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Resilience
Americas Biotechnology Report 2003
 WELCOME

To our clients and other friends

Welcome to Resilience, Ernst & Youngs 17th annual review of the U.S. biotechnology industry and analysis
of progress in Canada and Latin America. The pages that follow present evidence of new forces confronting
the sector and viewpoints that illuminate daunting challenges. This Americas review demonstrates that despite
an increasingly complex 21st century environment, biotechnology is not only surviving but also succeeding.

As science advances and financial uncertainty continues, many biotech companies face the prospect of
reinventing themselves with strategies that may not fit neatly into previously accepted business models.
In the face of these challenges, we are encouraged by the depth of focus and the speed of adaptationa
concept summarized in our choice of this reviews title, Resilience.

Our most recent reports on biotechnology have highlighted the exciting advances in genomics and pro-
teomics as well as the sectors dynamic collaborations that transcend geographic boundaries. Enthusiasm
for biotechs potential to improve and extend quality of life draws patients looking for hope, investors
Michael S. Hildreth seeking opportunity, and talented scientists and business leaders ready to get to work. While biotechs
Ernst & Young promise holds strong, a more sober mood characterizes the sectors condition as it matures in a business
Americas Biotechnology Director environment defined by a global economic slump, uncertainties associated with the war on terrorism, lim-
ited access to financing, and aggressive government efforts to curb spending on medicines.
July 2003
To understand the forces creating these challenges and responses that create future opportunities for
biotechnology companies, Ernst & Young offers its perspective by presenting key data analysis and points
of view along with insightful perspective from guest contributors. We focus on trends affecting compa-
nies throughout the Americas, including:

Market consolidation and changing business models

Emerging policies and policymakers shaping the market
The future of partnerships within and outside the sector
The product pipeline

Resilience is a snapshot of our industry at a critical point in its history. A more mature biotechnology sector
now confronts a familiar situation of its youth: the need to survive uncertainty and prove its value in scien-
tific and financial terms. Now, however, it can claim strong fundamentals and a solid record of success.

This report presents biotechnologys challenges and examines solutions to overcome them. Join us on our
Web site at www.ey.com/biotech and learn more about our collection of biotechnology and health sci-
ences knowledge.

Sincerely,

H E A LT H S C I E N C E S : R E S I L I E N C E
Contents
Foreword 2
Weathering the Storm
Frank Baldino, CEO, Cephalon

Introduction 3
Its Not Dj Vu All Over Again

Industry Perspective 9
Era of Integrated Science
Michael Hunkapiller, President, Applied Biosystems

Defining Events 10

Year in Review: Overview 11

Survival and Success

Industry Perspective 14
Innovation Will Prevail
Frederick Frank, Vice Chairman, Lehman Brothers

Year in Review: Public Policy 15

Focus on Reimbursement

CEO Roundtable 18
Challenges Abound
Michael Astrue, Transkaryotic Therapies; Steven Engle, La Jolla Pharmaceuticals; Colin Goddard, OSI Pharmaceuticals;
Arthur Sands, Lexicon Genetics; Raymond Withy, Abgenix

Year in Review: Deals 23

Consolidation, Pharma Alliances

Canada: Year in Review 26

Cash Crunch Time

Canada: Industry Perspective 30

Elements of Success
Francesco Bellini, CEO, Neurochem

Capital Markets Roundtable 31

Investor Risk Aversion
Pierre Cantin, CDP Capital-Technology Ventures; Samuel Colella, Versant Ventures; Jonathan Leff, Warburg Pincus;
David Molowa, JP Morgan; Eric Schmidt, SG Cowen

Year in Review: Financing 37

Depression Deepens

Latin America: Industry Perspective 40

Fighting for Progress
Marcelo Argelles, President, Bio Sidus, and the Argentinean Forum of Biotechnology

Year in Review: Products &Technology 41

Good News Needed

Frank Baldino
CEO, Cephalon
Weathering the Storm
All industries evolve over time and the biotechnol-
ogy industry is no exception. So just what is this
industry evolving into?
As we endure the bear market of 2003, our industry
has changed dramatically to adapt to the challenges
presented not only by a protracted weak stock market,
but also by an investment community that has taken
a jaundiced view of the biotechnology industry.
Only a few years ago the buzzwords were about plat-
form technologies such as genomics and proteomics.
Today, it is difficult even for companies with late-
stage technologies and Phase II clinical data to receive
any interest from the institutional investors who for
decades have dominated this industry.
For evidence of this behavior, one needs only to look
at the plummeting market caps of biotech compa-
nies. Many of the high-flying platform companies
are now worth less than the cash on their balance
sheets, which rapidly is becoming the situation faced
by most biotechnology companies whose products
remain in pre-clinical development.
It appears the appeal of technologies that hold the
promise to lead to products in a decade has dwin-
dled. This should come as no surprise to anyone
who has followed our industry.
Over the past 25 years, since the founding of Genentech,
only a handful of companies have achieved profitability.
Today, there are approximately 1,900 biotech compa-
nies in the U.S. and Canada, more than 400 publicly
traded companies and about 20 profitable biotechnol-
ogy companies. This fact alone should drive even the
most stalwart of life science investors out of the industry.
To garner the interest of Wall Street today, compa-
nies need to have products in late-stage clinical
development or very near the market. This seems
2 H E A LT H S C I E N C E S : R E S I L I E N C E
F O R E WO R D
impossible in the context of a capital intensive indus-
try whose lead times are measured in decades and
whose risk of product failure is extremely high. If this
trend continues, the dawn of biotechnology that was
promised in the new millennium will quickly fade.
However, there is a silver lining to the circumstances
currently facing our industry. After all, biotechnol-
ogy is delivering products that greatly improve the
quality of life for patients. It is the biotechnology
industry that is answering the call for products with
better outcomes and more cost-effective therapies.
Why else are the large pharmaceutical companies so
interested in developing these technologies them-
selves? And we should not diminish the competitive
advantages of the entrepreneurial spirit that domi-
nates the mentality of our employees.
The challenging events in the market today provide an
important wake-up call to our industry. The demand
from investors is for more discipline, sound business
practices, and balanced risk. Every industry that has
succeeded over a long period of time has developed
the products that its customers want and has suffi-
ciently diversified its product portfolio to adapt to
changes in the economy.
Evolving the biotechnology industry into one with a
more diversified product portfolio to better balance
the extraordinary risk in its business has the advan-
tage of rendering our industry not only more attrac-
tive to investors, but also will allow us to withstand
product delays, failures in drug development, or any
of the repeated cycles of economic uncertainty.
Ironically, there are few examples where this
approach is embraced in the biotechnology indus-
try. How many times do people refer to drug targets
as innovative technology addressing unmet
medical needs and large-market opportunities?
One could argue that focusing exclusively on a
process to develop a drug that would treat a med-
ical need where no therapy currently exists is
tantamount to business suicide. Most likely there
are reasons why nothing is available to treat these
patients. It is extremely difficult to discover any
product, let alone one where the etiology of dis-
ease and identification of valid targets to
approach the disease are uncertain.
The level of risk introduced into a company that
follows this approach exclusively is extraordinary.
Another phrase we hear is offsetting risk by increas-
ing the number of products in development (shots on
goal). Risk is decreased under these circumstances
only if some other products in the pipeline address
known mechanisms with known clinical outcomes
and a reasonable market opportunity. If all the addi-
tional product candidates are innovative approaches to
complicated diseases where the target and the impact
of disease are not comprehensively established, then
the risk of failure is not diminished, it remains.
The answer seems to be in achieving balance. I am not
suggesting that the biotechnology industry abandon its
innovative approach. Quite the contrary. It is almost an
obligation for the biotechnology industry to be the first
to develop these high-risk, innovative products with
important medical outcomes. After all, it was innova-
tion that founded this industry and innovation that will
drive it to a more successful future. But first we need to
survive and develop a more sustainable business model.
Combining lower risks with technology in parallel
with higher-risk ideas and innovation as approaches to
product development seems to be a logical extension.
We see this type of risk-balancing and diversity within
our industry, but not often within a single company.
We see companies steeped in innovation but losing
$100 million per year on 10-year development
cycles. We see drug delivery companies with lower
technology hurdles and more certain markets but
without the innovation necessary to change the lives
of patients suffering from serious diseases. And, we
see companies in-licensing marketed products gen-
erating profits with no innovative R&D.
The perfect approach may be to balance all these
endeavors in a single company. This will signifi-
cantly reduce the risk profile of the business and
ensure that more companies reach profitability.
This type of balance can be achieved organically
or through a strategy of merger and acquisition.
However, one thing is certain: The biotechnology
industry needs to evolve to a more balanced business
model not only to weather the current storm, but also
to survive for an eternity.
 I N T RO D U C T I O N

Its Not Dj Vu All Over Again
When times get tough on Wall Street, as they have
been the past two years for much of the biotechnol-
ogy industry, soul-searching reaches a fever pitch.
In the cyclical history of biotech investing, down-
cycle discussions organized around a drought in
equity financing have become familiar. The talk
focuses on proficient product development, industry
consolidation, conserving resources, and retreating
from thoughts of becoming a fully integrated phar-
maceutical company (FIPCO).
This market depression, however, has been sig-
nificantly different and more severe. The drop has
been more precipitous, following a mania of epic
proportions in 2000, and the slide may last into
2004 or longer.
New forces are at work creating new challenges
that require contemporary responses to market real-
ities. A prolonged global economic slump has
made equity capital scarce and market values plum-
met. The consolidation of the global pharmaceuti-
cal industry continues to reduce the number of
partnerships between pharma and biotech compa-
nies. Regulatory approvals of innovative therapies
have slowed and reimbursement issues abound.
In the face of these challenging forces, however, the
biotech industry is demonstrating strength, flexibil-
ity and resilience. The FIPCO model aspired to by
all biotech companies a decade ago likely will be
appropriate only for the largest industry players. The
need to balance risk will lead to an increasing
number of partnerships among biotech companies
themselves. Balancing risk in the current depressed
market environment also will lead to an increased
number of mergers and acquisitions.
Companies must sharply focus their spending plans,
investing in activities that support nearer term com-
mercial opportunities. This means concentrating on
core competencies and partnering programs outside
of the scope of each companys key strengths.

U.S. biotechnology at a glance

Public companies Industry total
2002 2001 % change 2002 2001 % change

Financial ($bn)

Product sales $21.9 $19.1 14.8% $24.3 $21.4 13.5%

Revenues 30.3 26.4 14.8 33.6 29.6 13.5

R&D expense 16.3 11.6 40.7 20.5 15.7 30.8

Net loss 9.4 4.6 102.3 11.6 6.8 71.2

Industry

Market capitalization $189.5 $290.4 -34.7%

Total financings $6.5 $5.5 17.9 $8.6 $7.9 9.5

Number of IPOs 4 4 0.0 4 4 0.0

Number of companies 318 342 -7.0 1,466 1,457 0.6

Employees 142,900 142,800 0.1 194,600 193,000 0.8

Source: Ernst & Young

Data shown largely for December 31, 2002, and December 31, 2001
R&D expense and net loss includes impact of write-offs for acquired in-process R&D, particularly related to Amgens acquisition of Immunex and MedImmunes acquisition of Aviron
Numbers may appear inconsistent because of rounding

3
 Investments in clinical and regulatory expertise
will be needed to deal with a reorganized U.S. Food
and Drug Administration (FDA) under new leader-
ship. Economic outcome models may become an
important element of drug development to support
appropriate reimbursement levels.
Biotech innovation has accelerated at a remarkable
pace, and the industry has proved it can translate
these scientific advances into new therapies that
significantly improve health. Continued product
successes are essential for ensuring the industry's
economic viability, and the industry is becoming
more proficient at reducing the risk of failure.
It is a testament to the power of the biotech R&D
engine that there are many more FIPCOs today,
minted in the mold of Amgen and Genentech, than
five years ago. This track record of achievement is
not lost on venture capitalists. Their funding of
emerging biotech companies remains strong.
But between big biotech and start-ups are hundreds
of loss-making private and publicly traded companies
struggling to survive what has become a perfect storm:
A broad global market slump
Political uncertainties associated with the war on
terrorism
Little or no access to public market equity financing
Top Americas biotechnology centers
Number of biotechnology companies
500
450
400
350
300
250
200
150
100
50
California Quebec Maryland
Massachusetts Ontario
Source: Ernst & Young
Data show number of public and private biotechnology companies by U.S. state or Canadian province
4 H E A LT H S C I E N C E S : R E S I L I E N C E
A decline in pharmaceutical partnerships, another
key source of funding
Aggressive government efforts to curb spending
on emerging therapies
Companies left standing after this first downturn of the
21st century may be those that were most proficient in
spotting opportunities for change amid the turmoil,
not those that were content to hang on until the next
market recovery. The business strategies adopted by
managers and their boards of directors in 2003 and
2004 may have more influence on the next 10 years
of biotech product development than either techno-
logical advancements or renewed access to capital.
Successful track record
Despite the current market depression, the biotech
industry enjoyed its third-most-lucrative equity financ-
ing year in history in 2002. The record was set in 2000.
The decline from the 2000 high of more than $30 bil-
lion of invested capital has been dramatic, but the sector
has moved beyond typical financing levels of the 1990s
and has broadened its investor base significantly.
This year also marks the 50th anniversary of the dis-
covery of DNAs double helix structure by Francis
Crick, James Watson, and Maurice Wilkinson. It is the
30th anniversary of the invention of recombinant DNA
technology, the platform that launched the biotech
U.S. States
Canadian Provinces
British Columbia New York Texas
North Carolina New Jersey Pennsylvania
industry. And it is the 20th anniversary of the develop-
ment of the polymerase chain reaction method of
amplifying DNA in sufficient quantities for research.
June 2003 also marks an equally significant mile-
stone, the third anniversary of the mapping of genes
on the double helix and the beginning of the real
work in understanding human life and death. The best
is yet to come for biotechnology and pharmaceutical
companies. With map in hand, they are accelerating
efforts in mining the human genome for biological
information to create preventive therapies, vaccines,
and therapeutics that will improve length and quality
of life. Biotech companies are at the beginning of
their technology curve, not the end. Biotechnologys
biggest discoveries have yet to be made.
The likelihood of continued progress is more than
speculation. It is grounded in the biotech sectors track
record of success since the mid-1970s. Biotech com-
panies have brought more than 150 breakthrough med-
icines to patients while the technology has expanded
beyond health care to become the major driver of inno-
vation in agriculture and industrial production.
Biotechnology has become key to understanding
every intersection between life and the environment.
Sales increasing
The pace of progress is accelerating rapidly. More
Washington Florida
Georgia Alberta Connecticut
than half the biotech products on the market were
approved in the last five years. About 15% of the
200 top-selling drugs worldwide were developed
by biotech companies alone or in partnership with
pharmaceutical companies. Total biotech com-
pany product sales and revenues have increased
steadily since 1993.
Six biotech drugs each have generated sales of more
than $1 billion: Procrit, Epogen, Neupogen, Intron A,
Humulin, and Rituxan. Blockbusters expected to join
the list are Avonex, Enbrel, and Remicade. Procrit
and Epogen are the same anemia drug, erythropoi-
etin. Procrit is sold by Johnson & Johnson and
Epogen is sold by Amgen. Combined sales make it
the fourth-best-selling drug worldwide.
In addition, the market capitizations of biotechs top
tier companies have eclipsed some of big pharmas
elite. As of March 3, 2003, Amgens market cap was
$6.5 billion higher than Eli Lillys and $25 billion
higher than Bristol-Myers Squibbs. Genentechs
market cap was twice that of Bayer. Gilead
Sciences, one of the newest members of biotechs
top tier, nearly equaled Schering AGs market cap.
Investors favor big biotech
These values demonstrate investors have more confi-
dence in the growth potential of these biotech compa-
nies than their big pharma counterparts, despite the
fact that pharma companies have significantly greater
revenues, numbers of employees, and R&D spending.
One telling statistic is that the biotech companies
spend almost twice as much on R&D per employee.
Another way to put into perspective biotechs suc-
cessful impact on health care and pharmaceutical
development is to look at the partnership Johnson &
Johnson forged with Amgen in 1986 for development
of erythropoietin. Johnson & Johnsons investment
17 years ago is responsible for a significant portion of
the companys 2002 year-end market value of more
than $150 billion. More than one-third of Johnson &
Johnsons product sales come from therapeutics, and
a significant portion of that was derived from sales of
drugs from four biotech companies: Amgen,
Centocor, Alza, and Sequus. Except for Amgen,
Johnson & Johnson owns the other three.
As the biotech industry has matured, however, a
stratification of haves and have-nots has occurred.
The haves are those companies with products on the
market, growth in sales, and robust R&D operations.
Many in this group, such as Amgen, Genzyme,
Genentech, Chiron, and Biogen were among the first
wave of biotech companies formed.
The haves also include emerging companies with
experienced management teams, significant cash in
the bank, and technology platforms that have
proven product development capabilities. These
emerging companies are attracting the most atten-
tion from venture capital investors, who recognize
the biotech revolution still is in its incipient phase.
The have-nots are a broad group whose main
common characteristics may be the most obvious:
lack of cash and high burn rates. They are product
development companies struggling with clinical
setbacks and they are toolkit companies, such as
genomic information suppliers, that soared high in
2000, but have fallen back to earth and are scram-
bling to reinvent themselves.
Consolidation intensifies
The major story of this cyclical downturn, especially

Big biotech, big pharma

Revenue R&D R&D Net Market
per expense per expense Income cap Market
Revenue employee R&D employee as % (loss) 12.31.02 cap/
($m) ($000) expense ($m) ($000) of revenue ($m) Employees ($m) revenue
Biotech
Amgen $5 ,523 $547 $1,117 $111 20% $1,600 10,100 $62,217 11.3
Genentech 2 ,618 498 623 119 24 64 5,252 17,067 6.5
Genzyme* 1,329 237 308 55 23 (13) 5,600 6,477 4.9
Chiron 1,172 290 326 81 28 226 4,044 7,073 6.0
Biogen 1,148 436 368 140 32 199 2,633 5,972 5.2
Medimmune 848 528 144 90 17 81 1,605 6,820 8.0
Gilead Sciences 467 373 135 108 29 72 1,250 6,687 14.3
Biovail 788 415 52 27 7 256 1,900 4,146 5.3
Weighted average $429 $95 22% 8 .4
Pharma
Bristol-Myers Squibb $18,119 $412 $2,218 $50 12% $2,235 44,000 $44,843 2.5
Eli Lilly 11,078 253 2,149 49 19 2,792 43,700 71,334 6.4
Johnson & Johnson 36,298 335 3,957 37 11 6,786 108,300 159,550 4 .4
Merck & Co.** 21,631 356 2,677 44 12 6,788 60,800 127,121 5.9
Pfizer 32,373 360 5,176 58 16 9,126 90,000 188,377 5.8
Weighted average $345 $47 14% 4 .9

Source: Ernst & Young and company financial data

Numbers may appear inconsistent because of rounding
R&D shown net of write-offs for acquired in-process R&D. Net income adjusted to exclude the impact of write-offs for acquired in-process R&D
*Genzymes market capitalization is the sum of its tracking stocks
** Merck numbers have been adjusted to exclude revenues, net income and employees related to MedCo Health

