Biotech remains an exciting, if high-risk sector, for long-term investors.
Back in March, I was upbeat about investing in the biotech sector, and I still am now. Consider these facts:
- the big pharma companies are being hit by widespread patent expiries. Drugs which achieved sales of close to $20bn (£10.6bn) in 2005 are coming off patent this year. Big pharma needs lots of new drugs to replace the patent expiries.
- back in 1993, fewer than 10% of newly approved drugs in the US came from the biotech sector. That figure should rise to 60% in 2006 according to BBBiotech, a biotech investment company.
- biotech has been able to achieve better terms in its partnership deals with the big pharmas. Amgen
(NASDAQ: AMGN)
, for example, out-licensed anaemia drug, Procrit, in 1987 for an 11% royalty in the US. In 2002, OSI Pharmaceuticals
(NASDAQ: OSIP)
out-licensed eye drug, Macugen, for a 50% US royalty!
That 50% figure is exceptionally high but it does underline the trend towards higher royalties for biotech companies.
My positive view on biotech strengthened further when I attended the FT Global and Biotechnology Conference this week and heard a talk by John Paterson, AstraZeneca's
(LSE: AZN)
development director. Astra has been on a biotech blitz over the last year with several licensing deals and the purchase of CambridgeAntibody Technology.
Astra's deal spree has quickly plugged gaps in its drug pipeline, and Paterson didn't rule out further transactions. Indeed, he expects 20 to 30% of Astra's drug portfolio to have come from in-licensing by 2010.
He also said that some rival pharma companies had "taken leave of their senses" in recent deals, paying too much and taking "huge risk." That's good news from my perspective; it shows how desperate some of the big boys are for new drugs, and some of those products will have to come from biotech.
Risk
Of course, the downside to biotech investment is risk. Sam Williams, a healthcare banker at Lehman Brothers, told the conference that biotech risk was "immense," and pointed out there are only 12 profitable biotechs in existence today (and none of them are in the UK) out of a total universe of more than a thousand.
So what's the best way to invest in biotech?
One approach is to buy shares in some of the UK biotech companies. Snag is, most UK companies are small with a limited number of drugs in the pipeline. What's more, managements are often inexperienced and have never taken a drug through to market launch.
Still, if you spread your cash around more than one player, you can reduce the risk a little. My current UK favourites are Antisoma
(LSE: ASM)
, Phytopharm
(LSE: PYM)
, Vectura
(LSE: VEC)
and Protherics
(LSE: PTI)
.
Another way to reduce the risk is to invest in one of the large, money-making biotechs, which are mostly based in the US. Take a look at Genentech
(LSE: DNA)
and Biogen Idec
(NASDAQ: BIIB)
. Just beware that these larger stocks probably aren't going to be spectacular multi-baggers from here.
Or you could invest in a biotech fund. The International Biotechnology Trust
(LSE: IBT)
has a nice global spread and its performance has beaten the Nasdaq Biotechnology Index over most recent time periods.
Whatever approach you take, I think risk-tolerant, long-term investors should at least consider putting some money into biotech.
For more biotech foolishness, read these articles:
Ed owns shares in Phytopharm, Antisoma and Alizyme
