It’s a mix of science, politics and business. When the business side gets too greedy, the politicians bash it and the shares fall, but the underlying growth is driven by the science and I think that will win in the end.
They have exciting stories to tell about new treatment methods and steadily increasing sales figures. Classic pharmacists are not talked about; biotech companies are. They work with living organisms to discover new therapeutic and diagnostic procedures – new medicines, for example. Together with the political climate, demand is growing steadily – even if at first glance it may not look like this.
On the one hand, the year 2014 showed that the majority of the ten best-selling pharmaceutical products came from biotech laboratories. The best-selling drugs include, for example, those for hepatitis C or cancer. Expenditures, whether on biotechnology or conventional drugs, are increasing and will continue to rise. A sure-fire success for investors? No.
The profit margins of the industry suffer, among other things, from price reductions and price controls in the end customer segment. Nevertheless, there are countries and companies that are driving innovation. They are, reportedly, according to a Deloitte survey, mostly in Singapore, China or Australia. Why the research expenditure? Because nobody can afford to ignore a market of billions.
The demand for new technologies such as DNA sequencing or “tissue engineering” – the breeding of natural tissue in the laboratory to use it, for example, for the replacement of damaged tissue – was 104.5 billion dollars in this market alone in 2015. This attracts companies to do more research and to benefit from the general trend. Another example from the world of biotech? In the biopharmaceutical segment, revenues were over 199 billion dollars in 2015 – among other things, because of growth hormones or recombinant proteins.
The overall biotechnology market, in turn, amounted to more than 330 billion dollars in 2015, and it should be over 775 billion in 2024, with annual growth of around 10 percent. The same trend is expected in the sales figures. For biotech drugs, this value was 289 billion dollars in 2014. In 2019 it shall already be 445 billion.
This is a business that has long been in the hands of large businesses, from Abbott to Sanofi. They work with small laboratories and take over other companies. Roche Diagnostics is particularly prominent in this area; it had a market share of 17.1 per cent in 2013. Among other things, this is because they are working together with the US biotech company Janus Biotherapeutics to find a drug for autoimmune diseases.
In the US is beating the heart of global biotechnology. With a market capitalization of around 310 billion US dollars, Johnson & Johnson is clearly the number one in the pharmaceutical and biotech industry, followed by Pfizer with a valuation of around 200 billion US dollars. Third place goes to Europe, the Swiss Novartis, followed by Roche, also from Switzerland and the French company Sanofi. Merck and Bayer from Germany on the following ranks.
The biotech sector has seen some extremely successful years on the stock market. From 2012 to mid-2015 alone, the Nasdaq Biotechnology Index increased by more than 50 per cent. However, the provisional high point was reached in mid 2015. Since then, prices have declined by a good 15 per cent, while the overall market has continued to rise.
When you look at the world’s ten top-selling medicines, you see that most of them are what’s known as biopharmaceuticals – preparations made from living cells, for the treatment of arthritis, hepatitis C and cancer. And as demand continues to increase, the double-digit growth rates are likely to continue as well.
Donald Trump as a stock price driver?
North America’s companies have secured the lion’s share of this market – and the share could still grow, due to the election of Donald Trump as US president. After his entry into office, the sector grew by ten percent in the meantime. Among other things, this is because biotech companies are seen as substitutes for the pharma sector – if one sector is doing well, the other also profits. And they both profit from Trump saying that he wants to revoke the Protection and Affordable Care Act, also known as “Obamacare.” This program secured 12 million uninsured Americans access to medical care. Not with Trump – he wants to implement the American Health Care Act and roll back the degree of regulation. This gives the industry, among other things, more power in pricing. In addition, tax reform is supposed to be waved through, which would allow the companies to bring $ 100 billion currently held abroad back to America. That leaves them able to do more: for example, share purchases or mergers. In concrete figures: Amgen has 34 billion dollars overseas and Gilead 25 billion.
So, what makes the biotech industry a real investment? On the one hand, the growing technical possibilities for research and their use, and, on the other hand, policy that gives the industry financial backbone.
However, fluctuations are likely to remain in the sector – research is exposed to the risk of setbacks, shares to the risk of resets. But who says that a Zeitgeist always comes in regular steps?
Despite lighter regulatory scrutiny, large US pharma will have to abide by other international standards and may be subject to consumers’ pressures. Therefore I believe there could be more potential ahead in growing markets with increased R&D potential in Europe and Asia.