5
 if it lasts another two years, may be the high degree
of industry contraction long predicted for the sector.
Over the past three decades, the industry has
expanded to about 1,900 companies in the U.S. and
Canada with a remarkable spate of innovation, and
no shortage of savvy entrepreneurs and risk-taking
investors. However, the question becomes whether
the current supply of scientists and capital can sus-
tain this many companies.
Signs of consolidation were evident in 2001 and
2002. There were a significant number of mergers
and acquisitions among publicly traded biotech com-
panies and more bankruptcies. Investors, stung by the
collapse of high-flying genomics companies in 2000,
are more selective and more risk-averse.
Industry consolidation, however, may increase but
will not likely be massive. The general recognition
by big pharma and big biotech players that innova-
tion is often more fruitful in smaller research and
development organizations will sustain a moderately
large number of independent biotech companies.
New forces at work
There are also new forces at work, economic and
social, that may be unique to the early 21st century.
The biotech industrys two main sources of capital,
equity markets and the pharmaceutical industry, have
undergone dramatic changes. Also, government pres-
sure is intensifying to control reimbursements for med-
icines even as demand for new and more advanced
therapies and their development costs increase.
A broad market slump, exacerbated by corporate
scandals and political uncertainties around the
world, has shaken investor confidence in every-
thing, old and new, and is making this drought in
public market financing especially severe. The cur-
rent dry spell is in its third year and counting. If it
lasts until 2005, as some predict, it would eclipse
the worst market downturns of the 1990s. To make
things more complicated, more biotech companies
than ever are waiting at the trough for a drink.
A recovery in the biotech industry will not occur
independently of a broad market rebound. When
that occurs, wary investors will be selective. A
sector-wide momentum spike in investor buying
associated with past rallies is unlikely. The climb in
market values will be gradual.
Pharmaceutical companies, which during the
1990s provided biotech companies with as much
R&D funding as public and private market equity
investors, also have tightened the spigot, even as
they aggressively seek products to augment gaps
in their pipelines. Like investors, big pharma is
more selective, looking primarily for biotech com-
panies with proven products in late-stage develop-
ment. In addition, there are fewer big pharma
companies to collaborate with, following a spate
of consolidation that began in the late 1990s.
Another unique force involves a greater pushback
from governments to hold down reimbursements
for new medicines even as biotech and pharmaceu-
tical company R&D expenses increase.
In the U.S., policymakers are anticipating the arrival
of the aging baby-boomers to the Medicare ranks,
escalating health care costs for federal and state gov-
ernments and private sector payers. After years of
trimming costs from health care providers, payers
are zeroing in on drug prices to achieve savings.
Biotech companies in the U.S. now must operate on
two tracks to achieve success: prove safety and effi-
cacy to the FDA and deliver cost-effectiveness to
payers. The largest health care payer in the U.S. is the
Centers for Medicare and Medicaid Services (CMS),
which oversees the federal Medicare and state
Medicaid health programs for senior citizens, dis-
abled people, and the poor.
The FDA is expected to be a more responsive agency
with the appointment of Commissioner Mark
McClellan in late 2002. He has said he plans to work
with the biotech industry to make sure companies
understand what is required to achieve approval of

Ernst & Young Survival Index

U.S. Canada
2002 2001 2000 1999 2002
Number of % of Number of % of Number of % of Number of % of Number of % of
companies total companies total companies total companies total companies total

More than 5 years of cash 79 25% 145 43% 148 43% 76 25% 16 19%

3-5 years of cash 26 8% 37 11% 41 12% 29 10% 7 8%

2-3 years of cash 37 12% 42 12% 29 8% 30 10% 18 21%

1-2 years of cash 71 22% 59 17% 56 16% 59 20% 12 14%

Less than 1 year of cash 105 33% 59 17% 68 20% 107 36% 32 38%

Total public companies 318 342 342 301 85

Source: Ernst & Young and company financial statement data

Numbers may appear inconsistent because of rounding

6 H E A LT H S C I E N C E S : R E S I L I E N C E
their products. As for CMS, Administrator Tom
Scully has made it clear that industry pricing of med-
icines will come under closer scrutiny.
New solutions needed
New forces create challenges that require innova-
tive solutions. But there is no one-size-fits-all
business model. Not everyone can be like big
pharma, and based on its recent performance that
may not be advisable. Achieving year-over-year
20% sales growth by relying on a few blockbusters
has not worked for major pharmaceutical compa-
nies. The bigger they are, the more blockbusters
they need. Blockbusters, drugs that achieve $1 bil-
lion in annual sales, also pay for lengthy drug
development times and R&D failures, which out-
number successes. However, with growing pres-
sure from payers to trim profit margins associated
with branded medicines, big pharma is being
forced to reinvent itself for the first time in
decades. It has tried the last several years by juic-
ing its cumbersome R&D engine with a heavy
dose of the biotech sectors entrepreneurial spirit.
Companies such as Pfizer and GlaxoSmithKline
have separated their R&D operations into
smaller groups and fostered competition among
them to spur innovation. This is where biotech
has a huge advantage.
U.S. biotechnology industry revenues increase at 16% CAGR since 1989
Industry revenues ($b)
35
30
25
20
15
20%
43%
10
23%
1989 1990 1991 1992
Source: Ernst & Young
Revenues of U.S. public and private biotechnology companies. CAGR (Compounded Annual Growth Rate). Percent changes show growth rate over previous year
If biotech companies can remember from whence
they came, their long-term chances for sustained
growth are bright. Biotech companies are the new
kids on the block; they are at the beginning of a
long, complex technology curve.
The FIPCO model for biotech companies, how-
ever, is still attainable. Biotech companies are
focused on developing first-of-a-kind drugs for
diseases that have few or no treatments available.
Amgen, the biggest biotech company in the world,
built its business on two breakthrough products.
Suggesting a FIPCO model is still viable for biotech
is a change in thinking from past market down cycles.
In the 1991 and 1995 issues of Ernst & Youngs annual
biotechnology reports, companies were told by invest-
ment experts and big pharma to retreat from being a
FIPCO, because it was much too expensive to achieve.
Change in thinking
Instead biotech executives were advised to embrace
the fully integrated drug discovery and development
company (FIDDCO) model of a tool and drug can-
didate supplier, whose major customer is big
pharma. That concept may have been right for the
times as biotech companies, responsible for an
explosion of biological information during the
15%
10%
15%
13%
12%
1993 1994 1995 1996 1997
decade of the 1990s, found themselves in the role of
educator and translator for big pharma. Its not work-
ing now. Biotech companies, responsible for the
genomics revolution, should also be product focused.
The ascent of companies such as Gilead Sciences,
MedImmune, IDEC Pharmaceuticals, Cephalon,
Immunex, and Centocor over the past few years
proves there is room at the top for biotech compa-
nies to make it on their own. In the case of
Immunex and Centocor, however, success also can
attract the attention of pipeline-hungry big pharma
and big biotech companies looking for acquisitions
that add to earnings growth.
The critical question for hundreds of loss-making
biotech companies is how to turn the corner on
profitability; how to grow, especially during
down cycles. There are some obvious moves, and
many companies are making them.
Strategies involve short-term shrinking by restructur-
ing broad development programs to reduce operating
costs and focus on products that have the greatest
chances of success. For genomics and other toolkit
companies of the late 1990s, restructuring has been
more dramatic, as they have undergone a metamorpho-
sis into hybrid technology-product development firms.
14%
15%
15%
10%
9%
1998 1999 2000 2001 2002
7
 Restructuring prevalent
Nearly 20% of the U.S.s approximately 320 publicly
traded biotech companies underwent restructuring in
2002. More than 80% of those restructured companies
were forced to cut programs and lay off employees even
though they raised significant amounts of cash during
the 2000 financing bonanza. The message here is to
build contingency plans for down cycles and product
setbacks; dont spend just because the money is there.
What may not be so obvious are the products to
focus on and products to put on the backburner. Big
pharma is making some of those decisions for
biotech companies by aggressively seeking partner-
ships for new medicines in late-stage, and in some
cases early-stage, clinical development.
For those biotech companies, deal terms are lucra-
tive and involve co-development responsibilities
and profit sharing. Neurocrine Biosciences deal
with Pfizer, worth more than $400 million, is for
an insomnia drug in Phase III development.
Exelixis alliance with GlaxoSmithKline, poten-
tially worth more than $300 million, involves
drugs as they reach early Phase II development for
a variety of diseases, including cancer.
Emerging companies, both private and public, trying
to get a first product of their own to market may want
to consider focusing on a drug for an orphan (or rare)
disease or a diagnostic. In the case of an orphan drug,
clinical development times may be shorter. Getting
that first approval can be critical for demonstrating to
future development partners a proficiency for navi-
gating the regulatory process.
In the case of diagnostics, development costs also may
be lower and regulatory hurdles are often less onerous.
Genetic tests will be an essential element in the mega-
trend toward pharmacogenomics, or personalized
medicine, and preventive therapies.
Another consideration in determining product focus
has to be the cost effectiveness of the medicine. Will
the new drug enable health care payers to reduce
costs elsewhere, such as replacing an outdated drug
or reducing hospital stays? What is the pricing strat-
egy for the product?
Changing alliances
Toolkit and other life sciences companies trying to
reinvent themselves should recognize the landscape
for alliances is changing as the science gets more
complex, capital remains scarce, and outsourcing
becomes critical. Companies are building networks
of alliances, much as computer and information
technology firms have done, to spread the risk of
drug development among multiple partners and
share in the rewards based on their contributions.
These new alliance networks allow companies to
integrate virtually. Each member of the network is
focused on a specific role critical in bringing high-
value products to market.
In the end, however, there still are too many com-
panies chasing R&D dollars. The long-awaited
consolidation within the U.S. and Canadian sec-
tors appears to be at hand. This contraction,
while painful in the short-term, should be healthy
for the long-term, resulting in more money for
stronger companies.
The wave of consolidation began two years ago.
According to BioWorld, 100 mergers occurred in
2001, another 70 in 2002. At the end of last year,
20 more acquisitions were pending.
Fueling the consolidation are investment fund man-
agers eager to trim struggling, money-losing com-
panies from their holdings. A significant number of
companies, even some with good technology, were
trading at stock prices reflecting only the value of
the cash they had in the bank. This makes them ripe
for bargain hunters.
With the public markets virtually shut down for ini-
tial public offerings (IPOs) and follow-on offerings,
merging may offer the best strategy. Private com-
panies also may want to consider remaining private
and in some cases it may be beneficial for public
companies to return to private status.
Even when the markets recover, consolidation
among investment banks has reduced the number of
firms able to support a rush of IPOs and follow-on
offerings. Plus, the banks have their own crisis of
public confidence: potential conflicts of interest
involving stock analysts who cover their banking
clients. Pressure to separate banking and analyst
functions could reduce already limited analyst cov-
erage on biotech companies.
In 2003, biotech companies face tough choices
about their futures. Taking advantage of opportuni-
ties based on an understanding of todays unique
economic and social forces could make the differ-
ence between survival and success.

Americas venture capital financing

U.S. Canada
2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 2002

Early rounds 44% 28% 37% 51% 54% 34% 22% 17% 28% 46% 38% 74%

Later rounds 56% 72% 63% 49% 46% 66% 78% 83% 72% 54% 62% 26%

Total number of biotech deals 146 149 155 129 146 137 124 94 115 126 133 101

Total raised in all biotech deals ($m) $2,164 $2,392 $2,778 $1,458 $1,275 $1,080 $818 $568 $679 $719 $668 $199

Average raised ($m) $15 $16 $18 $11 $9 $8 $7 $6 $6 $6 $5 $2

Source: Ernst & Young, BioCentury, and Venture One

Numbers may appear inconsistent because of rounding

8 H E A LT H S C I E N C E S : R E S I L I E N C E

Michael
Hunkapiller
President
Applied Biosystems
Era of Integrated Science
The pharmaceutical and biotechnology industries
are challenged as never before to be more produc-
tive and efficient in research and development.
On one hand, the wealth of biological information
available from the mapping of the human, mouse,
and other genomes creates unprecedented opportu-
nities for drug developers and academic biologists.
On the other hand, it creates daunting challenges.
Many observers believe the future financial health
of the industry lies in the balance.
Recent advances in technology and information content
are enabling scientists to think in terms of genome-
scale experiments for the first time. Rather than the
piece-by-piece approach used historically, scientists
have access to whole sets of genes in their genomic,
proteomic, and comparative contexts. However, this
also means the community must deal with hundreds of
thousands, if not millions, of potential assays for exper-
imentation, and that changes the ground rules.
Currently, less than half of genes identified have
even a partially known function associated with
them. More than 6 million sites of variation have
been categorized within the human population at
specific points within the genome.
The challenge is to effectively integrate overwhelm-
ing amounts of available information content so that
functional and medically relevant genes and varia-
tions can be more rapidly identified, in a manner that
reduces the unit cost of large-scale analyses to make
genome-scale studies economically feasible.
Consequently, at Applied Biosystems we see our
value as a company changing. That value is not only
in our technology, but also in helping customers
integrate and better apply technology and biological
content to expedite research and commercial goals.
I N D U S T RY PERSPECTIVE
This includes developing a host of new products and ser-
vices that researchersfrom academic labs to pharma-
ceutical companiescan use to more easily and
cost-effectively leverage recent information and techno-
logical advances toward a better understanding of genes,
their products, and important metabolic pathways.
A critical need in the industry is to make the available
genomic data accessible to the entire spectrum of the
research communityfrom small to large labs and
including researchers investigating specific diseases
and those conducting genome-level studies. To
address this need, we have joined with our sister
Applera Corporation businesses, Celera Genomics,
and Celera Diagnostics, to invest collectively $100
million in the Applera Genomics Initiative (AGI).
By employing the sequencing facility at Celera
Genomics, Applera sequenced the coding and regu-
latory regions of 39 humans and one chimpanzee to
discover genetic variations, or single nucleotide poly-
morphisms (SNPs), located in genes and regulatory
regions. These are the SNPs believed to most likely
influence gene expression and protein coding. They
may contribute to individual differences in suscepti-
bility to diseases, their severity, and response to treat-
ment. As a result, Applera has more than doubled the
number of known functional SNPs.
Celera Genomics believes this SNP and expression
data can be useful in selecting and validating thera-
peutic targets, and in the evaluation of toxicity and
efficacy of drug candidates. Celera Diagnostics, a
joint venture between Applied Biosystems and Celera
Genomics, will use the novel functional SNPs and
information on expression of predicted genes in dis-
ease association studies and in molecular diagnostics
to predict disease predisposition and monitor disease
progression, drug toxicity, and drug efficacy.
A goal of this R&D program for Applied Biosystems
is for disease researchers to spend less time on the
tedious work of designing and validating assays. This
will free them to focus on unraveling the complex
interaction between genes, disease, and the environ-
ment, expediting development of new drugs and diag-
nostics. To this end, we developed functionally tested,
ready-to-use, genome-wide assays to save scientists
the time, costs, and bioinformatics work of applying
human and mouse genome data to their research.
We have also integrated these assays into our
Celera Discovery System online research platform,
which provides a context for researchers to query,
analyze, and compare data, and then directly link to
assays to test a hypothesis.
This integration enables scientists to tie databases of
information to wet-lab experimentation using pre-
validated reagents. It was also a first step toward
development of an expanded information portal,
whereby we plan to provide a means for scientists to
further integrate sources of scientific content with
tools, services, and other products important to the
discovery and development process.
Further integration of raw biological information
with annotated content, and better linkage between
in-silico biology and wet-biology assays, instru-
ments, and software will be required to enable the
next generation of life science discovery. Otherwise,
the potential from discovering new target classes
will not see a payoff in expedited and more efficient
development of new pharmaceuticals.
Increasing availability of high-quality biological
data and advances in technology are transforming
the study of complex biological systems. The
burden of accelerating this transformation lies not
on the individual researcher or pharmaceutical
company, but on technology and data providers to
find critical interfaces between hypothesis-driven
experimentation and large- and small-scale biology.
We believe we can significantly impact the future of
the industry by improving, expediting, and lowering
the cost of discovery and development programs, and
by offering solutions that enable integrated science.
By their very nature, biological research and drug
development are open-ended, uncertain, and hence,
high-risk endeavors. Still, the next few years will bring
many important discoveries and a wave of fundamen-
tally new products: first, new nucleic-acid based diag-
nostic tests, and later, new classes of drugs derived
from the frontiers of gene- and protein-based research.
We are optimistic that integrated approaches to life
science, if backed by reasonable levels of investment,
will be instrumental in the success of the next phase of
bio-pharmaceutical research and development.
9

Events
Financing
Capital markets depression enters third year in 2003;
risk-averse investors play it safe with established,
revenue-driven companies
Venture capital funding in Canada and U.S.
remains strong
Deals
Consolidation activity intensifies among
biotech companies
Big pharma pays top dollar for late-stage drugs to fill
productivity gaps
Products & Technology
Number of U.S. Food and Drug Administration (FDA)
first-time approvals declines; significant number of
drugs suffer setbacks in late-stage clinical development
More than 250 biotech products in Phase III trials
Public Policy
U.S. Centers for Medicare and Medicaid Services
moves to reduce health care costs by attacking drug
profit margins and cutting reimbursements
FDA shifts Biologics License Applications to Center for
Drug Evaluation and Research
FDA gets commissioner, Mark McClellan, after 21
months without a permanent leader
Canadian Supreme Court prohibits patenting of
Harvard OncoMouse and higher life forms
10
DEFINING EVENTS
Implications
Initial public offerings and follow-on offerings decline, leaving emerging companies scrambling for new sources of
financing
Publicly traded companies restructure, cutting employees and programs to conserve cash and reassure investors
Sector becomes more stratified with growing divide between haves (established, profitable companies) and have-
nots (technology platform companies with no clear path to profitability)
As private company valuations fall, investors focus on later-stage financing rounds to find bargains, and early-stage
rounds to fund exciting new technologies
Revenue-driven companies go bargain hunting for new technologies and products; rich get richer
Dwindling resources force merger by desperation, in some cases only prolonging inevitable demise
Competition high among biotech companies for pharma deals; negotiations take longer as pharma increases its
diligence to screen products and partners
Companies with proven late-stage products hold upper hand in negotiations, command larger payments, R&D
funding, and profit-sharing
Product success stories key to restoring investor confidence; recovery unlikely without positive product news.
If half are approved, the number of new biotech products on the market will jump by more than 70% over the next
several years
Biotech companies not only must prove safety and efficacy of drugs for FDA approval, but also cost-effectiveness to
justify higher reimbursements
Change could create regulatory pathway for therapeutically equivalent biologics (biogenerics)
New leadership expected to return FDA focus to expedited review of New Drug Applications, following two years of
increasing approval times
Ruling not likely to affect Canadian industry because most patents are sought in Europe, Japan, and U.S.
H E A LT H S C I E N C E S : R E S I L I E N C E
 YEAR IN R E V I E W : O V E RV I E W

Survival and Success
As the biotech industry approaches 2004, the envi-
ronment is one of survival and success. There
always have been more companies struggling to
survive than building on successes. The difference
in 2002 and 2003 is the widening gap between the
haves and have-nots.
This century started with a bang in 2000 and many
companies benefited from the celebration of great
expectations from remarkable scientific advance-
ments, such as the mapping of the human genome.
Sharply escalating stock prices uncorked a genie-like
atmosphere in the capital markets with biotech com-
panies asking for and getting a whopping $30 billion-
plus in equity financing. The party, which actually
started the second half of 1999, lasted about one year.
The Nasdaq Biotech Index was down in March
2003 more than 60% from October 2000. The
AMEX Pharmaceutical Index has dropped nearly
40% since January 2001. Over the past two years,
the Nasdaq Biotech Index has dropped more than
both the Nasdaq Composite and the Dow Jones
Industrial Average indexes.
The initial public offering (IPO) and follow-on
markets for biotech stocks have been closed since
the end of 2000; fewer than 10 IPOs in 2001 and
2002, compared with nearly 60 in 2000. The total
market capitalization of about 300 U.S. biotech
companies reached a staggering $353 billion in
2000, an increase of more than 150% over the pre-
vious year. By the end of 2002, the industry had
lost $170 billion in market value.
The most popular form of public market financing
over the past two years has been issuance of con-
vertible debt, much of which was sold when stock
prices were considerably higher. This debt is coming
due over the next several years and if stocks remain
depressed, loss-making companies will face the need
to repay hundreds of millions of dollars in cash,
rather than equity.
Venture financing strong
A bright spot has been venture capital funding, which
has remained strong for emerging biotech companies
since 2000. Private companies have experienced
decreases in valuations, but venture capital money is
available for those with drugs in clinical development
and technologies that have proven product develop-
ment capabilities.
The biotech sector, in general, has fared better than
other high-tech industries in the private equity mar-
kets. Venture capitalists are still convinced of the
long-term value of biotechnology. Money is going
to later-stage and early-stage companies. The most

