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3Q Financial Markets Preview: Disquieting murmurs

Companies and investors looking for a quick end to their pain are unlikely to find much joy in the traditionally slow third quarter. And although some market watchers say the malaise could end in the fall, others say a 1H09 turnaround is more likely. Indeed, the hard times have spurred talk of an industry restructuring not heard in years.

As the drought continues, some loss-making companies are doing what they can to preserve cash, sidelining some programs, partnering earlier or financing on more dilutive terms. But the 2Q numbers show cash-strapped companies are choosing to sit on the sidelines rather than take a PIPE financing on disagreeable terms despite the fact the average cash position of small cap companies continues to deteriorate.

Thus dilutive financing instruments were relatively infrequent last quarter as managements shied away from the added warrants and deeper discounts. PIPEs totaled only $432 million in 2Q, a bit more than one-third the amount raised in 2Q07. But necessity may push more companies to finance in the second half.

Some bright spots

Despite the permeating sense of gloom, biotech stocks actually performed relatively well last quarter.

The price-weighted BioCentury 100 added 4% as 19 companies priced above $30 averaged 13% gains, and nearly half of the tracked companies - 48 - posted gains. The BTK dropped 2%, but that was better than the S&P 500, which fell 3%, and the Dow Jones Industrials, down 7%. The tech-heavy NASDAQ Composite managed to tack on 1% (see “Index Performance,” A12).

Still, the amount raised by public biotechs shrank for the fourth quarter in a row. Public companies raised $1.2 billion, only one-third the total in 1Q08 and the smallest quarter for public company financing in nearly six years - since 3Q02. Indeed, at $1.3 billion, private company financing outstripped public companies, again for the first time since 3Q02.

Globally, the biotech industry has raised only $6.7 billion in public and private financing since the start of the year, compared with $20.7 billion in 1H07.

The situation is especially acute in Europe, where biotechs have raised $1.1 billion compared with $5.1 billion for the same period last year. Even taking out the $2 billion raised by Shire plc in 2007, the amount raised by companies is less than a third what it was last year.

Since the markets peaked on Oct. 12, 2007, biotechs have suffered losses across the board. Those worth over $2 billion suffered the least, with a 12.4% decline. Micro-caps suffered the most,

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