Jones Lang LaSalle
Signs That Biotech Has a Healthier Future
By Andrew Pollack
THE biotechnology industry is finally getting closer to an elusive goal: breaking even.
Despite its reputation for developing lifesaving drugs and providing high-paying jobs, the industry has lost tens of billions of dollars since Genentech, the first genetic engineering company, was founded 30 years ago this Friday.
Although the biotechnology giants Genentech and Amgen are now profitable, as are about four dozen smaller players, the overall industry has been kept afloat only by the willingness of investors to finance research and development.
"Investors have been very patient with the biotech industry, which has been one of the biggest money-losing industries in the history of mankind," Arthur D. Levinson, the chief executive of Genentech, told analysts last month. "The cumulative loss by this industry from its inception in 1976 is nearing $100 billion."
But perhaps the tide is turning. Publicly traded American biotechnology companies lost only $2.1 billion in 2005, down from $4.9 billion in 2004, according to the latest annual scorecard compiled by Ernst & Young, the accounting and consulting firm.
More important, the firm said, the loss last year was equivalent to only 4 percent of the $47.8 billion in combined revenue from the 329 public companies in the biotech industry. That is the first time that figure has ever been below 5 percent.
"We still feel pretty bullish that profitability for the entire industry, at least in the United States, will occur by the end of this decade," said Donn Szaro, leader of the global biotechnology practice for Ernst & Young. The prediction is for profitability on a yearly basis, not an erasure of three decades of cumulative losses.
For investors, of course, what matters most is what happens to the share price, not profits. Even shares of unprofitable companies can rise substantially — at least for a while — based on prospects for new drugs.
The stock of New River Pharmaceuticals, for instance, has more than quadrupled since its initial offering in 2004, propelled by hopes that the company's experimental drug for attention deficit hyperactivity disorder will be safer than alternatives. The stock closed yesterday at $33.51, up 30 cents.
Moreover, investors generally seek out particular stocks, not the industry as a whole, and big hits can pay off well. Amgen and Genentech, the two largest biotech companies, have market values of more than $85 billion, exceeding those of many of the traditional pharmaceutical companies.
At the end of 2005, the market capitalization of those two companies alone accounted for nearly half the total $410 billion for all publicly traded American biotech companies. And much of the improvement in the industry's bottom line in 2005 came from an increase of $1.8 billion in the combined net profit of Amgen and Genentech.
But even as those companies succeeded, the industry's overall income has been dragged down by companies that failed, and by newer companies that are still too young to have reached profitability.
The American industry is generally far ahead of its competitors elsewhere in sales and product development and market value. Oddly, however, the biotechnology industry in the Asia-Pacific region eked out a small profit of $7 million, according to the Ernst & Young calculations, because big profits from an Australian company, CSL, more than offset small losses from many other companies.
The accounting firm's calculation of income favors the industry because it leaves out private companies, which tend to be in earlier stages of development, and therefore more likely to be in the red. The 1,086 private American biotech companies lost $2 billion last year, about the same as the public companies, but on revenue of only $2.9 billion.
On the other hand, the Ernst & Young data may also be shortchanging the industry because some successful biotech companies end up being acquired by larger pharmaceutical companies and are no longer counted.
So far, despite losses, investors continue to put money into the sector. The public and private American companies combined raised $14.7 billion last year, down slightly from 2004 but still the third-largest sum ever.
But investors have become increasingly wary of initial public stock offerings, particularly when companies do not have products close to reaching the market. Only 13 biotech companies went public last year, less than half the 2004 figure, and most of them were at lower prices than the companies had expected, according to the report.
If the industry has not fared well in terms of profit and loss, how about drug development? In 2005, for the third consecutive year, new biotechnology drugs received more approvals from the Food and Drug Administration than drugs from big pharmaceutical companies.
The F.D.A. approved 18 novel biotech drugs, compared with only 11 from big conventional drug makers. Still, biotechnology companies have by no means figured out how to avoid the pitfalls in drug development. And for companies without profits, any setback in development can mean a steep fall in the stock.
That happened three times just yesterday. Inhibitex lost two-thirds of its market value after reports that the company's leading drug candidate, Veronate, did not prevent infections in premature babies in a late-stage clinical trial.
Cortex Pharmaceuticals lost half its value when the F.D.A. halted clinical trials of a drug, citing problems seen in animal testing.
And shares of Incyte plummeted 40 percent when the company said it would discontinue development of a drug for treating H.I.V. because of side effects.