Major venture funds closed in 2002 ($m)

Fund name Firm Location Month closed Amount

MPM Bioventures III MPM Capital Boston, MA December 900.0

Perseus-Soros BioPharmaceutical Fund, LP Perseus-Soros BioPharmaceutical Fund New York, NY May 450.0

Forward Ventures V Forward Ventures San Diego, CA April 400.0

ProQuest Investments II, LP ProQuest Investments Princeton, NJ March 153.7

Hamilton Apex Technology Ventures Hamilton Apex Technology Ventures San Diego, CA June 150.0

SB Life Science Ventures I SB Life Science Equity Management Menlo Park, CA January 100.0

Radius Venture Partners II, LP Radius Ventures New York, NY September 73.5

Coastview Bioscience Partners I Coastview Capital Los Angeles, CA December 72.0

POSCO BioVentures Fund I POSCO BioVentures Carlsbad, CA January 50.0

Oxford Bioscience Partners II (Annex) LP Oxford Bioscience Partners Boston, MA February 20.2

Versant Affiliates Fund II - A Versant Ventures Menlo Park, CA December 7.5

Prospect Associates II Prospect Venture Partners Palo Alto, CA February 7.0

Versant Side Fund II Versant Ventures Menlo Park, CA May 3.6

Source: Ernst & Young and Venture One

11
 desperate are those companies in between that need
significant capital to move drugs into clinical trials.
This down cycle in the market for biotech stocks,
however, has more to do with the current world-
wide economic slump than with the industry itself.
Biotech fundamentals are strong. Companies have
experienced managers, proven technologies, and
many still have significant sums of cash in the
bank. But biotech stocks overall will not recover
independent of a broader market rally.
Cash reserves, however, are dwindling. They are a key
reality check for a sector with a net loss of billions of
dollars each year. The Ernst & Young Survival Index
tracks the rate at which companies spend those
reserves. The index shows an increase in 2002 over
2001 in the percentage of companies with less than
two years of cash. This could become critical if the
capital markets remain closed beyond 2003.
Product setbacks
Aside from the general market downturn, the biotech
industry has not helped its case. Recombinant
Capital, a San Francisco consulting firm, reported
that at least 30 medicines failed in Phase II or Phase
III studies in 2002. The sector also experienced its
own corporate governance scandals.
U.S. IPOs over time
Number of IPOs
40
35
30
25
20
15
10
5
1993 1993 1994 1994 1995 1995
H1 H2 H1 H2 H1 H2
Source: Ernst & Young, BioCentury, BioWorld, and VentureOne
12
Despite this gloomy picture, there are many success
stories. The industrys product sales and revenues
grew in 2002, the 14th consecutive annual increase.
The Biotechnology Industry Organization reported
35 product approvals in 2002 by the U.S. Food and
Drug Administration (FDA) compared with 24 in
2001. The figures include approvals of existing
drugs for new indications. The number of first-time
drug approvals, however, decreased.
The number of publicly traded U.S. companies
declined by about seven percent, from 342 to 318, in
2002 due to aggressive merger and acquisition
(M&A) activity and a higher incidence of bankrupt-
cies. BioWorld has reported about 200 M&As in the
biotech industry worldwide in 2001 and 2002. The
M&A activity, expected to continue, is considered a
positive sign for a sector that has long been
described as overcrowded and redundant. However,
the total number of privately held companies
increased slightly based on the strong venture capi-
tal support for new technologies. In addition, the
number of employees increased about one percent
from 193,000 to nearly 195,000.
Biotechs top-tier companies made significant
progress in 2002. Amgen expects worldwide prod-
uct sales to more than double between 2002 and
Number of IPOs
Average raised ($m)
1996 1996 1997 1997 1998 1998 1999 1999
H1 H2 H1 H2 H1 H2 H1 H2
Period
H E A LT H S C I E N C E S : R E S I L I E N C E
the end of 2005. Annual sales growth is projected
in the 30% range with adjusted earnings growth at
about 25% over the next three years.
Genentech reported a 21% increase in earnings per
share for 2002 and a 24% increase in product
sales. Gilead Sciences product sales increased
more than 120%, and early in 2003 it completed
acquisition of Triangle Pharmaceuticals and its
HIV and hepatitis B drugs.
IDEC Pharmaceuticals reported a 48% increase in
revenues for 2002 and a more than 40% jump in net
income. IDECs Rituxan sales surged nearly 40%.
The cancer drug achieved blockbuster status with
$1.1 billion in sales last year recorded by IDECs
partner, Genentech.
Cephalon, which reported its first full year of profits in
2001, boosted revenues in 2002 to more than $500
million on product sales that increased 106% over
2001. Cephalon reported earnings per share of $1.26 in
2002 compared with $0.19 per share the previous year.
MedImmune, which expects to launch the first
nasal spray flu vaccine this year, has projected its
revenues will top $1 billion for the first time in
2003 and earnings will double.
Average raised ($m)
120
100
80
60
40
20
2000 2000 2001 2001 2002 2002
H1 H2 H1 H2 H1 H2
Money still available Selected biotechnology company restructurings
Despite the market downturn, the U.S. biotech
sector overall recorded its third-best financing year Company Work force reduction Date Description
in history, and 2002 fundraising was greater than
2001. However, a significant portion of the equity
financing was raised by two companies, Amgen Applied Biosystems 10% 12/27/2002 Reduce R&D to historical levels of
and IDEC Pharmaceuticals, which sold convertible 11%12% of revenues
debt for $2.5 billion and $675 million, respectively.
Advanced Viral 70% 11/8/2002 Sell Bahama manufacturing facility
Still, the money raised through equity financings is
considerably more than the sums received in the
ArQule 31% 11/8/2002 Focus on existing alliances
1990s. Biotech companies also entered a new era in
partnerships with pharmaceutical firms. Companies
with products in clinical development are negotiat- Avigen 28% 10/22/2002 Extend cash for four to five years
ing co-development agreements, accepting more of
the development risk and sharing a greater percent- CuraGen 25% 11/7/2002 Reduce early-stage research expenses,
age of the rewards with their pharma partners. postpone facility construction

Public policy issues

On the public policy front, the FDA has a new com- Genaera 19% 11/7/2002 Cut preclinical development programs
missioner, Mark McClellan. He has made a point of
telling the biotech and pharmaceutical industries Genome Therapeutics 17% 9/25/2002 Reduce early-stage gene target discov-
his agency exists to help bring safe and effective ery efforts; focus on revenue generat-
medicines to market, not to block them. The appoint- ing programs and drug development
ment is viewed as hope for improving the speed of
drug reviews. The FDA will be assisted in that mis-
sion by congressional reauthorization of the Incyte 37% 11/20/2002 Focus on drug development
Prescription Drug User Fee Act, which increased
the fees companies pay to the FDA for review of Inhale Therapeutics 10% 12/11/2002 Focus on target growth areas
new drug applications. (now known as
Nektar Therapeutics)
However, the sectors frustrations with U.S. govern-
ment regulators have not subsided. The FDAs deci- Maxygen 10% 11/13/2002 Focus on therapeutics
sion to move biologics review from the Center for
Biologics Evaluation and Research into Center for
Neurogen 10% 10/2/2002 Extend cash to 2005
Drugs Evaluation and Research could be a step
toward creating a regulatory pathway for generic
biologics. In addition, the Centers for Medicare and Targeted Genetics 58% 12/17/2002 Extend cash through 2003 for gene
Medicaid Services (CMS), the nations largest therapy programs
health care payer, is targeting biotech and pharma-
ceutical company profit margins on drugs to force Valentis 78% 10/8/2002 Reduce cash burn
reduction in prices for medicines.

Innovative biotechnology, however, is here to stay. Isis Pharmaceuticals 8% 11/16/2002 Help extend cash beyond 2006
When the dust clears from this latest down spiral,
the sector as a whole may look leaner, but it should OSI Pharmaceuticals 8% 10/24/2002 Sharpen focus on oncology programs
be fundamentally stronger.
Durect 16% 11/22/2002 Focus on pain product and drug
delivery programs

Exelixis 7% 11/7/2002 Reduce early-stage programs

Millennium 4% 12/16/2002 Reduce early-stage programs

Pharmaceuticals

Source: Ernst & Young, BioCentury, and company reports

13

Frederick Frank
Vice Chairman
Lehman Brothers
Innovation Will Prevail
My how it was fun, exciting, and intoxicating for all
participants: companies, investment bankers, security
analysts, corporate management and their law firms
and, of course, shareholders. Itwas an ethereal expe-
rience. And, how precipitously this three-letter word
fun reverted to a four-letter word, ugly. Im refer- accelerate the pace of progress, now so severely con-
ring, of course, to that incredibly short chapter of four
months, December 1999 to March 2000, when we
lived and witnessed a phenomenon in the biotechnol-
ogy arena I characterized as gravity suspended.
One does not need to rehash the statistics of how each
companys stock price, especially the genomics play-
ers, had a pattern tracing the shape of the Matterhorn.
Those statistics are now ingrained in our memories
and psyche. The question is how do we restore an
environment where the achievements and promise of
biotechnology rekindle investor attention and enthu-
siasm. In short, how do we transform ugly to beauti-
ful, and is that a realistic possibility?
The challenge is to achieve equilibrium. I would
hypothesize that the elements exist to reach a state of
balance where the inherent potential of the underly-
ing prowess of the science translates into a cornu-
copia of approved therapeutic and diagnostic agents,
and highly valued enabling technological tools for
enhancing drug discovery and development.
Lets begin with an observation. It is my judgment that
many of the dreams of the early pioneers probing the
new scientific frontier of molecular biology were well-
founded, not ephemeral imaginings. Not surprisingly, in
examining the history of most technological advances,
the promise was easy to articulate, but difficult to
achieve in the time frame forecast. The commercializa-
tion challenges were profound, and the time interval to
realize their potential was far longer than anticipated.
The biotechnology realm fits the historical mold of
most technology-based industries, and will once
14
I N D U S T RY PERSPECTIVE
again repeat that historical experience, only more
so because of the nature of life sciences and the
stringent regulatory process.
When that equilibrium state is in sight, investors will
experience positive returns and capital access will
investment realm, but rather an individual company
strained by capital rationing. The breadth of the
industry delivering novel therapeutics, diagnostics,
agricultural products, nutriceuticals, and useful
industrial products may prove to be astonishing
meaning, the original expectations will be validated
after a quarter-century of relative disappointment.
While one would only need to examine most organi-
zations original business plans to substantiate the
degree of disappointment as to the flow of new prod-
ucts, it is equally fair to say the evolution of the
underlying science has been far faster and more pro-
found than almost anyone could have forecast.
Thus, we have this dilemma of marshaling the
required resources to achieve this hoped for state of
equilibrium. And this challenge is Herculean when
one pauses to note that the biotechnology industry is
the single-most capital-intensive industry in the
world. Given the time line to develop a drug, one
need think of the definition of what is a biotechnol-
ogy enterprise. In short, a biotech company is a phar-
maceutical company, not encumbered with revenues.
One need only look at the successful companies that
have achieved the status of fully integrated pharma-
ceutical companies and measure how long it took to
get their first product to market, and how much cap-
ital they had to raise to accomplish that feat.
It appears to me that the equity market, in general,
and the biotech market, in particular, are in an
unprecedented state of uncertain animation. Hence,
looking for historical guideposts is unlikely to be
useful. The impairment of overall investor confi-
dence, our present national sense of vulnerability,
H E A LT H S C I E N C E S : R E S I L I E N C E
and fear of the future underlie a risk-averse attitude
that will take considerable time to reverse.
The impact on the biotechnology industry is to change
the investment dynamic. In fact, I would contend this
has already happened. No longer is it a homogeneous
experience. Success will be particular, not general.
Individual companies achieving conspicuous success
will be rewarded, or, to the contrary, clinical or technol-
ogy setbacks will reap harsh investor punishment. As
investors, we are learning the message conveyed by Walt
Whitman just before the turn of the 20th century:
Long, too long America. Traveling
roads all even and peaceful. You
learnd from joys and prosperity
only. But now, oh now, to learn
from crisis of anguish.
Yes, we are at a juncture aptly described as a crisis of
anguish. Fortunately, the remarkable, committed sci-
entific minds will not relent. They will prevail because
knowledge is aggregative and the wealth of accumu-
lated scientific experience, knowledge, and under-
standing will lead to profound achievements. I am
confident we shall witness some of these in 2003, and
many more in subsequent years. The pipeline of clin-
ical products is both expanding and advancing toward
new product approvals. The natural affinity of large
pharma and aspiring biotech will help bring needed
capital to the industry via more collaborative partner-
ships and corporate alliances.
The negative technology values now so prevalent in the
industry are likely to disappear by 2004 and beyond
providing investors with exceptional opportunities and
another period of fun. This will follow the painful
interval of triage now underway. Discriminating capi-
tal allocation is replacing the honeymoon phase of
prior years. That trend is precedented.

