A once-troubled biotech industry appears finally to be growing up. Back in 2001-2002 the idea was unthinkable: biotech values had crashed as scientists-turned-entrepreneurs struggled to deliver on promises to shareholders, and the whole sector wore one huge warning label. Now, however, the biotech industry seems at risk of possibly becoming a clever – even mature – long-term buy.
Dr Navid Malik, a pharmaceuticals analyst from stockbrokers Collins Stewart, says the surge of interest in biotech comes down partly to big pharma companies seeing once-solid product earners nearing the end of their patent runs, with a worrying lack of new pills to replace them.
‘Pharmaceutical firms are having a torrid time building new products now,’ he explains. ‘Sometimes patent challenges are issued as soon as a drug is launched. The whole business model has changed. There’s really very little patent protection around.’
Accusations also fly that some of the big pharma monoliths have become too introverted, too complacent. The drug companies are aware of the criticism and are reacting, buying up biotech companies, especially where latestage biotech products are likely to feed easily into their own market.
‘In 2000 the cost of a late-stage asset was $75 mn,’ says Gareth Powell, a biotech fund manager at Axa Framlington. ‘In 2005 that figure had increased to $450 mn.’ Two years on, that figure will likely be a great deal higher.
Biotech on the rise
Biotech IR appears to be rising to the challenge. Julia Wilson is head of investor relations and corporate communications at dual-listed UK-based biotech firm Vernalis. The company has two products: Frovatriptan, a migraine treatment, and Apokyn, a Parkinson’s disease drug. In the last 18 months,
Vernalis has substantially increased outreach in the US using IR agencies, according to Wilson. ‘We’ve used small US IR agencies and found them excellent,’ she says. ‘It’s been very beneficial. The biotech market is that much more developed in the US, where investors don’t have the same perception UK investors have.
For example, with spending, in the US it’s definitely about building up a war chest, and then it’s a case of, Here’s your $250 mn to do it. In the UK, by contrast, you get a little bit of money at a time.’
This parsimonious British attitude, says Wilson, is down to a less experienced and less knowledgeable UK biotech market. ‘We have far more dialogue with US investors and often get emails with extremely detailed questions,’ she explains. ‘A lot of the questions are scientific, or are very inquisitive about strategy.’
Another British pharmaceutical Iro adds that biotech IR is ‘almost unrecognizably better’ than a few years ago. Malik certainly agrees. ‘Let’s say I call Pfizer,’ he explains. ‘Often it’s very busy and not as open to talking as you might think. If I ask about its strategy or something else awkward, you get a situation where it starts reading from a script. But smaller biotech companies are much more amenable to giving you the full picture.’
Yet Mike Preston, international business director at Phosphagenics, an Aim-listed biotech company based in Melbourne, Australia, questions whether the recent biotech boom has genuine longevity. It’s nothing to do with the quality of product, he says. His concern focuses on the experience of the market to value biotech correctly and consistently.
‘Has the market now translated into one where biotech shares are easier to sell?’ he asks. ‘Well, take a look at the Australian stock market: it’s very resources-driven – gold and mining. Australia has some phenomenal bioscience companies and its immigration policies mean the universities are bursting with bright people. But the stock market simply hasn’t caught on, so companies have to go overseas.’
US leads the way
Preston adds that the fund management industry is also too generalist – especially in the UK and Australia – to have in-depth experience of the biotech sector. ‘But go to the US and the specificity and training of the fund managers there is, I have to say, light years ahead of the UK,’ he continues. ‘That’s why the biotech market will always be dictated by what’s happening in the US. UK investors, though more cautious, do give long-term loyalty, however. In the US it’s far more flavor of the month. Share prices are even more volatile there.’
Still, Dave Lemus, Cfo of Morphosys, a German antibody company that recently opened an Oxford-based headquarters, says the biotech space remains a very changed animal. Information quality is far improved and pharma companies remain willing to pay good money for biotech firms that can help them out of their own product rut.
‘A lot of [biotech] companies have been acquired at significant valuations,’ Lemus points out. ‘The leverage between pharma and biotech has definitely changed; it’s far more comfortable for us. Big pharma simply has not delivered the innovation. Look at Cambridge Antibody Technology, bought by AstraZeneca for £702 mn ($1.4 bn) in 2006, for example. AstraZeneca didn’t dismantle it – it built on it. That’s a big change.’
And the deals look like continuing (see Pharma-biotech deals 2006-2007, page 33), which is good news for biotech firms that are increasingly in a position to name their price. But the sector is wide and sprawling, and big pharma companies can still be selective. For the moment, though, biotech has turned a corner. It must feel good to be taken seriously again.
