Back when stockmarkets were still on the up, the idea of ploughing money into a small biotech working on a breakthrough Aids vaccine didn’t seem so gung-ho. But in an industry where nearly 90% of drugs don’t even make it through clinical trials, it still took a serious spirit of adventure to entrust your money to a small group of scientists who need to raise a hefty sum just to get their breakthrough drug to market.
But following the collapse of equity markets, that spirit of adventure has long gone. Total financing for biotechs fell 54% in the first three quarters of last year, says Robert Langreth in Forbes magazine. And young biotech firms that rely on repeated equity financing for the 15 years it can take to design a new drug are facing oblivion. Even the industry’s lobby group, the Biotechnology Industry Organization admits that 45% of the 370 publicly traded biotechs will run out of cash in the next six to 12 months. In desperation, the British biotech industry is canvassing Westminster for a £500m bail-out to see it through. Meanwhile, American biotechs are hoping for a big federal tax break from US President Obama.
However, it’s big pharmaceuticals firms, rather than tax breaks, that will really turn biotech’s fortunes. That’s because it’s been nearly 20 years since big pharma enjoyed a purple patch in drug development, and its pipelines are beginning to look very empty. Modern medicine has been around 60 or so years and in that time most of the ‘easy’ cures have been found. So now big pharma is really having to bust a gut to bring breakthrough drugs to market. Last year, for example, the ten biggest drug makers spent more than $50bn on research and development. That’s four times the spend of the entire US biotech industry. And yet nearly three-quarters of all new drugs approved for sales in America last year actually came from small biotech labs, notes Robert Cyran on Breakingviews.
Then there’s the threat from generic drug patent expiries. With 70 of the industry’s 100 top-selling drugs losing patent protection by 2011, big pharma faces losing $100bn in sales as competition hots up. But biotech drugs won’t come up against the same challenge. Key processes that can involve cultivating living cells to churn out complex drugs are tricky to copy. So biotech drugs are far harder to replicate than traditional drugs. New legislation clearing the way for the development of generic biotech drugs could be approved this year. But by cherry picking the biotechs with the best pipelines, big pharmaceuticals will still save themselves some serious headaches.
That’s why Roche has been pursuing industry leader Genentech for the last six months. Its $44bn offer last week confirms that any biotech stock worth its salt is a candidate for takeover. And the biggest biotechs will grow profits irrespective of the ugly economic prospects, says Johanna Bennett in Barron’s. After all, the number of patients with cancer or rare genetic diseases is on the increase. In fact, with several blockbusters on pharmacy shelves fuelling strong earnings, profits from big biotech could climb as much as 15% to 20% annually for the next three to five years, according to S&P analyst Steven Silver. And biotech shares are cheap. Many companies trade for less than the cash on their books, so their pipelines are essentially free for the taking, says Robert Cyran. We have a look below at a biotech giant with a healthy pipeline.
Amgen looks set to make healthy profits
The hundreds of companies anxiously looking for investors at last week’s JP Morgan annual biotech conference face a bleak future, says David Ewing Duncan in Portfolio magazine. But among the few winners left in the industry, cancer drug maker Amgen (Nasdaq:AMGN) looks especially attractive. Amgen has endured a string of disappointments, including safety issues that damaged sales of its once-popular anaemia drugs. It’s now trading at a discount to its big biotech peers on a forward p/e of 12.3.
But the company is on the mend, thanks to cost-cutting and a string of promising new drugs, says Johanna Bennett in Barron’s. Its new osteoporosis drug, denosumab, released this year, could be Amgen’s next blockbuster, eventually generating annual sales of $2.5bn, according to Evan McCulloch, manager of the Franklin Biotechnology Discovery Fund. Sure, denosumab faces competition from rival drugs offered by Merck and Novartis. But their offerings are taken by pill or intravenously, weekly or monthly, which can lead to heartburn. Denosumab, on the other hand, offers a far more patient-friendly, twice-a-year injection.
Citigroup sees profits climbing an average of 11% annually between 2009 and 2012. Amgen is sitting on $11bn in debt. But with $9.7bn in cash and free cash flow of $5.4bn, it has more than enough to invest in its pipeline and pick up smaller biotechs. It would also make a decent takeover target for a big pharmaceutical looking to replenish its own pipeline.