Focus on Reimbursement
In the heavily regulated biotech industry, companies
must keep as vigilant an eye on government activi-
ties as they do on those of a primary competitor.
Policymakers are scrambling to weigh the publics
growing health care expectations, rapidly escalating
drug and biologics costs, demographics of aging,
and stark budget outlooks against concern over
patient safety, quality, and efficacy.
While the biotech sector focuses on the business
basics necessary for survival, federal and state
policymakers are concentrating on profit margins
and forecasts of rapid growth in pharmaceutical
and biologics spending. Their concern: ensuring
access to cost-effective biologics and curbing the
growth of health care costs.
The risk for biotechnology companies and their
investors is clear. At the end of the day, it is the profit
on the sale of the product, not the U.S. Food and
FDA approval times for all NDAs increase significantly; priority approval times triple
Median approval times, months
30
25
20
15
10
1993 1994 1995
Source: U.S. Food and Drug Administration (FDA)
New drug applications (NDAs) cover therapeutics on the market for which new formulations and new indications are sought
YEAR I N R E V I E W: PUBLIC POLICY
Drug Administration (FDA) approval of the product,
which will determine future market leaders.
Hundreds of biotech products approaching premarket
review are at risk of federal cost-containment mea-
sures under consideration by the Centers for Medicare
and Medicaid Services (CMS), as well as Congress,
long before the products ever reach the market.
CMS Administrator Tom Scully is forging new
administrative and regulatory pathways in an
attempt to cut costs and help ensure the long-
term solvency of the Medicare Trust Fund, in
light of the near-term entry of biologic therapies,
some of which are priced in the hundreds of
thousands of dollars.
In Canada, the Royal Commission on Health Care
recommended that government, rather than the pri-
vate sector, continue to play the lead role in paying
for health care. Implementation of health system
reform recommendations will take time to material-
Standard median approval time
Priority median approval time
1996 1997 1998 1999
ize; the public will not likely experience the full
benefits of increased government investments for
several years.
Governments hand in biotechnology, as is true for
hospitals, physicians, managed care, medical devices,
and the pharmaceutical sectors, is here to stay.
Price controls
Efforts to modernize public sector health care in the
U.S. and Canada were on top of the public policy
agenda in both Washington, D.C., and Ottawa in
2002. In both countries, policymakers are being
forced to consider an array of complex and compet-
ing public policy demands, including:
Extending access to life-saving and life-
enhancing biotech products
Ensuring the solvency of their Medicare
programs
Enhancing the safety and quality of biotech
products
2000 2001 2002
15
 In Canada, the federal government received recom-
mendations in the form of a government-commis-
sioned, independent report on the role of the private
sector in health care. One recommendation was to
prohibit private payments for diagnostic tests. The
report called for government to extend its coverage
of health care services to include home care, cata-
strophic drug costs, and diagnostics. Policymakers
expressed a firm commitment to manage the costs
of all drugs, including generic drugs.
In the U.S., the timing and outcome of the current
debate are dependent on achieving consensus on
the role of the market in Medicare, eligibility and
benefit levels, and overall cost. Comprehensive
reform of Medicare in the U.S. through an
increased reliance on the private sector is viewed
as necessary in order to slow the growth of health
care spending and manage a possible prescription
drug benefit program.
Whether or not Medicare retains its public-sector
characteristics or becomes more market-driven, the
prospect of price controls on drugs and biologics
looms large. Both the private sector and CMS have
demonstrated their capacity to rein in costs by con-
trolling drug pricing, facilitating greater use of
generic drugs, and seeking cost-effectiveness and
quality outcomes studies.
FDA approval times for NMEs show some improvement, but priority approval times soar
Median approval times, months
30
25
20
15
10
1993 1994 1995
Source: U.S. Food and Drug Administration (FDA)
New molecular entities (NMEs) are unique drugs, seeking first-time approval.
16
The ability of CMS to impact biologics prices is
clear in its application of new drug reimbursement
rates for the Hospital Outpatient Prospective
Payment System (OPPS), as well as its application
of new standards upon which reimbursement
levels may be modified, such as CMS new func-
tional equivalence standard. Under this new stan-
dard, reimbursement for Amgens Aranesp was cut
in half in 2003.
The Biotechnology Industry Organization (BIO)
calculated that reimbursements for 59 of 94 BIO
members products decreased an average of
more than 35% under the new OPPS rates
during 2002.
CMS also is demonstrating no signs of compassion
in its efforts to reduce spending on biologics.
Orphan drugs were abandoned in the new OPPS
rule, which introduced new criteria to determine
their reimbursement status. Only four biotech prod-
ucts qualify out of roughly 400 products that the
FDA has designated as orphan drugs.
In addition, CMS deviated from the FDA position
in its determination that radiopharmaceuticals
should no longer be classified as drugs or biolog-
ics, at least from a reimbursement perspective.
Standard median approval time
Priority median approval time
1996 1997 1998
H E A LT H S C I E N C E S : R E S I L I E N C E
As CMS cutbacks threaten to curtail the availabil-
ity of some innovative biologics in the U.S.,
patients who currently flock to Canada and Mexico
for more affordable drugs may seek the same
remedy for high-priced biologics. Canada has been
the prime focus of legislative and market-driven
efforts to stem the tide of reimportation. However, an
estimated 20%-40% of U.S. citizens who travel to
Mexico bring back prescription medicines.
In the near term, however, the incidence of reimpor-
tation of biologics is likely to remain low, as the vast
majority of biologics must be administered by trained
professionals and are not easily transported. As the
delivery mechanisms evolve with the advent of
more solid and oral biologics formulations, the inci-
dence of reimportation of biologics from Canada,
Mexico, and Latin America could increase to levels
comparable to those in the pharmaceutical sector.
On the U.S. state level, costs associated with
Medicaid, which represents nearly 20% of state
spending, are the fastest-growing budget expense at a
time when total state balances have fallen dramati-
cally. Increases in drug spendingaveraging about
18% annually between 1997 and 2000, compared to
7.7% average annual growth in total Medicaid spend-
ing increasesaccount for a significant portion of
the increase in Medicaid expenditures, particularly in
1999 2000 2001 2002
the outpatient setting, and many states are pursuing
measures to cut Medicaid costs.
Adopting government approaches to contain spend-
ing on pharmaceuticals, high-priced biologics and
combination products may be neither rational nor in
the interest of an innovative industry. Industry is sure
to lobby for legislative remedies on all fronts, but the
forces of changedemographics, budgets, political
willfavor both price concessions and policies sup-
porting more affordable, cost-effective products.
Therapeutically equivalent biologics
To justify adequate payment levels from third-party
payers such as government, biotech companies will
have to demonstrate that high-priced products are
cost-effective. To date, public and private sector
payers believe the data are sorely lacking.
The dearth of solid cost-effectiveness data for
brand biologics is contributing to the publics
impatience with policymakers to develop an
affordable regulatory path for market entry of
therapeutically equivalent, or generic, biologics.
The question is not if, but when and how, thera-
peutically equivalent biologics will enter the U.S.
market, as they already have entered markets
outside the Americas.
Leading brand drug manufacturers are integrat-
ing generic biologics into their pipelines in
response to their widespread acceptance among
payers, the public, and policymakers.
New FDA Commissioner Mark McClellan has
already indicated an interest in facilitating a scientif-
ically sound regulatory pathway for therapeutically
equivalent biologics. In addition, he is committed to
closing the loopholes in the Hatch-Waxman Act to
facilitate market entry of generic drugs.
The FDAs decision to transfer review authority
over therapeutic biologic products from the Center
for Biologics Evaluation and Research (CBER) to
the Center for Drugs Evaluation and Research
(CDER) represents a first step in establishing the
bureaucratic groundwork. The consolidation repre-
sents the most fundamental change in the structure
of the drug and biologics review framework since
CBER was spun off from the drug review center in
the late 1980s. The move is meant to address the
inconsistency between the centers reviews of dif-
ferent products for the same indication.
Legal loopholes exist in the U.S. regulatory frame-
work, which may allow some therapeutically equiva-
lent biologics, such as human insulin and human
growth hormone, to reach the market in the near
term. Pursuit of the 505(b)(2) application process is
one way in which firms are looking to achieve an
abbreviated FDA approval for these generic products.
Over the long term, a clear and distinct regulatory
pathway for therapeutically equivalent biologics in
the U.S. is likely to emerge as policymakers, payers,
and consumers seize the cost-saving opportunities
they have enjoyed with generic pharmaceuticals.
Still unclear, however, is whether therapeutically
equivalent biologics cost any less than brand prod-
ucts, given the potentially higher regulatory require-
ments and costs of production they likely will face
relative to generic drugs.
Will claims that generic biologics are not scientifi-
cally feasible prove valid? Experience outside the
Americas seems to indicate the safety profile of
generic biologics is adequate. The availability of these
products outside the Americas will encourage the
development of a unique regulatory pathway in the
U.S. Whether manufacturers can keep operating costs
as low as generic drug makers will ultimately deter-
mine whether generic biologics prove to be an afford-
able option for payers, providers, and patients.
FDA regulatory developments
The industry expressed a collective sigh of relief with
the appointment of McClellan to lead the FDA as
2002 drew to a close. McClellans qualifications as a
physician, his academic and practical expertise in
health economics, as well as his former health policy
role in the White House lifted the spirits of the finan-
cially strapped biotech sector, concerned with a slug-
gish review and approval process. Under the five-year
reauthorization of the Prescription Drug User Fee Act
III (PDUFA), the FDA has committed to performance
objectives identical to those in PDUFA IIa 10-
month review deadline for regular applications and six
months for accelerated and expedited applications.
Also under PDUFA, industry accepted a near dou-
bling of its previous level of user fees by 2006. The
additional funding is expected to help reduce
approval times, which grew in 2002 compared with
2001. However, a greater number of new drug appli-
cations is pending at the agency, indicating that the
number of approvals is likely to be higher in 2003
compared with 2002, whether or not enhancements
in the approval process are achieved in the near term.
Early interaction between FDA and CMS raised con-
cern within the private sector that FDA also might
begin considering cost-effectiveness in premarket
reviews. McClellan insists the FDAs only interest in
cost-effectiveness relates to the cost of drug develop-
ment and regulation, not the products per se.
Realistically, the cost implications associated with the
approval of new products inevitably are likely to
weigh on the minds of regulators at both CMS and
FDA, with CMS taking the lead with regard to federal
reimbursement decisions.
Bioethics and cloning
Safety concerns in some instances conflict with public
and private sector demands for access to affordable
health care and incentives for innovation. The FDA is
cracking down on drugs reimported from Canada, and
the Presidents Council on Bioethics is seeking a
moratorium on therapeutic cloning research, both in
the name of safety and quality.
Policymakers also are weighing the benefits of sci-
entific advancement versus potential safety and eth-
ical concerns over stem cell research. Considerable
state and federal activity was inspired in 2002 by
high profile, unsubstantiated reports of milestones
in efforts to clone a human being, and ongoing stem
cell research.
The Presidents Council on Bioethics weighed in on
the human cloning issue for the first time in 2002, as
did the National Academy of Sciences. Both groups
agreed that attempts to clone a human being would be
unethical and dangerous. Thirty-one states currently
have pending legislation related to cloning. Although
policymakers and industry continue to voice wide-
spread opposition to reproductive cloning, for which
a voluntary moratorium has been in place for several
years, certain bills introduced would make it illegal to
conduct therapeutic research using somatic cell
nuclear transfer. They would threaten specific
research into certain biotech innovations. Other pro-
posals would ban only human cloning, a position
favored by a majority of policymakers.
As biotechnology leaders plot the growth of their
companies, it is imperative they maintain a close
watch over the legislative and regulatory frameworks
that will impact their product profits and market-
place of the future. Increasingly, biotechnology com-
panies will need to embrace strategies that not only
manage their compliance risks, but optimize the reg-
ulatory regimens for marketplace advantage.
17

Challenges Abound
Ernst & Young asked five CEOs to discuss the
state of the biotech industry and the challenges
they face in building their businesses.
Participants are Michael Astrue of Transkaryotic
Therapies in Cambridge, MA; Steven Engle of La
Jolla Pharmaceuticals in La Jolla, CA.; Colin
Goddard of OSI Pharmaceuticals in Melville, NY;
Arthur Sands of Lexicon Genetics in The
Woodlands, TX; and Raymond Withy of Abgenix
in Fremont, CA. Interviews were held in February
and March 2003.
E&Y: How do companies build value in a depressed
market?
Withy: The key for companies is to focus. Focus on
what they do better than anyone else. If companies
move forward, building value with some degree of
Steven Engle
La Jolla
Pharmaceuticals
18
CEO R O U N D TA B L E
patience, we are confident value can be realized
and shown to others. Take Abgenix as an example.
We could have made the decision to move outside
our key area of focus on antibodies, but we realized
that by focusing on each of the aspects for antibody
drug development we can realize value. We have
optimized our technology for creating antibodies
and the manufacture of antibodies. We have also
become good at moving antibodies through the var-
ious stages of development.
Goddard: We have to look to the long term in an
industry that basically has a 10- to 12-year product
cycle and requires long-term thoughtful planning,
and strategic positioning to succeed. Whether the
markets are good or bad, you have to manage your
business in exactly the same way: take advantage of
your core assets capital, intellectual property, tech-
nology, and people and create a vibrant pipeline of
drug candidates and product opportunities.
Colin Goddard
OSI
Pharmaceuticals
Michael Astrue
Transkaryotic
Therapies
H E A LT H S C I E N C E S : R E S I L I E N C E
Astrue: Do not lose track of focus with great tech-
nology. There is a tendency, particularly for earlier-
stage companies, to get excited about the science and
try to do too much. We are in the process of limiting
the number of in-house programs and out-licensing
other programs. We are asking these questions:
Where do we really want to be? What do we do best?
What within that zone has the most value to patients
and shareholders?
E&Y: How have alliances with big pharma changed
over the last two years?
Sands: Alliances are more focused on the end game,
the discovery of the high-value product. That is where
we have seen our business go. That is very productive
for the industry because this business is all about get-
ting to these new drugs efficiently; mining the human
genome to find real breakthroughs. We have seen a
reduction in alliances around technology platforms
Raymond Withy
Abgenix
Arthur Sands
Lexicon
Genetics
 and software, and more focus on how we bring for-
ward a therapeutic that has real medical relevance and
high value in the medical marketplace.
Engle: CEOs ask themselves every day, Are we
better off working with a big pharmaceutical company
or a big biotechnology company? Or is this the time
for the company to develop the product itself? There
are a number of issues here: expertise of partners on
the development and marketing sides, ability to work
as a partner, what funds they bring to the alliance, and
what priority our drug will have. The biggest problem
is maintaining continuity at a big pharmaceutical
company when the project has a long development
time. We handle this challenge with people whose
sole job is maintaining partner relationships.
Astrue: Transkaryotic Therapies, historically, has
been reluctant to partner. In the past, the company
tried to fund everything itself. That is a mistake.
Partnering is one of the ways you spread risk. You
can have a piece of more programs if you out-
license some of your technology. For alliances to
work, you need a joint focus. When we size up a
potential partner, the first calls go to companies that
have demonstrated an interest in a particular indica-
tion or type of technology. When you get past that
screen, you look at who is running a quality organi-
U.S. biotech and pharma stocks relative to the Nasdaq and Dow since January 2001
Nasdaq Biotech
Index
AMEX Pharma
1.20
1.10
1.00
0.90
0.80
0.70
0.60
0.50
0.40
Jan Feb Mar Apr May Jun Jul Aug Sep
01 01 01 01 01 01 01 01 01
Source: finance.yahoo.com
zation, who could teach you something, and who is
most likely to execute well with the program you
hand them. You try to balance all that with the eco-
nomics of who is making the best offer. You should
be careful about taking what appears to be the most
lucrative offer without considering the likelihood of
achieving real long-term value.
E&Y: How do you balance the conflict between
investing in new programs and satisfying Wall Streets
pressure for profitability and earnings growth?
Withy: It has taken on a new dimension as we
have moved into a high cost-of-capital environ-
ment. The only revenues, the only earnings that
count in the end are the ones you get by capturing
margin on the sale of products. So the question is:
How do you get there? There are business models
to offset the investment required to get to the sale
of products either by yourself or with partners. We
are engaged in a variety of activities, including
licensing discovery services and production ser-
vices. But ultimately, it is difficult to wrap an earn-
ings story around a development-stage company if
you are in therapeutic products development. What
you are really doing is allocating investment dol-
lars across programs to minimize risk, to get to a
marketed product.
Nasdaq
DJIA
Oct Nov Dec Jan Feb Mar Apr May Jun
01 01 01 02 02 02 02 02 02
Goddard: As a management team, if we ever lose
sight of the long term, we will lose. A successful
pharmaceutical product costs $700 million to $800
million in R&D investment. What must happen to
justify that kind of investment? Of course, it is the
returns. They have to be enormous and the only way
you will have enormous returns is to stay true to a
well-disciplined, high-quality R&D strategy that can
deliver that outcome. We have to build our R&D
capabilities around the notion that we will deliver
sustained profitability with the success of our lead
drug, Tarceva. This is an R&D-driven enterprise. If
you do not place bets you cannot win. But at the
same time, you have to scale those bets to a realistic
and reasonable level of expectation for the prof-
itability that can come from these kinds of drugs.
Astrue: When you get to an intermediate stage, the
drive to profitability is very important. Once you
raise money and develop your foundation technol-
ogy, it is very important to show you have a plan for
becoming profitable. In our case, our plan is to be
profitable in about three years. To do that, we are
making some very hard choices. We are reducing the
number of employees in addition to reducing the
number of programs so that we can continue to be a
viable company because at some point Wall Street
runs out of patience if you cannot deliver a profit.
Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr
02 02 02 02 02 02 03 03 03 03
19
 E&Y: How do you view the FDA?
Engle:The new FDA Commissioner, Mark McClellan,
is not only a physician, but also a person who under-
stands health policy, costs, and economics issues. He
understands the tradeoffs between innovation and regu-
lation. An issue for us, however, is that we are a small
company and we do not have a lot of extra people sitting
around with nothing to do. If we have to spend a lot of
time educating new groups of regulators during the
course of our clinical development, that creates a terrible
burden on our company. Another factor is that, if you
were developing a drug in the area of beta-blockers or
ACE inhibitors, the clinical trials are well-defined. In
developing drugs for diseases that do not have treat-
ments, you may have fewer competitors, but you also
have more issues to resolve with the regulators.
Goddard: It is in flux. One reason has been the
tremendous focus on epidermal growth factor receptor
drugs. The industry has had two very high-profile
blow-ups in this area. In hindsight, these were attempts
to achieve accelerated approval with overly aggressive
development programs. It has created a debate around
the concept of accelerated approval. The FDA is
caught between a rock and a hard place. It wants to be
responsive to industry, but when something goes
wrong, as it has with approved drugs that have been
Growing Selectivity: Big pharma enters fewer alliances with biotechs
(Total number of therapeutic alliances with top 20 pharma companies)
Number of alliances
140
118
120 113
100
74
80
65
60
44
40
20
Early-Stage
Source: Recombinant Capital
20
recalled for safety reasons, the FDA is blamed. The
dilemma is one the industry has, in part, propagated.
Astrue: It has been a difficult five years working
with the FDA, more so than in the past. The com-
mitment to expedited drug development waned
after Commissioner David Kessler left. The
agency has wandered a little bit. The biotech
industry also is in a time of dislocation because the
FDA is consolidating the Center for Biologics
Evaluation and Research with the Center for Drugs
Evaluation and Research. It is not clear who is
deciding what for whom. I happen to think that the
merger is a good idea and that over the longer run
it will result in better and more consistent guidance
to the industry. In the short run, though, it is a very
difficult time.
E&Y: How will changes in Medicare and drug reim-
bursement affect biotech?
Withy: This is a critically important debate for the
industry and the country. We are at a point where
there are significant reforms coming to Medicare
throughout the reimbursement arena. If we follow
the general principles of market competition, let-
ting the marketplace work these things out, every-
body will benefit.
19881990 19941996
19911993 19971999
45
35
22 24
10
Mid-Stage
H E A LT H S C I E N C E S : R E S I L I E N C E
Engle: We are all concerned about developing drugs
in a reasonable amount of time that provide benefits
which justify the prices charged for the drugs. With
an increasingly aged population, if you do not come
up with innovative drugs, you will continue to see
escalating hospitalization costs. The solution for
some people is how do we cut the pie finer and finer,
but not let it grow. What biotech companies propose,
in general, is that if we continue to innovate, we will
lower overall health care costs. There is pressure on
drug pricing that comes from a shortsightedness we
did not have in the past.
I recognize in the real world we have to deal with
an increasing federal budget. The people who
always get penalized in a system where innovation
is stifled by freezing prices are the people who
cannot afford drugs on their own. It is a perverse
kind of result where people think they are doing
good by controlling prices. What they are missing is
that if they turn off innovation, it is only a matter of
time until either the budgets for health care balloon out
of control or the poor will not get the therapies other
people can afford.
Astrue: A lot of market analyses done within
biotech companies are remarkably naive and incom-
plete. They take the size of the patient population
20002002
47 49
34
20
11
Late-Stage
and anticipated cost of the drug and multiply; that is
their market. I have seen too many cases in which
companies have not factored in reimbursement bar-
riers. I have had experience with a couple of these
cases and it was enormously frustrating for me to
keep raising my hand and saying: Medicare is not
going to pay for that and that is X% of your market.
The response from some 28-year-old MBA was:
Well, if the product is good enough, elderly people
will find a way to pay for it. Not at $2,000 a year.
Not with the cumulative costs of their pharmaceuti-
cal products and their general economic status. The
biotech industry has been pretty unsophisticated
about reimbursement. If we have a Medicare pre-
scription drug benefit I hope we do and I am
optimistic we will have it in the next two years it
is going to change the entire landscape. It is going to
be even more punishing for companies that ignore
reimbursement issues.
E&Y: How have investors changed over the last five
years?
Sands: When I look back to 1996 and 1997, we
were dealing with investors who were very experi-
enced in biotechnology and had a very long-term
perspective. Then, in 2000, we saw a tremendous
momentum move where there was a different sort
but pays more heavily for late-stage products
(Average total size of therapeutic alliances with top 20 pharma companies)
($m)
250
200
150
91
100
50
50 35
16 17
Early-Stage
Source: Recombinant Capital
of investor moving into biotech; maybe some
spillover from the dot-com world or the tech world.
With the downturn of the tech market, we have seen
the momentum investors leave. In fact, with the
world situation being what it is, we have seen a lot
of investment leave the market in general. Now we
are back to where we were in 1996 and 1997 with
some of the more seasoned biotech investors who
understand long-term value creation. They are
having a great time buying stocks that are cheap at
this point. Patient investors will be the investors of
the future for the biotech industry.
Withy: In the past five years, we have seen the
beginning and end of a bull market. If you look
at where we were in mid-1998 and where we are
now, we have gone through a full cycle, and
there has been a significant change in investors.
Investors during the growth stage became less
and less patient, but now we are back to the real-
ities of drug development. It is risky, it takes a
long time, and I think investors at the moment
are looking for new models for the biotech
industry to adopt so their investment decisions
start making sense again. Focusing on what you
do best and creating positive cash flow within
the context of a network of alliances should
interest a new breed of investors.
19881990 19941996
19911993 1997 1999
52 54
32 37
22
Mid-Stage
Goddard: Over the last two years, the emergence of
aggressive hedge funds has had a negative impact
on our sector. But the biggest issue is a preponder-
ance of investors in the marketplace at the moment
who are looking for short-term moves in the market,
trying to play the market as distinct from investing
in quality companies that can deliver a long-term
return. It is one of the biggest issues confronting the
biotech sector because our sector is based on tech-
nology, opportunity, and innovation that require a
long incubation time. This very short-term focus
of the market and the resultant whipsaw volatility
are bad for organizations like ours.
E&Y: What will a biotech company look like in 10
years?
Engle: We have been working since 1989 on a tech-
nology that specifically turns off certain B cells gen-
erating disease-causing antibodies. These are often
autoimmune diseases. It is our goal not only to com-
plete the development of Riquent for lupus, but also
to continue development of LJP 1082 for the autoim-
mune thrombosis diseases. Now take that story and
multiply it times more than 300 companies on the
public side plus many more on the private side, and
you begin to get an idea why everybody gets so
excited about biotechnology. Merger activity is
20002002
207
68
43 46
35
Late-Stage
21
 inevitable, but this industry needs diversity and there
is plenty of room for small biotech companies.
The oil industry is a good analogy. Trying to develop
a new oil field by going out and drilling some holes
carries significant risks similar to trying to develop
new drugs. There are about seven to 10 key oil com-
panies at the top, similar to big pharma. But there are
hundreds of smaller oil companies that go out and
take the risk of developing major new oil finds. That
process has not changed and that has been going on
for 60 to 80 years in the oil business.
Sands: There will be fewer biotechnology compa-
nies, but those that exist will be extremely success-
ful. There are tremendous barriers to entry to this
field. It is a knowledge-based industry. It requires
tremendous intellectual property to operate. I do not
think it is going to be an easy field to grow 500
companies for 10 years. That is not realistic. Our
Selected 2002 Americas mergers and acquisitions
Company
Amgen
Millennium Pharmaceuticals
MedImmune
Biovail (Canada)
Exelixis
Inwest Investment
Bayer Diagnostics
Chiron
BioMarin
Invitrogen
Dinethaid Research (Canada)
Renovis
Antigenics
Harvard Bioscience
Cardiome Pharma (Canada)
CytRx
Sequenom
Source: Ernst & Young and BioWorld Financial Watch
22
system uses natural selection to find the best com- Astrue: A lot of things will look similar. A few
panies. The strong will survive and prosper. things will change. For the bigger biotech compa-
nies, the distinction between them and big pharma
Goddard: Biotechnology as a separately identified will become blurrier. Big pharma will have more
sector will disappear. We are part of the same biotech products, and some big pharma companies
industry with our big pharma colleagues. The inno- will look more like biotech companies. There will be
vative notion 20 years ago that molecular biology more consolidation, particularly among intermedi-
and protein products add up to different types of ate-stage companies. We will have a couple of boom
companies has blurred with the evolution of the sci- periods, which tend to come when a new platform
ence and the businesses. You will still have biotech technology yields a very productive array of prod-
as something of a farm system for the bigger com- ucts. Although I have been disappointed, I am still a
panies, whether they are big biotech or big pharma believer in gene therapy, which may replace the first-
companies. Biotech will still be a place where inno- and second-generation biotech products. I am
vative science is funded and can translate into value hoping we have a piece of that here. We have a
for everyone. But I am not sure the biotech tremendous gene therapy platform that offers the
umbrella, which has been neatly defined for a promise of re-administration of a gene because our
decade or so, is applicable as we go forward. There system does not rely on viruses for delivery.
will be two kinds of companies: those that provide
high-quality products and those that provide tech-
nological innovations.
Acquired company or merger partner Transaction value ($m)
Immunex 10,300.0
COR Therapeutics 2,000.0
Aviron 1,500.0
Pharma Pass 190.0
Genomica 110.0
Drug Royalty (Canada) 85.1
Visible Genetics (Canada) 61.4
Matrix Pharmaceutical 61.0
Glyko Biomedical 48.5
InforMax 42.0
OxoChemie 37.0
Centaur Pharmaceuticals 35.0
Aronex Pharmaceuticals 28.6
Genomic Solutions 18.0
Paralex 15.0
Global Genomics Capital 6.3
Axiom Biotechnologies 4.1
H E A LT H S C I E N C E S : R E S I L I E N C E
 YEAR IN R E V I E W: D E A L S