Signs That Biotech Has a Healthier Future
By Andrew Pollack
THE biotechnology industry is finally getting closer to an elusive goal: breaking even.
Despite its reputation for developing lifesaving drugs and providing high-paying jobs, the industry has lost tens of billions of dollars since Genentech, the first genetic engineering company, was founded 30 years ago this Friday.
Although the biotechnology giants Genentech and Amgen are now profitable, as are about four dozen smaller players, the overall industry has been kept afloat only by the willingness of investors to finance research and development.
"Investors have been very patient with the biotech industry, which has been one of the biggest money-losing industries in the history of mankind," Arthur D. Levinson, the chief executive of Genentech, told analysts last month. "The cumulative loss by this industry from its inception in 1976 is nearing $100 billion."
But perhaps the tide is turning. Publicly traded American biotechnology companies lost only $2.1 billion in 2005, down from $4.9 billion in 2004, according to the latest annual scorecard compiled by Ernst & Young, the accounting and consulting firm.
More important, the firm said, the loss last year was equivalent to only 4 percent of the $47.8 billion in combined revenue from the 329 public companies in the biotech industry. That is the first time that figure has ever been below 5 percent.
"We still feel pretty bullish that profitability for the entire industry, at least in the United States, will occur by the end of this decade," said Donn Szaro, leader of the global biotechnology practice for Ernst & Young. The prediction is for profitability on a yearly basis, not an erasure of three decades of cumulative losses.
For investors, of course, what matters most is what happens to the share price, not profits. Even shares of unprofitable companies can rise substantially — at least for a while — based on prospects for new drugs.
The stock of New River Pharmaceuticals, for instance, has more than quadrupled since its initial offering in 2004, propelled by hopes that the company's experimental drug for attention deficit hyperactivity disorder will be safer than alternatives. The stock closed yesterday at $33.51, up 30 cents.
Moreover, investors generally seek out particular stocks, not the industry as a whole, and big hits can pay off well. Amgen and Genentech, the two largest biotech companies, have market values of more than $85 billion, exceeding those of many of the traditional pharmaceutical companies.
At the end of 2005, the market capitalization of those two companies alone accounted for nearly half the total $410 billion for all publicly traded American biotech companies. And much of the improvement in the industry's bottom line in 2005 came from an increase of $1.8 billion in the combined net profit of Amgen and Genentech.
But even as those companies succeeded, the industry's overall income has been dragged down by companies that failed, and by newer companies that are still too young to have reached profitability.
The American industry is generally far ahead of its competitors elsewhere in sales and product development and market value. Oddly, however, the biotechnology industry in the Asia-Pacific region eked out a small profit of $7 million, according to the Ernst & Young calculations, because big profits from an Australian company, CSL, more than offset small losses from many other companies.
The accounting firm's calculation of income favors the industry because it leaves out private companies, which tend to be in earlier stages of development, and therefore more likely to be in the red. The 1,086 private American biotech companies lost $2 billion last year, about the same as the public companies, but on revenue of only $2.9 billion.
On the other hand, the Ernst & Young data may also be shortchanging the industry because some successful biotech companies end up being acquired by larger pharmaceutical companies and are no longer counted.
So far, despite losses, investors continue to put money into the sector. The public and private American companies combined raised $14.7 billion last year, down slightly from 2004 but still the third-largest sum ever.
But investors have become increasingly wary of initial public stock offerings, particularly when companies do not have products close to reaching the market. Only 13 biotech companies went public last year, less than half the 2004 figure, and most of them were at lower prices than the companies had expected, according to the report.
If the industry has not fared well in terms of profit and loss, how about drug development? In 2005, for the third consecutive year, new biotechnology drugs received more approvals from the Food and Drug Administration than drugs from big pharmaceutical companies.
The F.D.A. approved 18 novel biotech drugs, compared with only 11 from big conventional drug makers. Still, biotechnology companies have by no means figured out how to avoid the pitfalls in drug development. And for companies without profits, any setback in development can mean a steep fall in the stock.
That happened three times just yesterday. Inhibitex lost two-thirds of its market value after reports that the company's leading drug candidate, Veronate, did not prevent infections in premature babies in a late-stage clinical trial.
Cortex Pharmaceuticals lost half its value when the F.D.A. halted clinical trials of a drug, citing problems seen in animal testing.
And shares of Incyte plummeted 40 percent when the company said it would discontinue development of a drug for treating H.I.V. because of side effects.
posted by Jones Lang LaSalle NJ News Blog at 2:24 PM
<< Home