The Biotech Sector: Playing for Keeps

Growth potential in biotech despite market woes

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By André P. Boulet, PhD

Over the past year and a half, the financial markets have suffered not only from the World Trade Center tragedy and associated terrorist activities, but also from Wall Street scandals such as Enron, WorldCom, ImClone/Bristol-Myers Squibb and Merck-Medco among others. At a time when American capitalism is a prime target for terrorism, investors’ confidence in stock markets has diminished significantly.

So far, there have been approximately 20 companies with irregularities that are under investigation. No one can predict how many there will be in the future, but among approximately 8,000 publicly traded companies, there are still many good companies with strong corporate governance. Found in all market segments from computer chips to health care, these good companies are delivering added value to their shareholders even in tough times.

Biotechnology, like other market sectors, has suffered significantly from investors’ negative perception of financial markets. Despite these difficult times, the biotechnology sector has growth potential. This sector has been maturing for nearly two decades, and is now entering a phase with strong opportunity for growth. Moreover, the sector is delivering a number of added- value products at an incredible pace.

Biotechnology: The Past

In 2000, out of 380 top-selling drugs with worldwide sales of $100 million US or more, 45 were issued from biotechnology. Table 1 illustrates the contribution of biotechnology products to the drug sector in that year. During the 15 years following the approval of the first biotechnology product (Protropin from Genentech, approved in 1985), the biotech industry has generated close to 12% of the top-selling drugs. Moreover, these biotech products generated over $23 billion US in combined annual sales in 2000.

Biotechnology: The Present at an Accelerated Pace

In 2000, 2001 and the first half of 2002, 54 new biotechnology products were approved by the U.S. Food and Drug Administration. Of those 54 products, 30 (55.6%) are expected to generate annual sales over $100 million US. Combined annual sales of these products are expected to exceed $16 billion US.

As seen in Table 2, six biotech products approved since 2000 have the potential to become blockbuster drugs (worldwide sales > $1 billion US). This compares favourably to the 15-year period that followed the approval of Protropin as the biotech industry delivered an equal number of blockbuster molecules.

In the first half of 2002, the biotech industry delivered a total of 15 new molecules. Out of these 15 products, it is expected that one has the blockbuster drug profile and seven have the potential to generate annual sales of at least $100 million US.

Another 11 biotech products were expected to be approved by the U.S. FDA during the second half of 2002. The minimum annual sales expected from those products is $200 million US, with two products fitting the blockbuster drug profile.

Delivering Higher-Value Products Faster Than Ever

If all biotech product approvals materialize, the biotech industry will have delivered, in the past year alone, nine added-value products — of which three have potential annual sales of more than $1 billion US and six have potential annual sales between US $500 million and $1 billion US. This single-year accumulation represents a substantial acceleration over the first 15-year period that followed Protropin approval, which produced 11 such products.

In terms of production, the industry will have cumulatively delivered high-value products in 2000, 2001 and 2002 at a pace much faster than during the post-Protropin approval period. Indeed, the biotech industry will have delivered 30% more products with annual sales potential of $200 million US or more (Table 3).

Markets are Down: Time to Invest

Although there is a wave of pessimism in the investment community, there are several signs supporting a pro-active investment strategy within the biotechnology sector. These indicators include:

• Worldwide markets for technology companies have been in a bear cycle for more than two years
• A growing number of companies are trading at a low ratio of price to cash per share
• A majority of companies will need to be refinanced within the next 24 months
• The actual price-to-book-value ratio is at its lowest point since 1994 and fundamental has never been better

It is obvious that the biotechnology sector is now entering a strong growth phase. This analysis covers only the therapeutic area. An analysis of the medical device and diagnostic areas of the biotech sector could be expected to show a similar growth profile.

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