Consolidation, Pharma Alliances
Two major trends with enormous impact for the
biotechnology industry are the anticipated accel-
eration of consolidation within the U.S. and
Canadian sectors nearly 1,900 companies, and
the pharmaceutical industrys urgent demand for
unique medicines to replace blockbusters nearing
loss of patent exclusivity.
Consolidation activity intensified in 2002 with a pre-
cipitous drop in biotech market values and consequent
drought in equity financing. The dramatic decline fol-
lowed the previous years rocket-like increase in stock
prices and new funding (more than $30 billion raised
and 156% increase in industry market cap).
With no market recovery in sight for 2003 and
2004, and companies desperate for cash, the long-
predicted, but never quite realized, weeding of the
biotech sector may be in full swing. Whats different
from cyclical downturns of the 1990s is the depth of
decline in market values from the highs of 2000 and
the protracted character of the funding shortage.
While venture capital has remained relatively plen-
tiful for biotech companies, the initial public offer-
ing and follow-on markets have been shut tight.
Several key signs exist that suggest a severe con-
traction of the biotech sector is at hand. First,
about 60 companies, or nearly 20% of the pub-
licly traded U.S. companies, underwent restruc-
turing in 2002 to cut operating costs, according to
signalsmag.com. About half were delisted or in
danger of being delisted from Nasdaq. Nearly all
that restructured raised significant sums of
money during the 2000 boom.
In addition, 43 companies, or about 13% of the U.S.
public companies, were trading below the value of
their cash reserves as of the end of February 2003,
signalsmag.com reported.
These companies included the biggest names in
genomics: Human Genome Sciences, Celera
Genomics, Incyte, and CuraGen. More than half
had at least $50 million in the bank, triggering
interest on the part of opportunistic biotech compa-
nies looking for alternative sources of cash.
If those two signs were not gloomy enough, 23
loss-making companies faced the possibility of
having to repay convertible debt to lenders in
cash rather than stock. Many of these compa-
nies sold the convertible debt when share prices
were much higher than today.

U.S. Census 2002: Counting biotechnology (private and public companies)

Number of companies

300

250

200

150

100

50

New England Southeast San Diego North Carolina New York State Midwest Texas Utah

San Francisco Mid-Atlantic Los Angeles/ New Jersey Pennsylvania/ Pacific NW Colorado Other
Bay Area Orange County Delaware Valley

New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island Midwest: Illinois, Michigan, Ohio, Wisconsin
Mid-Atlantic: Maryland, Virginia, District of Columbia Pacific NW: Oregon, Washington
Southeast: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Tennessee, South Carolina Other: Hawaii, Minnesota, Missouri, Montana, Nebraska, Nevada, Oklahoma, South Dakota

Source: Ernst & Young

23
 The total debt of the 23 companies, according to
BioCentury, was more than $6 billion, about 20%
of all revenues generated by the U.S. biotech
industry in 2002. The only investors smiling
about this are short-sellers.
Ironically, these various bad turns have a healthy
upside: survival of the fittest. Many mergers and
acquisitions (M&A) have occurred within the biotech
industry, and should yield stronger companies.
Most experts agree too many loss-making companies
with bad business plans are chasing limited R&D
funding in the capital markets. In fact, managers of
both public and private biotech funds are aggressively
encouraging mergers within their portfolios.
Big pharma has not been a big player the past two
years on the M&A biotech scene. Most mergers have
involved biotech companies buying other biotech
companies, and that trend is expected to continue.
Pharmaceutical companies have been preoccupied with
their own problems: sinking market values, reduction in
the pace of sales growth, loss of patent exclusivity on
their blockbuster medicines, and product pipelines that
are not generating enough new blockbusters.
Billion dollar-plus drugsthe blockbustersthat
face loss of patent exclusivity in the next three years
account for about $40 billion in sales, more than
40% of the total $95 billion in blockbuster sales. Big
pharmas reliance on blockbusters to grow earnings
and pay for escalating R&D costs is reflected in a
recent examination of the top 200 best selling drugs
worldwide. Sales of those medicines are about $175
Top 10 biotech deals 2002
Companies
Pfizer and Eyetech Pharmaceuticals
Pfizer and Neurocrine Biosciences
Sanofi Synthelabo and Immuno-Designed Molecules
Roche and Antisoma
Aventis and Genta
Eli Lilly and Amylin
GlaxoSmithKline and Exelixis
Dupont and ChemFirst
Schering and Immunex
Elan and Enzon Pharmaceuticals
Source: Recombinant Capital
24
billion. Twenty-five percent are blockbusters, but
they account for more than 50% of the total.
Nearly 30 of the top-selling 200 drugs were developed
by biotech companies alone or in partnership with
pharma companies. They account for 18% of the $175
billion in total sales.
Jan Leschly, chairman of the venture capital firm Care
Capital and a former CEO of SmithKline Beecham,
noted pharmas productivity has slowed to a relative
trickle since 1999, when 35 new molecular entities, or
unique medicines, were approved by the FDA. The
number declined to 27 in 2000, 24 in 2001, and 15 in
2002. In addition, R&D spending has tripled since
1992, while investigational new drug submissions
have remained flat.
The impact of pharmas woes is significant for biotech
companies. Although pharmaceutical companies are
more selective in their alliances, they are in urgent
need of biotech innovation. They also are willing to
share the risk and high cost of drug development,
giving biotech companies the opportunity to be co-
developers that earn a share of profits beyond the tra-
ditional single-digit royalty rates of past technology
licensing deals.
Among the $100 million-plus deals in 2002 were the
following: Gryphons $155 million collaboration
with Roche for a drug to boost red blood cells,
Tripos $100 million deal with Pfizer for synthesiz-
ing new drug compounds, Adolors $220 million
agreement with GlaxoSmithKline for commercial-
ization of alvimopan for pain relief, Isotechnikas
$215 million pact with Roche for a transplantation
H E A LT H S C I E N C E S : R E S I L I E N C E
drug, and StressGen Biotechnologies $200 million
agreement with Roche for commercialization of a
human papillomavirus medicine.
Mega-deals included Gentas $333 million collabora-
tion with Aventis for an anti-cancer drug in Phase III
trials, Amylin Pharmaceuticals $320 million deal
with Eli Lilly for a Type II diabetes medicine in Phase
III trials, Eyetech Pharmaceuticals $440 million
agreement with Pfizer for an age-related macular
degeneration drug in Phase II/III trials, Neurocrine
Biosciences $400 million deal with Pfizer for an
insomnia drug in Phase III trials, and Exelixis $310
million pact with GlaxoSmithKline for development
of inflammatory diseases and cancer drugs that prove
promising in early Phase II trials.
Based on BioWorlds compilation of big pharma to
biotech alliances in 2002, Roche negotiated 21
deals; GlaxoSmithKline, 19; Eli Lilly, 15; Pfizer,
13; Merck & Co., 13; and AstraZeneca, 12.
Among the high-profile M&As of 2002 were
MedImmunes acquisition of Aviron; Millennium
Pharmaceuticals buyout of Cor Therapeutics;
Schering AGs purchase of Collateral Therapeutics;
Amgens acquisition of Immunex; Chirons takeover
of Matrix Pharmaceuticals; and Bayers purchase of
Visible Genetics.
Noteworthy M&As announced in 2002 and closed
earlier this year include Gilead Sciences purchase of
Triangle Pharmaceuticals, Angiotech Pharmaceuticals
acquisition of Cohesion Technologies, and Variagenics
merger with Hyseq Pharmaceuticals to form a new
company called Nuvelo.
Value ($m)
439
408
380
370
333
320
310
305
283
270
 Selected 2002 U.S. biotechnology public financial highlights [by geographic area, ($m), percent change over 2001]
Number of Market Cash and
public Number of capitalization Net short-term Total
companies employees 12.31.02 Revenue R&D loss investments assets

Region
San Francisco Bay Area 62 31,844 $49,164.1 $8,994.3 $3,639.7 $1,307.4 $8,774.4 $22,501.5
-7% 3% -37% 17% 4% 25% -12% -4%
New England 52 24,447 $22,311.3 $4,830.3 $2,836.0 $1,856.1 $6,939.2 $15,988.0
-2% -1% -44% 15% 17% 48% -10% 7%
San Diego 28 8,569 $12,195.5 $1,646.8 $843.7 $748.4 $3,416.1 $7,543.3
-7% 6% -46% 12% 5% 11% -9% 8%
New Jersey 24 4,872 $5,012.6 $838.7 $528.4 $478.8 $1,310.1 $2,891.8
4% 11% -53% 21% 28% 105% -20% -2%
Mid-Atlantic 20 5,984 $11,516.8 $1,325.3 $1,943.0 $1,733.7 $3,234.6 $6,104.3
0% 6% -42% 27% 141% 201% -11% 7%
Southeast 16 3,953 $2,317.1 $943.8 $186.7 $138.6 $344.7 $1,273.8
-16% 1% -42% 10% 11% -406% -30% -11%
New York State 15 2,813 $3,681.2 $250.9 $389.9 $383.6 $1,076.9 $1,642.9
-17% -5% -61% -10% -31% -21% -29% -27%
Midwest 13 1,156 $820.9 $162.7 $119.0 $164.5 $256.4 $425.6
-24% -41% -48% -14% -9% -30% -35% -37%
Pacific NW 17 2,417 $3,114.1 $332.1 $489.1 $582.7 $855.3 $1,414.2
0% -36% -89% -73% -18% 128% -57% -63%
Los Angeles/Orange County 13 27,091 $66,521.4 $7,249.0 $4,280.5 $1,439.3 $5,260.7 $27,471.7
-7% 8% 0% 31% 309% -218% 54% 185%
North Carolina 14 23,388 $5,167.0 $2,586.2 $176.3 $8.6 $1,214.7 $3,827.7
0% -5% -25% 9% -33% -97% 8% 19%
Pennsylvania/ 13 2,285 $3,809.4 $633.1 $321.9 $22.4 $1,087.1 $2,313.6
Delaware Valley -7% -7% -40% 80% 9% -93% -17% 4%
Texas 13 1,536 $1,164.9 $115.9 $216.3 $239.4 $579.5 $976.6
-7% -7% -66% 3% -18% -9% -24% -22%
Colorado 6 737 $687.5 $105.3 $107.8 $93.3 $229.6 $383.7
-14% -18% -48% 60% -9% -32% -18% -2%
Utah 2 674 $1,216.2 $61.9 $123.5 $109.4 $344.9 $450.6
0% 6% -49% 4% 33% 90% 16% 14%
Other 10 1,112 $796.9 $179.8 $70.0 $72.1 $158.5 $478.8
-23% 2% -50% 9% -5% -14% -10% -6%
Total 318 142,878 $189,496.1 $30,265.8 $16,271.7 $9,378 .1 $35,082.6 $95,688.3
-7% 0% -35% 15% 41% 102% -9% 20%

New England: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island Midwest: Illinois, Michigan, Ohio, Wisconsin
Mid-Atlantic: Maryland, Virginia, District of Columbia Pacific NW: Oregon, Washington
Southeast: Alabama, Arkansas, Florida, Georgia, Kentucky, Louisiana, Tennessee, South Carolina Other: Hawaii, Minnesota, Missouri, Montana, Nebraska, Nevada, Oklahoma, South Dakota

Source: Ernst & Young and company financial statement data

Percent changes refer to change over December 2001 data
Large changes in R&D and net income in Los Angeles/Orange County and Mid-Atlantic are due to write-offs for acquired in-process R&D by Amgen and MedImmune related to their acquisitions
Numbers may appear inconsistent because of rounding

25
 C A NA DA : YEAR IN REVIEW

Cash Crunch Time Canadian biotechnology at a glance 2001

Canada ended 2002 second only to the U.S. in the
number of biotech companies. However, it has two 2002
2002 2001
2001 % Change
% Change
times more companies as a percentage of gross
Public company data
domestic product than the U.S. and six times more
Revenues ($m) 1,466 1,021 44%
than Europe. As a result, most Canadian biotech
companies are much smaller than their competitors R&D expense ($m) 555 474 17%
around the globe. Net loss ($m) 263 507 -48%
Market capitalization ($m) 8,867 12,909 -31%
With the globalization of the biotech industry, these Number of employees 7,785 7,005 11%
smaller Canadian companies find it difficult to operate
Financings
in the global marketplace. They do not have the critical
Public company financings ($m) 328 926 -65%
mass to effectively compete nor do they have the
market capitalization of the larger U.S. and European Number of IPOs 1 4 -75%
biotech companies. Their global competitors have the Private company financings ($m) 199 388 -49%
advantage of using their larger market capitalizations Number of companies
as a currency to make strategic acquisitions. Public companies 85 85 0%
Private companies 332 331 <1%
Entering 2002, a significant increase in merger and
Public and private companies 417 416 <1%
acquisition (M&A) activity was expected among
these smaller Canadian firms. For most of the year, Source: Ernst & Young
this activity remained relatively consistent with 2002 data were converted to U.S. $ using an exchange rate of 1.54 (Canadian per U.S. $): 2001 data were
prior years. Toward the end of 2002 as market con- converted using an exchange rate of 1.59. Numbers may appear inconsistent because of rounding
ditions deteriorated further, the dramatic slowdown
in funding and the decline in the market capitaliza-
tion resulted in a much more active and interesting The Canadian Biotechnology News biotech index A number of Canadian biotech companies, which
market for M&As. decreased by 39.25% during 2002, and in the fourth were producing revenue and either were making a
quarter, there was only one secondary offering by a profit or were at break-even, raised fairly substan-
The number of publicly traded biotech companies public Canadian biotech company. tial debt rounds, without conversion privileges,
remained the same as in 2001 at 85. In 2002, two totalling almost $500 million. This almost equaled
companies were acquired, one merged with another Funding in 2002 totalled $527 million based on $10 the entire amount of equity raised in 2002. This
public company and four others closed due to a lack million in one IPO, $318 million in secondary and debt financing was found to be much less dilutive
of funds. These seven companies were replaced by other offerings, and $199 million in venture capital for the companies that often viewed their share
one that managed to complete an initial public offer- financing. This is 40% of the amount raised in 2001 prices as being far below their true value.
ing (IPO) in a difficult environment and six pri- and about 45% of the total in 2000.
vately held companies that used reverse takeovers to In weak capital markets, the ability to raise such
obtain a public listing. The Ernst & Young Survival Index indicates that debt financing will begin to separate the more
32 public companies, or 38% of the sector, have mature companies from the remainder of the indus-
The primary cause for the lack of mergers in 2002 less than one year of cash, and 14% of the compa- try, and should encourage further consolidation.
was a direct result of the funding raised in 2000 and nies have between one and two years of cash. With
2001. Adding up IPOs, secondary offerings and pri- 44 public companies having less than two years of At the end of 2002, many companies were sig-
vate placements, the Canadian industry in 2000 cash, M&A activity will likely increase signifi- nificantly cutting back on their staff and their
raised $1.2 billion and another $1.3 billion in 2001. cantly in 2003 to avoid a significant number of clinical trial budgets. This has resulted in com-
As a result of the outstanding level of financing in closures and potential delays in commercializing panies focusing on products that have a high
those two years, most Canadian companies had sig- lead technologies. probability of success and that have high revenue
nificant cash resources and expected capital markets potentials. Canadian biotech companies have
to pick up late last year. As 2002 progressed, however, The funding crises and lower market capitaliza- been successful in securing alliances for these
the markets did not pick up and in fact declined fur- tions have caused Canadian companies to seek products with pharmaceutical or other more
ther. The available funding subsequently decreased. debt financing. advanced biotech companies.

