OVER the past three years, US biotech companies have absorbed hard knocks like a punch-drunk boxer, sending stock prices into a dizzying descent. But the market has rallied during 2003, proving you can never count biotech out.
Corporate scandals, clinical trial failures, fewer drug approvals, deflated expectations of genome-inspired breakthroughs and a turbulent world economic climate conspired to create a deep aversion to risk among investors. The decline from record highs in 2000 has been dramatic. The Nasdaq biotech index lost more than two-thirds of its value between its peak in February 2000 and January 2003.
For an industry in which the vast majority of companies lose money, the loss of investor confidence as well means few opportunities to raise new cash. By the end of 2002 many companies were in trouble: 55 per cent in the US, 52 per cent in Canada and 35 per cent in Europe had less than two years of cash reserves.
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Biotech investing, however, has always had ups and downs. Bad news scatters investors. Good news, particularly scientific innovations and new drug advances, brings them back with ever more enthusiasm.
The 2003 market recovery has been supported by a series of approvals of medicines with big sales potential developed by US companies – and the prospect of more drugs to sell in the near future. There has been good news from clinical trials, particularly for cancer therapies, and the pipeline of experimental medicines for cardiovascular, metabolic and central nervous system diseases is bulging.
Outperforming rival sectors
On the financial side, top-tier US companies have been selling more and more new drugs and so have reported better earnings growth than was expected. What’s more, the overall economy has shown signs of improving. The Nasdaq biotech index gained about 40 per cent between January and July, outperforming the Nasdaq composite and Dow Jones industrial average, both of which were also on an upswing.
These good vibes meant big money for US biotech companies in June: more than $2.6 billion in equity financing. That’s more than 25 per cent of the total amount that was raised in 2002. If the trend continues this autumn, the US biotech industry could be well on its way towards recovery from the post-2000 depression.
The US rally is also likely to signal new financing opportunities for biotech companies worldwide. As the dominant player in global biotech development, the US industry has a strong influence on the other world biotech centres in Europe, Canada and the Asia-Pacific region. The US has the most biotechs by far of any country: it has 318 public companies and 1148 private ones. Canada comes a distant second with 417 (85 public; 332 private). US companies account for more than 70 per cent of global revenues, R&D spending and employees.
A look at the US industry’s overall performance in 2002 reveals that despite the severe decline in stock values and financing opportunities after 2000, companies continued to spend, moving new products through development. R&D expenses increased more than 30 per cent in 2002 compared with 2001. The $20.5 billion spent on R&D in 2002 was about 60 per cent of total revenues ($33.6 billion), which were 14 per cent up on the previous year. Biotech drug sales continued to increase, and although R&D alliances with pharmaceutical companies have declined over the past two years, individual deals for drugs in late stages of development have been more lucrative for biotech companies. The US industry’s total revenues from drug sales and R&D alliances have increased significantly each year since 1989.
The post-2000 depression, however, has changed the business of biotech. With new money in short supply, companies have been laying off employees, restructuring and cutting R&D programmes. The industry is contracting as merger activity intensifies, but that is not necessarily bad news if the end result is fewer, stronger and more focused companies with improved chances for success.
Investors’ aversion to risk since 2000 has had another significant effect. Many investors will no longer accept the standard practice of US biotech companies in past decades, in which a project was expected to yield profit only after 10 to 15 years. In 2002, companies lost a total of $11.6 billion. From 2000 to 2002, only 20 of the 1466 companies in the US recorded net earnings for all three years. To survive in the 21st century, companies will have to prove they are as proficient in the business of biotechnology as they are in the science.
