and $10B in partnering.

Outcome: The biotech industry raised an estimated $40 billion in financing (+$25 billion) and partnering ($15 billion) capital in the U.S.

Mergers & Acquisitions/Partnering

Prediction: Increased big pharma consolidation, increased biotech to big pharma consolidation, and increased biotech-to-biotech consolidation.

Outcome: Pharma/biotech and biotech/biotech consolidation continued to be red-hot as pharmas looked increasingly outside for pipeline and access to innovation ... Major deals in the year included:

Big pharma/pharma: Bayer AG/Schering AG $19.9 billion Merck KGaA/Serono $12.9 billion UCB/Schwartz Pharma $5.4 billion

Big pharma/biotech: Abbott/Kos $3.7 billion Eli Lilly/Icos $2.1 billion Merck/Sirna $1.1 billion

Biotech/biotech: Gilead/Myogen $2.5 billion Genentech/Tanox $900 million Illumina/Solexa $500 million Genzyme/AnorMED $560 million

Prediction: An improved partnering environment for biotechs with even larger values attributed to earlier stage compounds (including pre-clinical). Pharma partners earlier ...

Outcome: The over $15 billion garnered by biotech in 2006 equaled the record set last year for partnering deals. Although significant-sized discovery deals are nothing new, pharma focused rather narrowly on identifying potential therapeutics to a single target or pathway, rather than on numerous targets.

Challenging Regulatory Environment

Prediction: A more challenging regulatory environment.

Outcome: The industry continued to wrestle with improving its productivity and ensuring product safety. These issues continued to keep drug approvals down in 2006, with just 21 NME's and new biologic license applications approved to date, comparable to the 22 in 2005 ... and in an effort to improve the situation, the FDA continued to drive its Critical Path Initiative agenda with personalized medicine firmly on the radar screen pointing the industry towards an increased use of pharmacogenomics and theranostics (diagnostics attached to therapeutics to identify responding patient populations).

Stem cells dominate the technology story

Prediction: Increased progress with stem cells both scientifically and economically, with more states joining the California focus on funding stem cell research

Outcome: Subject of stem cells continued to dominate both the science and the political agenda during 2006. Technology advanced abroad while US politics served to create a not so ideal environment for research and investment community domestically. President Bush used his veto power in September for the first time since taking office, saying that an embryonic stem-cell research bill "crossed a moral boundary." The bill, which the Senate passed by a vote of 63-37 would have loosened the restrictions on federal funding for stem-cell research. However, there was hope of the horizon since in Nancy's Pelosi's first 100 hours reversal of the President's position on stem cells is a key issue; although such reversal doesn't appear to be veto-proof. Some notable results also came from the election with 16 of the 19 Congressional races in which stem cells were considered to be a divisive issue were won on the stem cell side, and all of the gubernatorial races also settled in favor of this issue.

Reimbursement - a "hot" issue

Prediction: More pressure from payers (managed care, CMS, various country health ministries) resulting in more product bundling, more personalized medicine, less "blockbusterology" (fewer "one size fits all" drugs).

Outcome: The CMS Medicare part D enacted in November 2005 - brought the debate on a government price controls system on the drug industry as a whole into sharp focus. Payers have become more demanding of drug companies to justify the cost of a drug with true clinical utility. To the surprise of many, this program is working very well - seniors are happy, pharma is happy and so is Medicare!

Biogenerics

Prediction: More approval of, and use of generics; the emergence of biopharmaceutical generics.

Outcome: Many first-generation rDNA proteins are now off-patent, leaving them open to generic competition. The April approval of Sandoz's growth hormone somatropin (Omnitrope) in the European Union and the US in May fueled speculation that there would be a wave of biosimilar approval. This did not materialize and leading US biotech company executives believe that it will be probably be many more years before we see them on the market. The debate continues ... but they are coming.

Globalization of biotech

Prediction: Increased growth of biotech internationally, especially in the BRIC countries (Brazil, Russia, India, China), Japan, and Scandinavia

Outcome: The predicted increase in the growth of biotech internationally continued to take place in 2006 with China and India leading the way.

About Burrill & Company

Founded in 1994, Burrill & Company is a San Francisco-based global leader in life sciences with principal activities in Venture Capital, Merchant Banking and Media. The company publishes an annual book on the "State of the Industry" - the 21st Edition, Biotech 2007-Life Sciences: A Global Transformation, will be available in March 2006. Burrill also publishes a range of biotechnology/life science newsletters and reports.

For more information, visit http://www.burrillandco.com or call 415/591-5474.