26 H E A LT H S C I E N C E S : R E S I L I E N C E
Many companies have been forced to temporarily
suspend development on other products until the cap-
ital markets improve. Many of these drugs are very
early-stage. If companies can find partners for these
products, the type of collaborative deal that can be
arranged rarely involves co-promotion rights and
often involves significantly reduced royalty streams.
These agreements are also taking significantly
longer to negotiate and are providing significantly
less cash up front.
PIPE financing
Much of the venture capital activity involved private
investment in public equity (PIPEs) during 2002.
Venture capital funding, including PIPEs, exceeded
that raised on the IPO and secondary markets for the
first time since 1998. Of the $527 million invested,
one-quarter was through PIPEs.
There are four reasons for this dramatic increase in
PIPE financing. First, many venture capitalists had not
fully exited from some of the smaller companies and
the funding was required to keep these companies
alive. Second, the value of many public companies was
lower than that of private companies. Third, valuation
is much easier to determine for a public company and
fourth, PIPEs offer a lower risk, later-stage investment
opportunity to venture capitalists who have become
more risk averse following the market beating they
have experienced over the previous 18 months.
2002 distribution of biotech companies by sector
Environment 4%
Genomics, proteomics,
and bioinformatics 12%
Source: Ernst & Young
The average size of a venture capital investment
decreased from $2.3 million in 2001 to less than $2
million in 2002. This decrease indicates that more
seed fundings and smaller deals are being under-
taken by venture capitalists in Canada. There has
also been a significant increase in tranche investing,
which is becoming the norm.
It may also explain that even with a number of fail-
ures, or M&As, of private biotech companies that
had completed a few rounds of financing the total
number of companies actually increased by one.
There were more than 40 seed or first rounds of
financing in 2002, representing 40% of the venture
capital deals in private companies. Many seed
financing rounds are for amounts between $350,000
and $1 million. This money is easier to obtain and
may involve a mix of government funding, govern-
ment grants, and private capital.
The shift to therapeutic companies has continued,
but there also has been a marked increase in funding
for new companies whose products will not require
the lengthy, difficult, and expensive drug approval
process. These companies primarily are in the areas
of advanced materials, agriculture and aquaculture,
bioinformatics, genomics, and proteomics.
Under an innovation strategy announced in January
2001, the federal government is committed to
Therapeutics 58%
Agriculture, animal health, and aquaculture 15%
Other 4%
strengthening the biotechnology research capacity
of Canadian universities and government institu-
tions, accelerating the ability to commercialize
biotechnology discoveries and pursuing a global
strategy to establish world-class expertise within
Canada. As such, federal and provincial govern-
ments have continued to fund basic research at uni-
versities and research institutes. Researchers and
professors, who saw their colleagues successfully
start companies in the late 1990s and 2000, decided
to take the risk and launch their own companies.
However, money for subsequent financing rounds,
typically involving greater amounts, is more and
more difficult to achieve. As a result, many of these
start-up companies will be looking for partners or
strategic mergers in the next year or two.
Drug successes
Product approvals by companies in Canada are pri-
marily focused on the U.S. and Europe, as both of
these markets are significantly larger than the
Canadian market. Although the Canadian biotech
sector had a number of drug failures in Phase II, it
also had some successes. At least 15 products were
approved in the U.S. or Europe in 2002.
As the number of product approvals increases, more
Canadian companies are earning revenues that will
sustain them into the future and help them avoid
relying solely on the capital markets for funding.
Advanced materials 3%
Diagnostics 4%
27
 Canadian companies presently have over 30 prod-
ucts in Phase III trials and over 50 products in
Phase II trials. Only about one-third of these prod-
ucts are partnered. This maturity in the Canadian
sector will help advance the industry in the 21st
century. The only cloud on the horizon, however,
concerns the small market capitalization of many
of these companies and the ease with which they
may be acquired by larger foreign entities. In many
cases, it could be cheaper to buy the company than
partner for technology.
Public policy
A major event concerning intellectual property pro-
tections in Canada occurred December 7, 2002,
when the Canadian Supreme Court denied corpora-
tions the right to patent higher life forms. This
resulted from a court case started in 1985 when a
patent application was filed by Harvard University
for its Harvard mouse, an OncoMouse used in
cancer drug development.
As a result of the court ruling, patent protections
for higher life forms will have to be adopted
through legislative changes. Although there is some
concern about the court ruling in Canada, most
observers feel it will not have a significant impact
on the Canadian biotech industry.
Canadian Census 2002: Counting biotech companies by province
Public companies
Private companies
No. of companies
150
120
90
60
30
13
4 5
Newfoundland Nova Scotia New Brunswick Prince Edward
Source: Ernst & Young
28
Canadian inventors who want to patent higher life
forms can seek protection in Europe, Japan, and the
U.S., which constitute the major sources of revenues
from applications of biotechnology.
On another public policy issue, the Canadian govern-
ment passed legislation limiting stem cell research.
The Canadian law is more restrictive than legislation
in Europe and Asia, particularly the UK and
Singapore, and may result in more aggressive
approaches to stem cell research moving offshore.
In June 2002, Toronto hosted the Biotechnology
Industry Organizations BIO 2002 International
Convention and Exhibition. The conference was
attended by more than 15,500 delegates, the largest
gathering at a BIO event, and for the first time, more
than half the participants came from outside the U.S.
BIO 2002 created a great deal of excitement within
the Canadian industry, and there was hope it would
help reboot the sector. Product-related problems, how-
ever, were encountered in clinical trials later in the
summer by some of the nations leading biotechnol-
ogy companies, which suffered substantial declines in
market capitalization. Conjuchem, GlycoDesign and
Altarex, for example, lost approximately 90% of their
value. This unfortunate turn of events heightened con-
127
84
31
24
3 2
Quebec Ontario
Island
H E A LT H S C I E N C E S : R E S I L I E N C E
cerns about the risks of biotech investments and soon
outstripped the euphoria created by BIO 2002.
Biotech centers
The biotechnology sector in Canada is clustered
around three centers: Montreal, Toronto, and
Vancouver. Provincial distributions of companies
remained relatively the same compared with 2001,
with Quebec leading in number of companies created
and amount of venture capital raised during 2002.
There were over 40 venture financings completed
in Quebec, raising more than $88 million, which
was 40% more than was raised by any other
province. Ontario followed with 23 deals for an
announced value of $62 million. British Columbia
had 16 deals for $25 million. All totals were sig-
nificantly down from 2001 levels. In British
Columbia, venture funding amounted to only 20%
of that raised in 2001.
The M&A activity in 2002 primarily involved
either takeovers of Canadian companies by foreign
enterprises or Canadian companies acquiring much
smaller private companies in Canada.
There were no blockbuster deals last year to com-
pare with 2001, when UK-based companies made
54
24
17
9 9 10
1
Manitoba Saskatchewan Alberta British
Columbia
three high-profile acquisitions: Shire Pharmaceuticals
acquired Biochem Pharma for $3.7 billion; Smith
& Nephew bought Acticoat for more than $70 mil-
lion; and SkyePharma paid more than $64 million
for RTP Pharma.
The biggest deals in 2002 in Canada were Biovails
acquisition of U.S.-based Pharma PASS for $190 mil-
lion, followed by U.S.-based Bayers takeover of
Visible Genetics for $61.4 million.
Visible Genetics in 2001 had the fourth-largest
market cap among Canadian biotech companies. At
the end of the third quarter 2001, it was valued at
$586 million. As a result of clinical trial setbacks,
however, the companys value plummeted during
2002 with the Bayer acquisition representing less
than 7% of Visible Genetics market cap in
September 2001. Another major deal was Dimethaid
Researchs acquisition of OxoChemie of Switzerland
for $37 million.
Most strategic alliances were relatively small in-
licensing and out-licensing deals, often involving
up-front payments between $500,000 and $5 mil-
lion. A significant portion of the up-front payment
was related to acquisition of stock, which signifi-
cantly reduced the profit/loss impact on the acquir-
ing corporations.
A major alliance, however, involved Isotechnikas
partnership with Roche. This co-development agree-
ment was for Isotechnikas innovative transplant
drug, ISA(TX)247, which was in early Phase II clin-
ical development. The collaboration represents the
largest Canadian drug development deal between a
big pharma and biotech company for commercial-
ization of a single drug molecule. Assuming all
development goals are achieved, the up-front and
milestone payments will amount to $215 million.
Isotechnika also will receive a percentage of the
gross profits and 70% of the R&D costs.
Another major deal was Axcans acquisition of a
pancreatic enzyme line of products from U.S.-based
Abbott Laboratories for $45 million.
Sector still growing
Despite the current depressed market conditions, the
number of start-up biotech companies in Canada will
continue to grow because of several key factors:
Government funding of various research facilities
Generous refundable research and development
tax credits from federal and provincial governments
Fairly easy access to para-government and private
seed capital
Larger, more advanced companies also will con-
tinue to grow based on their ability to raise funds
outside of the normal capital markets with plenty of
debt financing available.
The problem will be early-stage and mid-stage
Canadian companies, public and private, that are
running out of cash and are still three or four years
from having product revenues. The private compa-
nies that received seed financing plus a further
round of venture capital need another major infu-
sion to continue their development programs. Also,
companies that went public over the past few years
are facing the same situation: dwindling cash and
limited access to new financing. Without an upturn
in the capital markets, many of these companies will
be forced to close or merge.
As this shake-out process continues, however, the
remaining companies in Canada will be much stronger
and more competitive in a global marketplace.

Selected 2002 Canada biotechnology public financial highlights [by geographic area ($m)]
Number of Market Cash and
public capitalization Net short-term Total
companies 12.31.02 Revenue R&D loss investments assets

Region

Ontario 31 $4,936 $908 $236 $34 $461 $2,606

Quebec 24 1,465 319 111 81 325 1,020

British Columbia 17 1,688 159 144 108 498 755

Other 13 778 80 64 40 130 279

Total 85 $8,867 $1,466 $555 $263 $1,414 $4,660

Source: Ernst & Young and company financial statement data

Numbers may appear inconsistent because of rounding

29

Francesco Bellini
CEO
Neurochem
Elements of Success
The world has changed radically for Canadas bio-
pharmaceutical industry since it began its growth
as a fledgling offspring of the nations research
laboratories in the mid-1980s. Since that time,
while some young companies have successfully
brought products to market and have been very
profitable, many others have failed, creating a gen-
eral atmosphere of skepticism among investors for
companies focused principally on scientific and
technological development.
As a result, the investment community is now
product-driven, seeking businesses with real prod-
ucts, product pipelines and solid short- to medium-
term potential for profits. Gone are the investors
with a 10- to 20-year horizon willing to wait for
the scientific breakthrough that will bring enor-
mous financial benefits. They are now content
with a smaller return but insist on a much shorter
timeframe; five years is now the norm.
These investors seek out companies with science
and technologies that have gone beyond the labo-
ratory and are already being tested in humans.
Savvy investors also want companies with prod-
ucts at different stages of human trials to ensure
growth in the companys revenue stream.
Although sufficient capital is a constant concern
for companies in early stages of research and
development, for those that find themselves with
proven technologies and rich pipelines, raising
capital is not a major problem. The investment
community knows that large pharmaceutical com-
panies are running out of innovative products.
Investors realize that companies with interesting
product candidates nearing the market offer sig-
30
C A NA DA : I N D U S T RY P E R S P E C T I V E
nificant potential added value. They are willing to
invest in those that can demonstrate clear win-
dows of opportunity to benefit from the poten-
tially lucrative pharmaceutical field.
In Canada, Neurochem is a case in point. In the last
half of 2002 and early 2003, the company succeeded
in attracting an exceptionally strong shareholder base
and a total possible investment of over $30 million.
Path to success
In my experience, first as co-founder of BioChem
Pharma and now with Neurochem, there are three
factors that smaller biopharmaceutical companies
must respect to ensure growth.
The first is focus. The heads of these companies
must exercise a truly surgical focus on the fields
in which they are involved and the product candi-
dates they want to develop. Every extraneous area
of activity, no matter how scientifically fascinat-
ing, must be cut away to avoid wasting precious
financial and human resources.
The second factor is cash. Especially in the present
context of difficult financial markets, obtain and pre-
serve as much cash as possible to provide room for
product development or possible acquisitions.
The third is perseverance. Companies need to
think their strategies out carefully and then stick
to them. At both BioChem and Neurochem, I have
been privileged to work with people who really
know what hard work and perseverance mean.
They are scientists of world-caliber, and outstand-
ing professionals in every field. They are people
who do not take no for an answer; people who,
when faced with a problem, probe and dig and
chip away at it, until the problem no longer exists.
H E A LT H S C I E N C E S : R E S I L I E N C E
Product strategy
Neurochems strategy is to focus on diseases of
the central nervous system. In the context of the
new investor environment for biopharmaceutical
companies, Neurochem meets all of the criteria.
The company has five product candidates in its
pipeline including one in pivital Phase II/III trials
and two in Phase II trials. All of them address
unmet medical needs.
Neurochem has also retained full rights to its prod-
ucts, with 151 patents granted or filed worldwide.
Neurochem is capable of bringing its own products
to market and has real potential to become a very
strong and profitable specialty pharmaceutical
company within the next three to four years.
For Neurochem, the challenge is to create the
infrastructure to transform this scientific and
technological base into a profitable business. The
focus will be on bringing product candidates to
market and on commercialization of the resulting
pharmaceutical products.
The companys strategy entails retaining full
rights to Neurochems novel products, particu-
larly those aimed at defined groups of specialist
doctors where logistics would facilitate coverage
by a relatively small sales and marketing force.
Neurochem is making the transition from a technol-
ogy-based business to a product-driven company
that will have the capabilities necessary to take the
fruits of its leading-edge know-how to market.

Investor Risk Aversion
Ernst & Young asked experts from the invest-
ment community to discuss trends and issues
affecting the capital markets for biotech compa-
nies. Participants were Pierre Cantin, partner
with CDP Capital-Technology Ventures in
Montreal; Samuel Colella, co-founder of Versant
Ventures in Menlo Park, CA.; Jonathan Leff, part-
ner with Warburg Pincus in New York; David
Molowa, managing director at JP Morgan in New
York; and Eric Schmidt, managing director at SG
Cowen in New York. The discussions were held in
March 2003.
E&Y: What will it take for the biotech sector to
recover from the depressed conditions of the past two
plus years?
Molowa: We are feeling the effect of the geopo-
litical overhang, where investors have become
extremely risk averse. I have been a biotech ana-
lyst since 1991, and have never seen such risk
aversion. If people are going to own equities, the
companies need to have revenues, positive earn-
ings, and cash flows. With that kind of a back-
Pierre Cantin
CDP Capital-Technology
Ventures
C A P I TA L M A R K E T S R O U N D TA B L E
drop, it sets the stage for people focusing on
about 10 companies and orphaning the rest of the
biotech sector.
Leff: We will not break out of this depressed condi-
tion until the broader economic and political factors
affecting investment confidence are cleared up. But
there are also issues specific to the biotech industry at
work. We are feeling a hangover from the excessive
optimism of the previous bull market. Expectations
were overblown. The key for the biotech industry to
begin outperforming the markets and bounce back
from this pessimistic environment is to deliver impor-
tant new drugs to the market.
Schmidt: On Wall Street, everything, including
performance, is relative. But if you step back from
stock performance, biotech fundamentals are not
that bad. They look better than they have at any
point in the history of this industry, whether you
look at the number of profitable companies or the
number of drugs in development, or the cash com-
panies have on hand to push forward. All those
metrics add up to a relatively positive outlook for
the sector. It will take one thing, and one thing only,
to reinvigorate the biotech sector: drug approvals.
David Molowa
JP Morgan
Samuel Colella
Versant Ventures
Colella: First, we need more winning products.
We have 150 products approved, but only 22 were
approved last year. This year should be a better
year. We have sizeable clinical products. Second,
it never hurts to have large mergers and acquisi-
tions, such as the Johnson & JohnsonScios
deal. It gives investors hope that there is real gold
on the other side of that rainbow. Third, we need
funds to flow into the sector. One factor that
caused the 2000 boom was cash flow into biotech
mutual funds. A significant amount of money
came in from the information technology sector,
particularly from the dot-com sector.
E&Y: What lessons have we learned from the latest
down cycle in the capital markets?
Cantin: Conduct expectation evaluations and
reality checks because operational plans and
clinical plans most often have delays. It is back
to basics. The genomics bubble is gone, so
people want to see more proof of concept at dif-
ferent stages before they will pay a specific price
for these companies, at the investor level and
pharma level.
Eric Schmidt
SG Cowen
Jonathan Leff
Warburg Pincus
31
 Schmidt: Good businesses really do matter.
There was a fundamental flaw in some of the business
models proposed to investors over the last two or three
years. No one ever built a business in life sciences on
the sale of information, and most likely, no one ever
will. We have to go back to business school 101. Get
back to fundamentals in terms of what makes a good
business and what does not. The business of drugs is a
good business model.
Colella: Sometimes, we overcomplicate things. We
experienced what we always knew: Cash is king again.
We learn we have to control burn rates. We have to be
more conservative in our clinical developments. We
know management is critical. There are some differ-
ences, however. One was lack of leadership at the U.S.
Food and Drug Administration. Another was a corporate
scandal. The ImClone scandal hurt our credibility. Also,
I cannot remember a time in any previous cycles when
biotech was down and pharma was down. Pharma
companies have problems with pricing, pipelines, mas-
sive consolidations, and great uncertainty. The difficul-
ties in pharma have exacerbated this cycle.
Molowa: It is all about products in biotechnology.
Technology platforms and information can quickly
become obsolete. Or you can have intellectual property
What a difference a year makes: In 2001, U.S. biotechs tracked the Dow and outperformed the Nasdaq
Index
1.25
1.00
0.75
0.50
0.25
Jan Feb Mar Apr
01 01 01 01
Source: finance.yahoo.com
32
issues that make it hard to determine the value of the
technology. This is the area where we have the greatest
hypervaluation. At the end of the day, this is really a
product business. We know the business model there.
We know what the gross margins are. We know who the
customers are. We know how people get reimbursed. We
know who the potential partners are for these products.
E&Y: What new technologies are getting funded?
Colella: Clearly, product companies are popular. We
would all like to have therapeutics. That is how you build
valuable companies. But it takes an immense amount of
money, and it takes a long timemore than a decade.
How do you finance a company for a decade? For the
raw start-up, if you want to build a product company, you
have to sell something. You need a service or technology
platform to sell to other biotech and pharma companies
to finance yourself as a product company. The new
models I like are platforms or services broad enough that
you have something left over after partnering, so you can
have your own products and eventually your own mar-
keting. Having said that, I am still seeing best of breed
new technology companies getting financed. That will
be forever in this business because venture capitalists
see that when you have powerful, new technology,
somebody will figure out how to commercialize it.
Nasdaq
DJIA
Nasdaq Biotech
May Jun Jul Aug
01 01 01 01
H E A LT H S C I E N C E S : R E S I L I E N C E
Leff: Few areas of technology have generated
enough excitement to attract significant invest-
ment over the past year. Right now, RNA interfer-
ence is perhaps the closest thing to a hot
technology in terms of attracting funding. But
from a private equity investor standpoint, the
emphasis has not been on technologies per se. It
is how the technology allows the company to
build a product-focused business that matters. A
company with an exciting new technology cannot
succeed today simply by licensing technology,
drug candidates, or preclinical product candidates
to others. To build sustainable value, a company
must move the right product opportunities into
development and commercialization, the way the
first generation of successful biotech companies
did it. Another key question is whether the tech-
nology will allow the company to beat the aver-
ages on drug discovery and drug development. Is
it going to result in a faster flow of products into
the clinic? Products with a higher probability of
success? Products with a greater market value
when they are commercialized? We need to see
how technology platforms generate meaningful
improvements on those key metrics.
Sep Oct Nov Dec
01 01 01 01
E&Y: How do emerging companies build value?
Schmidt: The question is extremely hard to answer,
and even harder to evaluate as a potential investor or
analyst. Until a company has Phase II data around a
particular compound candidate, it is extremely hard
to evaluate. Investors try to back good science,
people, business plans, and business models that
likely will work. But these emerging companies are
difficult to evaluate. It is not much more than a crap-
shoot at the end.
Cantin: They have to be creative, but also need to
focus on the true key element drivers. They have to
get to proof of concept in humans. Some companies
are doing a lot of programs at the pre-clinical level,
sort of a big pharma approach. But what investors
and big pharma want to see is, does this work in
human beings? Do not bet the whole thing on one
product, but selectively progress forward so you can
have some kind of proof of concept that this com-
pound would work in humans.
Leff: It comes back to what kind of tangible
value creation can be shown in terms of moving
product candidates toward the clinic, into the
clinic, and through the clinic. Of course, that
while in 2002 biotechs tracked Nasdaq and underperformed the Dow
Index
1.25
1.00
0.75
0.50
0.25
Jan Feb Mar Apr
02 02 02 02
Source: finance.yahoo.com
does not just mean any product candidate. It
means quality product candidates that have a real
opportunity for success and attractive commer-
cial value. It is not about the technology platform
itself. It is what that platform can do to create a
pipeline of products with measurable progress
toward the market.
E&Y: Will we see some acceleration in M&A activity?
Is there a need for the industry to consolidate?
Molowa: There has been a need to consolidate
almost from the beginning of this industry. There
has been a tremendous amount of redundancy built
over time and a lack of critical mass across the
board. But typically, for social reasons, nothing
really has happened. Not until companies get their
backs to the wall, will you see something happen.
We are dreaming if we think big pharma is going to
come in and save the daybuying out all these
broken companies. That is not going to happen.
Pharmas managements are as risk averse as they
have ever been and more focused on near-term prof-
itability than they have ever been.
Cantin: If the market keeps going the way it is,
there will be more M&A activity. It will not be to
Nasdaq
DJIA
Nasdaq Biotech
May Jun Jul Aug
02 02 02 02
the degree people think. As soon as this market
turns around, for whatever reason, most M&A
plans will be dropped and people will try to
finance as a stand-alone; that is human nature. But
the market will still be tough and we are looking
actively at M&A opportunities, mainly biotech-to-
biotech. Big biotech will purchase young biotech.
But also companies that are relatively equal are
considering mergers. Those are the toughest to do.
The relative valuation gets in the way, egos get in
the way, and shareholders of both companies do
not want to accept the valuation of the other. In
M&A transactions last year in Canada, most of the
acquirers were U.S.-based. Also, historically, some
UK companies have been interested in Canada.
Colella: We have no choice but to merge companies
to get more critical mass. The statistics are showing
more M&A activity, particularly more biotech-to-
biotech. Some of it is pure survival. There is no
question that there will be a lot more M&As in
2003, 2004, and the foreseeable future. There also
will be more pharma acquisition of biotech, but it
will not be rampant. It is not the nature of the phar-
maceutical industry to buy small biotech compa-
nies. It is more their strategy to consolidate larger
entities than it is to pick up a small entity.
Sep Oct Nov Dec
02 02 02 02
33
 Schmidt: You can characterize M&A in one of two
camps. There is good M&A, done from a position
of strength. We have seen examples like that at a
steady pace over the last five or 10 years, a bigger
company buys a smaller company for top-line growth,
such as Warner-LambertAgouron Pharmaceuticals,
Johnson & JohnsonCentocor, MedImmuneAviron,
or this years example, Johnson & JohnsonScios.
That will continue. There are plenty of big names
looking to acquire a fast-growing top-line product
company. On the other hand, in this market, the bad
M&As, out of a position of weakness, are likely to
accelerate slightly. There may be some critical mass to
be gained by putting together two smaller, yet unsuc-
cessful biotech companies. But it is not the type of
M&A that interests investors.
E&Y: How have biotech-to-biotech and pharma-to-
biotech alliances changed in the past two years?
Cantin: In the genomics and proteomics space, the
big difference is that pharma companies in general
have been burned. They acquired or did licensing
deals at significant up-front payments to get data they
did not know how to use. Big pharma companies are
very careful now. They will still do deals at the early
stage, but the deals will be based on very little up-
front and will be very stage-based, milestone-based,
Select Americas public offerings 2002
Company
IPOs
ZymoGenetics
DOV Pharmaceuticals
Ribapharm
BioDelivery Sciences International
Follow-ons
Antigenics
PanGeo Pharma (Canada)
SangStat Medical
Aphton
Amylin Pharmaceuticals
Array BioPharma
Orchid BioSciences
Salix Pharmaceuticals
Axcan Pharma (Canada)
Vasogen (Canada)
Telik
Trimeris
Tularik
NPS Pharmaceuticals
Myriad Genetics
Source: Ernst & Young, BioCentury, Venture One, and signalsmag.com
34
and back-loaded when the product is on the market.
It takes much more time for pharma companies to do
a deal. They want to see a clear path that this tech-
nology will bring them products.
Colella: It is harder to do alliances. It takes longer.
Deals are getting bigger. Some are even larger than
we have done in the past. There is more maturity in
doing these alliances. This comes from the fact that
the biotech industry now has seasoned management.
A decade ago we had first-time CEOs in biotechs.
We have people now that have run multiple compa-
nies, have been around the track a number of times,
and know how to do an alliance. I think pharma is
also better at doing alliances. Alliances have become
true partnerships and that is healthy. The other thing
that happened is biotech-to-biotech alliances can
work. Companies are realizing they cannot do every-
thing. So they focus on core functions, in-license
products, or use services from somebody else. We are
going to become a business that is more segmented,
where people sell services, such as screening, toxi-
cology, or clinical services. The business is maturing.
Leff: We are seeing more robust terms for in-licensing
of late-stage products by pharma and big-cap
biotech from emerging biotech companies. That
goes back to the pipeline gap. We are seeing more
Amount raised ($m)
120
65
260
11
60
18
89
17
97
35
23
62
66
16
86
113
27
110
59
H E A LT H S C I E N C E S : R E S I L I E N C E
and more biotech companies strike deals where they
retain 50% of their marketing rights and still bring
in a lot of up-front capital from the pharma partner.
Pharmaceutical companies generally resisted that
type of deal as recently as a few years ago.
Molowa: These escalating alliance terms actually
might drive some pharma acquisitions of biotech. The
SciosJohnson & Johnson deal is a case in point. That
started out as a licensing auction for one of Scios
pipeline programs. In part, because the deal terms
were getting onerous, negotiations stepped to that next
level where the big pharma company said, Maybe its
worth taking on the entire company rather than giving
up so much of the downstream economics. Similar
deals, however, will have to be driven by a change in
thinking of big pharma. It must be willing to take
more risk than it has historically. Maybe we will have
situations where the pharma company buys 50% of
the biotech company and the other 50% upon hitting
certain milestones in development of pipeline prod-
ucts. That way, pharma averts some risk.
E&Y: What important regulatory events will influence
the capital markets?
Colella: Factors that influence business, but are
somewhat outside our control, are reimbursement,
Month
February
April
April
June
January
January
February
February
February
February
February
March
March
May
September
September
October
October
November
drug pricing, and generics. Those will have an
impact, positive or negative. So far, I like what I hear
coming out of our new FDA commissioner (Mark
McClellan). But this whole world of reimbursement
is a massive area of uncertainty. As our companies
move more into products, factors like how attractive
is the market, how stable is pricing, and what are the
margins, are issues that will impact us a lot.
Molowa: The thing we are keeping an eye on for the
next six to 18 months is generic biologics. Clearly,
McClellan has said it is coming. It is just a matter of
how the FDA is going to structure it. This is worri-
some for the biotech industry. It will take time, but
there will be a lot more visibility on putting a
process in place. However, I am not sure anything
will actually be instituted over the next 18 months.
Schmidt: As far as the FDA goes, it may be too early
to call it a trend, but investors are taking notice that we
are dealing with a much kinder and gentler regulatory
agency than we had 12 months ago. That not only
reflects on the new commissioner, but also the re-
enactment of the Prescription Drug User Fee Act III
and the ongoing reorganization of the Center for
Biologics Evaluation and Research, which was gener-
ally viewed by the industry as a terrible place to be
with a Biologics License Application. We are opti-
Yearly biotechnology financings ($m)
2002
IPOs $456
Follow-ons 838
Other 5,242
Venture 2,164
Total $8,699
Source: Ernst & Young, BioCentury, BioWorld, Venture One, and signalsmag.com
Numbers may appear inconsistent because of rounding
Year is January to December
mistic that 2003 is going to be a good year for new
drug approvals because so few products were
approved in 2002 and there is a backlog of new drugs
under review. The Centers for Medicare and Medicaid
Services, however, counters that enthusiasm because
for the first time we have seen that agency willing to
force the issue of pricing with biotech on certain prod-
ucts. Many of us in this industry had feared it was just
a matter of time before government might have to be
a bit more aggressive in terms of reimbursement for
some of these high-priced products.
E&Y: Convertible debt financings have been used by
many companies in the past three years to raise funds.
In many cases, the notes were issued when stock
prices were much higher. Does this have a negative
impact on the biotech sector?
Molowa: I can tell you who is paying attention to
convertible debt: short sellers. That is straight
debt. There is no equity component whatsoever. It
keeps people away who are interested in being
long-term investors in the company. It is a reason
for someone to be negative on a company.
Schmidt: The good news is that this is probably not
an industry-wide issue, but rather a company-specific
concern . For about five to 10 unprofitable companies,
U.S.
2001 2000 1999
$208 $4,997 $685
1,695 14,964 3,680
3,635 9,987 2,969
2,392 2,773 1,435
$7,930 $32,722 $8,769
the convertible debt they issued amounts to pure debt
today. For those companies that made that decision, it
certainly looks like the wrong one in retrospect.
Leff: I would say that unless a company is prof-
itable or is about to turn profitable, convertible
debt usually is a mistake. If you issue a convert
and your business does not deliver splendidly or
your stock trades down, which is the case for just
about everybody who has issued convertible debt
in the past couple of years, then it is straight debt
and it must be paid back, often by issuing equity
at a very painful price.
Colella: The industry needs capital and having dif-
ferent avenues of capital is positive. From that
standpoint, I think convertible debt is a positive
addition to the portfolio of financing approaches. In
this climate, however, a number of companies are
coming up to the time when their converts come to
fruition. What will happen to those companies
remains to be seen. It will not destroy them, but it
will impact their value.
Cantin: It depends more on the size of the debt
financing relative to the financial strength of the com-
pany and degree of advancement. A company thats
close to break-even or about to launch a product can
Canada
1998 2002
$260 $10
500 186
787 132
1,219 199
$2,766 $527
35
 sustain a higher debt financing than some relatively
younger companies. Debt is usually repaid by cash
flow and biotechs do not have cash flow. They have
cash. A high level of debt in biotech is negative. If an
investor has a choice between two companies, and
everything else is the same, if one has significant
debt financing and the other does not, I would take
the one without the debt financing. If convertible
debt has to be repaid in cash, the companys man-
agement will have to convince shareholders to let it
negotiate with the debt holders or it will have to try
to reach a deal with a big pharma partner to get
money quickly. In either case, the biotech company
is not in the drivers seat.
E&Y: Reforms of the investment banking industrys
analyst and research functions have been discussed.
How will this impact the biotech industry?
Molowa: What is happening already on sell-side
research is that analysts in the major and medium-size
banking firms will be driven to cover the same 10
companies because if we are not going to have any ties
to the investment bank, then there is only one other
source of revenue generation, and that is commission
dollars. So we will focus on those companies that are
most relevant to our institutional clients. Unfortunately,
the majority of the smaller biotech companies will be
orphaned because there will be no incentive for the
analysts to cover them; and the bankers will have no
say in which companies we cover.
Leff: Speaking from the perspective of a private
equity investor, the change David Molowa described
has raised concerns for the small- to mid-cap com-
panies about how they will get their messages out.
They are constantly in the marketplace trying to get
recognized and get investors attention. An important
element of that effort historically has been winning
over research analysts to get the companies stories
in front of the analysts clients. If the analysts cannot
play that role, the capital markets will have to find
some other way to complete that function. These
companies are creating value in our economy, and
ultimately, our markets will have to find a way to
bring the companies together with investors.
Schmidt: There is a ton of uncertainty on Wall Street
about this issue of the role of research analysts. None
of us in research is sure what our job descriptions are
anymore; what we can and cannot do. That uncer-
tainty will weigh heavily on the biotech sector.

Americas top 40: Venture financings in 2002

January 1, 2002December 31, 2002

Company Amount raised ($m) Company Amount raised ($m)

Infinity Pharmaceuticals 70.0 Renovis 34.3

CancerVax 55.0 Phenomix 32.0
Oculex Pharmaceuticals 50.0 AGYTherapeutics 31.3
Corgentech 50.0 Scynexis 29.0
Targacept 46.0 Immunicon 28.8
Inhibitex 45.0 Zyomyx 27.0
Alexza Molecular Delivery 45.0 Plexxikon 27.0
XenoPort 43.9 Microbia 26.0
Kalypsys 43.0 Gryphon 26.0
Agensys 42.8 Vela Pharmaceuticals 25.0
Memory Pharmaceutical 41.5 Surface Logix 25.0
Achillion Pharmaceuticals 41.0 AlgoRx Pharmaceuticals 25.0
Raven Biotechnologies 40.8 Protarga 24.0
CombinatoRx 40.0 Point Biomedical 23.3
Archemix 37.0 Amphora Discovery 23.0
Senomyx 36.8 NeurogesX 22.9
Syntonix Pharmaceuticals 35.8 Idun Pharmaceuticals 22.8
TolerRx 35.0 Rib-X Pharmaceuticals 22.0
Nobex 35.0 PicoLiter 22.0
Dynavax Technologies 34.8 BioStratum 20.0

Source: Ernst & Young, BioCentury, and Venture One

36 H E A LT H S C I E N C E S : R E S I L I E N C E
 YEAR I N R E V I E W: F I NA N C I N G

Depression Deepens
Biotech stock values suffered dramatic declines
during 2002, in a significant shift from the previ-
ous year. While biotech stocks had experienced
considerable volatility in 2001, the sector largely
held its own that year in spite of huge declines in
the valuations of high-tech companies.
However, the markets distinction between biotech
stocks and those of other technology companies disap-
peared in 2002, when biotech company valuations
declined significantly along with the Nasdaq. In 2001,
the Nasdaq Biotech Index tracked the Dow Jones
Industrial Average Index, outperforming the Nasdaq
Composite Index. In 2002, the story was reversed
the Nasdaq Biotech Index significantly underper-
formed the Dow, and instead tracked the Nasdaq
Composite Index.
The erosion in market value of biotech companies may
indicate increasing risk aversion among investors who
are grouping biotechnology companies with other
high-tech firms. It may also indicate a perception that
biotechnology companies had previously been over-
valued in the run-up over the last few years. In any
event, investors still recognize the long-term growth
potential in the sector. Big biotech companies continue
to trade at higher price-to-earnings ratios than their big
pharma counterparts. The AMEX Pharma index, how-
ever, outperformed the Nasdaq Biotech index in 2002.
Winner takes all
The difficulty of the current financing environment has
affected most biotech companies. For many companies,
raising capital has become their greatest ongoing chal-
lenge. The industry also has witnessed significant
restructurings and merger and acquisition (M&A)
activity in 2002 as some biotechs struggle to survive.
The financing picture, however, is still not as grim as
it had been through much of the 1990s. While total
capital raised is certainly down relative to the unprece-
dented surge in financings that began in the last quar-
ter of 1999 and continued through 2000, it has held
steady at around $8 billion in each of the last two years.
This may be considerably short of the $32.7 bil-
lion raised in 2000, but it is about three times the
amount raised in 1998.
Though the overall level of financing actually
increased in 2002 over 2001, the industry still faces
genuine challenges because of shifts in the allocation
of the money raised. In this winner takes all situa-
tion, some companies have access to adequate capi-
tal, but many others are left out in the cold. Raising
capital has become more difficult for certain sectors,
such as platform companies. Public offerings have
all but disappeared as a major source of capital.
While venture financings continue to provide capital
to the industry, venture capitalists continue to be risk
averse, and the bar has been raised for companies
looking to attract venture capital.

2002 quarterly breakdown of Americas biotechnology financings ($m)

First quarter Second quarter Third quarter Fourth quarter Total
U.S. Canada U.S. Canada U.S. Canada U.S. Canada U.S. Canada

IPOs $120 $0 $336 $10 $0 $0 $0 $0 $456 $10

(1) (0) (3) (1) (0) (0) (0) (0) (4) (1)

Follow-ons $410 $120 $33 $63 $199 $0 $196 $3 $838 $186

(9) (5) (1) (6) (2) (0) (3) (1) (15) (12)

Venture $627 $43 $625 $32 $426 $67 $485 $57 $2,164 $199

(39) (27) (39) (26) (26) (27) (42) (21) (146) (101)

Other $3,280 $4 $1,058 $82 $294 $27 $609 $19 $5,242 $132

(40) (4) (24) (17) (23) (11) (22) (13) (109) (45)

Total $4,437 $167 $2,052 $187 $919 $94 $1,291 $79 $8,699 $527

(89) (36) (67) (50) (51) (38) (67) (35) (274) (159)

Source: Ernst & Young, BioCentury, BioWorld, Venture One, and Signals Magazine
Figures in parentheses are number of financings
Numbers may appear inconsistent because of rounding

37
 Public offerings
Public offerings remained all but closed to biotech
companies. There were four biotech initial public
offerings (IPO) in 2002: ZymoGenetics, DOV
Pharmaceuticals, Ribapharm, and BioDelivery
Sciences International, which was on par with the four
IPOs in 2001. In spite of the small number of IPOs,
the total capital raised was more than twice that raised
in 2001; and the average amount raised through IPOs
was larger than for any previous year.
Unfortunately, the increase in capital raised through
IPOs was offset by a drop in follow-on offerings,
from $1.7 billion in 2001 to about $800 million in
2002. Taken together, public offerings raised less in
2002 than in any year since 1999.
One consequence of the decline in IPOs and follow-
on offerings has been the use of private investment
in public equity (PIPE) financings. In PIPEs, public
companies negotiate the sale of unregistered securi-
ties to select institutional and other investors. PIPEs
allow biotech companies to raise capital more
quickly and with less risk, given the difficult market
for IPOs and follow-ons.
Venture funds also are investing in publicly traded
companies through PIPEs to take advantage of bar-
gains created by the enormous declines in public
valuations. Venture capital interest in PIPES also
may be a signal that these investors think publicly
traded stock prices have bottomed out.
Venture, other deals
Biotech companies raised $2.2 billion in venture cap-
ital in 2002, compared with $2.4 billion in 2001. In
2000 and 2001, venture capital had shifted noticeably
toward later rounds, as investors looked for bargains
among companies further along in the product devel-
opment cycle.
There is some evidence this started to change in
2002, as more capital was flowing towards early
stage financings (defined as seed, first, and
second rounds). However, the share of capital
flowing to the very earliest financingsseed and
first roundshas remained steady. The shift was
driven by an increase in capital flowing to second
round financings. Major venture rounds included
Infinity Pharmaceuticals, CancerVax, Oculex
Pharmaceuticals, and Corgentech.
A notable increase in 2002 financings occurred in
the other category of public equity sales. These
financings jumped from $3.6 billion in 2001 to
$5.2 billion in 2002.
This was largely driven by a $2.5 billion sale of con-
vertible debt by Amgen in February. Other signifi-
cant convertible debt financings included IDEC
Pharmaceuticals ($675 million), Gilead Sciences
($300 million), Abgenix ($200 million), and OSI
Pharmaceuticals ($200 million). Of the top 16
financings in the other category, nine were con-
vertible debt and seven were PIPEs.
Convertible debt financings have become a popular
vehicle for biotechnology companies in the last few
years. The rise in biotech stock prices allowed
companies to raise capital through debt, even if
they were unprofitable and had low cash on hand.
The decline in stock prices during 2002 has raised
concerns, however, that this debt may become
problematic for some companies, further compli-
cating what is already a challenging financial and
operational environment.

Debt crisis? U.S. public companies' convertible debt soared with the stock market, but remains high after the market correction

Average biotechnology industry convertible debt

Average biotechnology industry market value
Average biotechnology industry cash and equivalents
Index values (1997 = 1)

6.0

4.0

2.0

1.0

1997 1998 1999 2000 2001 2002

Source: Ernst & Young

38 H E A LT H S C I E N C E S : R E S I L I E N C E
 Biotech PIPE returns

Companies Date Raised ($m) Deal price 3/28/03 close Gain/(loss) % change

The Medicines Company 6/20/02 $32.80 $8.20 $19.20 $11.00 134%

Onyx 5/29/02 20.00 6.75 8.59 1.84 27
Trimeris 1/24/02 42.80 34.00 42.21 8.21 24
Lynx 4/17/02 22.60 1.55 1.87 0.32 21
Corixa 8/12/02 45.00 6.85 6.85 0
Igen 3/12/02 36.80 36.80 35.59 (1.21) -3
Vicuron 4/10/02 44.90 15.00 10.68 (4.32) -29
Epix 1/15/02 32.20 12.50 7.85 (4.65) -37
Aeterna 4/9/02 35.70 7.50 4.10 (3.40) -45
Ligand 4/17/02 69.30 16.31 6.40 (9.91) -61
Biopure 4/24/02 20.70 7.50 2.79 (4.71) -63
AVI Biopharma 3/26/02 22.10 7.50 2.76 (4.74) -63
La Jolla 1/15/02 51.60 7.37 1.48 (5.89) -80
Rigel 1/17/02 31.50 4.50 0.89 (3.61) -80
Deltagen 5/16/02 25.30 4.57 0.23 (4.34) -95

Source: BioCentury
PIPE (private investment in public equity)

PIPEs most popular in health care sector, particularly biotech

PIPE sector analysis 2002 Health care PIPE distribution 2002

Other 6%
Consumer/Retail 7%

Media/
Telecom
9% Health care
Health care 31% (ex -Biotech)
PIPEs
Biotech PIPEs
Business 36%
64%
Services
10%
Technology 26%

Natural
Resources
11%

Source: Lehman Brothers

PIPE (private investment in public equity)

39

Marcelo Argelles
President, Bio Sidus, and
the Argentinean Forum
of Biotechnology
Fighting for Progress
Abundance and quality of primary resources have
for long characterized the Latin American region.
They have been the cornerstone of the agro-exporter
model of our regional economy.
The wealth of a nation, however, can no longer be
measured only by the geoclimatic opportunities or
the availability of natural raw materials. It also is
measured by the technological level, the level of
applied knowledge that the country has managed to
generate. If in the past, natural resources were the
essence, now it is mandatory to know how to indus-
trially exploit them.
Despite this strong belief and the deep transforma-
tion of multiple economical parameters that have
occurred during the past years in Latin America, no
significant fostering mechanisms to recreate the cul-
ture of investment applied to innovation (a common
practice in developed countries) have been imple-
mented either by government or private sectors.
In general terms, and after some failed attempts,
the expected relationship between the academic
sector and industry in the region has not been fully
attained. Beyond any policy, industry should better
interpret scientists and their environment and, in
turn, scientists should give priority to this relation-
ship as the key to their survival and growth. In this
sense, industry should take the initiative and
become the engine to drive this development.
Training of technologiststhat is, basic scientists
devoted to resolving concrete problems in industrial
times, volumes, and cost-effectivenessis manda-
tory. Industry should also favor education of scientists
in commercial, administrative, and legal management
so scientists can understand their significance, and
get acquainted with technical problems. A merger
of these cultures will facilitate the success of any
40
L AT I N A M E R I C A :
I N D U S T RY P E R S P E C T I V E
enterprise. Moreover, industry should make an
extra effort to address an efficient management of
intellectual property and regulatory affairs issues,
key aspects to face the globalization phenomenon.
Argentina
The development of biotechnology in Argentina
was initiated in the early 1980s. The national gov-
ernment launched in 1982 a National Program of
Biotechnology and cooperation programs at
regional and international levels. Official science
and technology entities supported this process,
which began to weaken by the mid-1990s, despite the
efforts of the state science and technology agency as
a consequence of the countrys economic crisis and
changes in entrepreneurial and government policies.
Globally, health care has found an important ally in
biotechnology, and the pharmaceutical industry has
greatly benefited from its profitable outcome.
Needless to say, this phenomenon that started in the
developed world also occurred to a lesser extent in
Latin America. Biotech development was especially
strong in Argentina, where a long tradition in biomed-
icine (Nobel Prize winners include Bernardo Alberto
Houssay, Luis F. Leloir, and Cesar Milstein) combines
with a proactive domestic pharmaceutical industry.
Health-oriented biotech did not start in Argentina
following the central world model; that is, spin-offs
that would later merge with big pharma. R&D
activities were mostly initiated as innovative
branches of local, traditional pharmaceutical firms.
A few spin-offs have become fully integrated, indi-
vidual biotech companies, and this is the case of Bio
Sidus. There are currently some 50 privately owned
companies engaged in some kind of biotechnology
projectmost of them unrelated to the academic
sector. There also are more than 60 centers, insti-
tutes, and research groups from universities and
national agencies that conduct R&D activities in the
field of biotechnology.
Though large in sales volume, the Latin
American marketscourged from time to time
by inflationary waveshas been characterized by
low prices for biomedicines and an impoverished
health security system that has not been able to
afford state-of-the-art medicines.
H E A LT H S C I E N C E S : R E S I L I E N C E
Affordable prices for research-based products to suit
this market reality go against any chance of growth.
Therefore, the only effective strategy to manage in a
market of these characteristics has been to reduce
production costs, while still preserving quality and
excellence. The strategy also involves broadening
the frontiers of commercialization to gain increas-
ingly larger shares in the regional market first, and
then extending operations to overseas markets.
Nevertheless, few have succeeded in this venture.
Other biotech applications
Another strong industrial application of biotech-
nology in Argentina has been devoted to the agrar-
ian sector, which constitutes one of the key
aspects of the local economy.
Of the overall crop production, 30% corresponds to
genetically modified varietieswhile 90% of soy plan-
tations are transgenicmaking Argentina the second
global producer of transgenic seeds. CONABIA, the
state regulatory entity for agricultural biotechnology,
has already evaluated and authorized more than 400
field assays for 100 different transformation events.
Government entities such as the National Institute of
Agrarian Technology (INTA) and some private
groups, have successfully transformed plant vari-
eties, especially potatoes resistant to herbicides and
viruses, that are waiting for public release approval.
Even though Argentina is a leading producer of milk
derivatives and meat for export, little has been done to
improve breeds or yields with the aid of biotechnology.
This is different from countries such as Canada and
Australia, where animal biotechnology has been greatly
encouraged. Environmental biotechnology and the
exploration of biodiversity are just emerging in
Argentina. Biological control of insect plagues is very
limited and little has been done in the field of biopesti-
cides. Most soil and waste-water bioremediation projects
initiated in the past did not succeed and were abandoned.
Attempts are underway in tertiary recovery of petroleum.
Hard though it may seem, our soil is still rich to
grow the long expected seed of merger between
academy and industry, to encourage national invest-
ment in science and technology, and to make the
necessary joint efforts to succeed in this venture.
There are many of us who still dare to accept this
challenge: fight to revert our reality.

Good News Needed
Although there were many drug development dis-
appointments during 2002, the U.S. Food and Drug
Administration (FDA) approved 35 biotech prod-
ucts, including 20 new medicines, nine of which
were developed solely by biotech companies.
Total 2002 approvals, which included new indica-
tions for existing drugs, were slightly higher than
2001, according to the Biotechnology Industry
Organization (BIO). The number of first-time
approvals, however, was lower. BioCentury reported
that drug approvals decreased from 30 in 2001 to 27
in 2002.
High-profile product setbacks in 2002 at least 30
tracked by Recombinant Capital, a San Francisco
consulting firmovershadowed approvals. These
failures, plus a trend over the past two years toward
increasing delays in FDA approval times, con-
tributed to the 2002 decline in market value of
biotech companies.
New drug approvals by the FDA decreased in 2002
Number of approvals
40
34
32
30
20
10
1998 1999
Source: BioCentury and Ernst & Young
FDA (U.S. Food and Drug Administration)
Y E A R I N R E V I E W:
P RO D U C T S & T E C H N O L O G Y
With a new leader at the helm, FDA Commissioner
Mark McClellan, and reauthorization of the
Prescription Drug User Fee Act, expectations are
high for a revival of efficiency at the regulatory
agency. McClellan has said the FDA will fast-track
therapeutics in response to urgent medical needs,
including those involving biodefense.
Market clearance early in 2003 for Biogens Amevive
for psoriasis two months ahead of schedule was con-
sidered an encouraging sign. Other approvals early in
2003 were Leuprogel for prostate cancer from Atrix
Laboratories and its partners, MediGene and Sanofi-
Synthelabo; Fuzeon for AIDS from Trimeris and
Roche; and Aralast for hereditary emphysema from
Alpha Therapeutic and Baxter Heathcare.
Notable new drugs approved in 2002 included
Cambridge Antibody Technologys Humira for rheuma-
toid arthritis, and GlaxoSmithKlines Pediarix, a vaccine
for preventing five diseases in infants. They were
cleared in December as McClellan assumed his post.
38
30
27
2000 2001 2002
Despite the product setbacks in 2002, the biotech
industry has proved it can bring advanced new drugs
to patients with accelerating proficiency.
BIO has reported a total of 155 biotech drugs, vaccines,
diagnostics, and other products have been approved by
the FDA since the industry was launched 25 years ago,
more than half of them in the past five years. Last
year marked the 20th anniversary of the first biotech
drug approval, recombinant human insulin.
More than 250 biotech products are in Phase III trials,
according to BioWorld. If historical approval rates
continue, the total number of marketed biotech prod-
ucts will increase significantly within the next several
years. According to BioCentury, more than 600
biotech products are in Phase II and Phase III trials.
The greatest percentage of these new medicines are
targeted against cancer and related conditions.
The stage is set for a series of product successes and
a consequent increase in the number of profitable
biotech companies. Both are essential if the biotech
sector is to recover as the broader U.S. and world
economy improves and as investors regain confi-
dence in buying stocks.
2002 product highlights
New product approvals of 2002 represent a broad range
of technologies from monoclonal and radio-labeled
antibodies to recombinant interferons. The market
expansion of existing products also is one of the strong
points of 2002, demonstrating the escalating impact of
biotech medicines on health care worldwide. The fol-
lowing are some of the leading approvals for 2002:
Neulasta (pegfilgrastim), developed by Amgen,
decreases the incidence of infection in chemother-
apy patients. It is an improvement on Amgens
Neupogen (filgrastim), replacing 10 to14 injec-
tions with a single injection of Neulasta.
Hepsera (adefovir dipivoxil), for hepatitis B, was
developed by Gilead Sciences. Hepsera provides a
treatment option for patients who are not candidates
for other hepatitis therapies or have developed resistance.
Rebif (interferon beta 1-a), developed by Serono,
is for relapsing forms of multiple sclerosis. Rebif is
approved under orphan drug status. It will compete
with Avonex from Biogen and Betaseron from
Chiron and Berlex Laboratories.
41
 Zevalin (ibritumomab tiuxetan), developed
by IDEC Pharmaceuticals, is the first radio-
labeled antibody therapy for cancer and was
developed to treat patients not responding to
standard chemotherapy treatments for non-
Hodgkins lymphoma.
New Indications
Aranesp (darbepoetin alfa) from Amgen origi-
nally received approval in 2001 for treatment of
anemia associated with chronic renal failure and in
2002 broadened its scope through approval in use
of chemotherapy induced anemia. Aranesp has a
longer half-life and a less frequent dosing regimen
than blockbusters Epogen or Procrit, the first gen-
eration of erythropoietin drugs developed by
Amgen in collaboration with Johnson & Johnson.
Enbrel (etanercept) by Immunex, acquired by
Amgen in 2002, was first approved in 1998 for
rheumatoid arthritis. In 2002, Enbrel was cleared
to treat psoriatic arthritis.
Remicade (infliximab), from Centocor and
Johnson & Johnson, is a monoclonal antibody that
neutralizes an important factor of the immune
response common in autoimmune diseases, includ-
ing Crohns disease. It has now received broader
approval to treat severely active Crohns and
received additional approval in rheumatoid arthritis.
On the horizon
This year the FDA has a number of drugs under
review that are considered promising. They include
Bexxar for non-Hodgkins lymphoma from Corixa
255 products in Phase III trials; percentage by therapeutic category
Diabetes 3%
Autoimmune 6%
Central Nervous System
10%
Source: BioWorld Phase III Report, January 2003
42
and GlaxoSmithKline; Xolair for asthma from
Genentech, Tanox, and Novartis; Cialis for erectile
dysfunction from Icos and Eli Lilly; and FluMist for
influenza from MedImmune.
A host of other medicines are in late-stage clinical
trials: Tarceva for lung cancer from OSI
Pharmaceuticals in partnership with Genentech and
Roche; Indiplon for insomnia from Neurocrine
Biosciences and Pfizer; and Oncophage, a person-
alized kidney and melanoma cancer vaccine, from
Antigenics.
Other products
Diagnostic product development and approvals rep-
resented another growing area in the biotech sector.
OraSure Technologies has developed a 20-minute
AIDS test. Bio-Rad has released tests for early detec-
tion of rheumatoid arthritis, AIDS, and hepatitis C.
Celera Diagnostics and Applied Biosystems have
received approval for an HIV genotyping system
that allows physicians to detect mutations that
confer drug resistance in AIDS patients.
During 2002, the tools used to develop medicines
have adapted to meet the growing demands of the
industry in genotyping. Single nucleotide polymor-
phisms (SNPs), which define variations in humans,
are a critical element. They are the focus of intense
research to understand why medicines are effective
in some people and ineffective in others.
Miscellaneous 24% Oncology 30%
Infectious
Diseases 16%
Cardiovascular 11%
H E A LT H S C I E N C E S : R E S I L I E N C E
Toolkit companies that identify SNPs and the role
they play in human drug response have become an
essential part of the discovery and development of
new medicines, especially as more pharmaceutical
companies integrate genotyping into their research
efforts. Applied Biosystems, Sequenom, Third
Wave, and Amersham Bioscience are some of the
companies with this technology.
Milestones
Fifty years ago, James Watson, Francis Crick, and
Maurice Wilkinson discovered the double helix
structure of DNA, setting in motion a new way to
develop medicine. For the first time, scientists could
use this blueprint of life to discover genes responsi-
ble for disease and develop biological therapies.
It took another 30 years before the first biotech
drug was introduced. The biotech industry since
then has made remarkable progress translating lab-
oratory discoveries into new therapies.
This year marks another milestone. Dolly the
sheep, the first cloned mammal, died in
February 2003, six years after she was born.
Cloned in Scotland, Dolly introduced biotech-
nology to a mainstream audience around the
world. The controversies she stirred over cloning
and human embryonic stem cell research remain
far from resolved and likely will continue to affect
the pace of progress in biotechnology.
 Selected biotech product approvals by the FDA in 2002
Product Company Indication

Avinza Ligand Pharmaceuticals and Elan Severe pain

Eligard Atrix Laboratories and Sanofi-Synthelabo Prostate cancer

FortaFlex Organogenesis and Biomet Rotator cuff repair

Hepsera Gilead Sciences Chronic hepatitis B

Imagent Alliance Pharmaceuticals, Cardinal Health, and InChord Communications Imaging agent for echocardiography

Neulasta Amgen Reduction in incidence of infection in

cancer patients receiving chemotherapy

Pegasys Inhale Therapeutics and Roche Chronic hepatitis C

Rebif Serono and Pfizer Multiple sclerosis

Secreflo Repligen Pancreatic assessment

Zevalin IDEC Pharmaceuticals B-cell non-Hodgkin's lymphoma

Source: Ernst & Young, Biotechnology Industry Organization, and Recombinant Capitals signalsmag.com
FDA (U.S. Food and Drug Administration)

Selected biotech products under review by the FDA

Product Company Indication

Aldurazyme BioMarin Pharmaceutical and Genzyme Hurler syndrome

Bexxar Corixa and GlaxoSmithKline B-cell non-Hodgkins lymphoma
Cidecin Cubist Pharmaceuticals Skin infections caused by
Gram-positive organisms

Coviracil Gilead Sciences HIV

Estrasorb Novavax and King Pharmaceuticals Topical estrogen replacement therapy
Fabrazyme Genzyme Fabry diseases
FluMist MedImmune Influenza
GW433908 Vertex Pharmaceuticals and GlaxoSmithKline HIV
Lutech Palatin Technologies and Mallinckrodt Diagnosis of appendicitis
Memantine Neurobiological Technologies and Forest Laboratories Alzheimer's disease
Prestara Genelabs Technologies and Watson Pharmaceuticals Limit bone loss in women with lupus
Ranexa CVTherapeutics Chronic angina
Raptiva Genentech and Xoma Psoriasis
Resperdal Consta Alkermes and Johnson &Johnson Schizophrenia
Symlin Amylin Pharmaceuticals Adjunctive therapy to insulin
for Type I or Type II diabetes

Source: Ernst & Young, Biotechnology Industry Organization, and Recombinant Capitals signalsmag.com
FDA (U.S. Food and Drug Administration)

43
 A C K N OW L E D G E M E N T S

Strategic direction
Michael Hildreth, Americas Biotechnology Director, Scott Morrison, U.S.
biotechnology leader, Rod Budd, Canadian biotechnology leader, and Chris Nolet,
Pacific Northwest biotechnology leader, provided strategic direction for the report.

Special recognition
Thanks goes to Sherry Daggett Chilton, Director of the Global Health Sciences
Center for Industry Change in Washington, D.C., for guiding the project. Charles
Craig in Atlanta managed the content and data team. Kimberly Medland and
Christopher Gray in Washington, D.C., Greg Jensen and David Galbraith in
Palo Alto, CA., Raymond Chow in Toronto, Margie Ross Decter in Boston, and
Maria Gorski in Houston, assisted in development of the report.

Data analysis
Gautam Jaggi, Anna Jan, Olga Rostapshova, and the rest of Thomas Neubigs
Ernst & Young Quantitative Economics and Statistics team collected and analyzed
the data and prepared the exhibits.

Design
Joseph Wurzer in Atlanta and Peter McKinley in New York designed and created
the cover and layout of the report. Marcella Wolfe, in Washington, D.C., designed
and created the Ernst & Young Web site for the report.

Special thanks
We also want to thank Jennifer Van Brunt of signalsmag.com and Recombinant
Capital for their contributions.

In addition, the Biotechnology Industry Organization (www.bio.org), BioWorld

(www.bioworld.com), and BioCentury (www.biocentury.com) provided support
and assistance in creating the publication.

Scope of this report

Biotechnology companies are defined as companies that use modern biological
techniques to develop products or services for human health care or animal health
care, agricultural productivity, food processing, renewable resources, industrial
manufacturing, or environmental management. Medical device, large pharmaceu-
tical, and large agribusiness companies are outside the scope of this report.

All currencies have been converted to U.S. dollars.

Cover photograph is a hand with DNA model, photographed by Michael Simpson

for Getty Images.

44 H E A LT H S C I E N C E S : R E S I L I E N C E
 Americas Biotechnology Contacts

Brazil
So Paulo Mark Garcia mark.garcia@ey.com 55 11 3165 5411

Canada
Edmonton John Goudey john.goudey@ca.eyi.com (780) 441-4651
Montreal Claude Bismuth claude.bismuth@ca.eyi.com (514) 874-4330
Rod Budd rod.budd@ca.eyi.com (514) 879-2605
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Vancouver Dennis Bettiol dennis.e.bettiol@ca.eyi.com (604) 643-5423

U.S.
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Chicago JoEllen Helmer joellen.helmer@ey.com (312) 879-5262
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Louisville Barry Pennybaker barry.pennybaker@ey.com (502) 585 -6543
Minneapolis William Miller william.miller@ey.com (612) 371-6984
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Raleigh Michael Constantino michael.constantino@ey.com (919) 981-2802
San Antonio David King david.king02@ey.com (210) 242-7108
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Washington, D.C. Rene Salas rene.salas@ey.com (703) 747-0732
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