Why Biotech in 2017 is like the Web in 1995?
Ever since the last US presidential election, financial newswires have been rife with speculation about which industries would be most affected — both good and bad.
It was an overwhelming surety that had Clinton ascended to the Presidency, a certain industry that had grabbed unflattering headlines last year would come under fire.
That industry is the biotech industry, and ever since November 2016 it has not only rallied but investors are also looking towards it as its next up-and-coming darling.
The Lull Period
The biotech industry first captivated investors in 2005 after the stem cell research successes. This spurred a startup revolution in this niche industry and it went on to expand its scope onto more than drug procurement and medical diagnostics. It branched out onto agriculture, healthcare IT and medical instrument manufacturing.
It continued to enjoy optimism and investor support as biotech clusters sprouted in and around notable hospitals and universities (for collaborative research).
However, with the advent of more money and firms, competition diluted the initial firms’ path-breaking discoveries.
The firms were unable to procure marketable consumer products despite the research, causing investors to doubt the payouts of R&D.
But, the crux of the industry is research which is why existing firms required blockbuster or cash cow products to stay afloat and fund its R&D. Hence, the firms tampered with their existing products’ pricing. Most notably, the EpiPen by drug maker Mylan, was criticized heavily for its 500% price hike since 2007.
Clinton, pre-election 2016, had suggested implementing various policies to control drug prices and reduce healthcare payers’ drug costs. She also proposed drug re-importation from countries that pay less for their medicine, something that didn’t bode well for the industry.
In 2016 alone, the iShares NASDAQ Biotechnology Index ETF which is the industry benchmark was down 24% alone (trailing the market index by over 30% for a period of 14 months) after a 35% peak in 2015.
Nonetheless, all that has changed since Clinton’s loss late-2016. The iShares NASDAQ Biotechnology Index ETF and the SPDR S&P Biotech ETF are up by over 10%, posting higher year-to-date returns than the DJIA and the S&P500. Some large biotech firms are trading at Forward P/E ratios of 22.4% compared to the Forward P/E ratios of Consumer Staples firms.
What has caused this upswing?
The Republican win over the White House and the Senate has spelled a defiant victory for the industry for the next two years at least.
Trump’s Administration seems to be less stringent upon drug pricing controls and the Republican Government in general spells lower corporate taxes. There is also talk of the introduction of a one-off tax rate for the “repatriation of funds” from overseas.
Another win in the biotech industry’s corner came about when California “voters turned down a ballot initiative aimed at reining in rising prices for prescription drugs.” The California Drug Price Relief Act or Proposition 61 was rejected in November 2016. There is another similar initiative underway in Ohio which is likely to get passed from the state but is unlikely to be upheld by the Supreme Court.
One more catalyst for the industry is the biotech’s cannabis sector that is touted to experience a growth rate of 400% over the next seven years.
Cannabis firms are still small (in size and operation) with unsteady revenue streams, but the changing laws and the growth prospects have made them lucrative takeover targets for larger pharmaceutical companies. M&A activity had stagnated during the biotech industry’s lull period but with renewed interest in cannabis firms, the whole industry is poised to gain.
The Parallels with the World Wide Web in 1995
The level of innovation that the biotech industry curates is truly inspiring. The likes of technology such as CRISPR that allows scientists to edit genomes with precision, or ReWalk that gives exoskeleton legs to paraplegics, can revolutionize our lives.
In fact, despite its recent slump, the biotech industry still managed to beat the market in a five-year period, thus the renewed interest for it will bring it closer to its tipping point. A parallel can be drawn from the biotech industry’s precarious position today to that of the Internet’s position in 1995.
Some key events had unfolded in 1995. Bill Gates wrote a memo to his employees outlining the importance of the internet and his intention to pivot Microsoft’s success to the as-then-unknown tour-de-force.
The Internet at the time was appreciated for all the potential benefits it yielded but it seemed obscure and there didn’t seem to be any money-generating capabilities in it.
1995 brought about the advent of SSL encryption (that allows online payments using credit cards), eBay, Yahoo as well as Amazon and the rest as they say is history.
Where Will the Next Big EpiPen Come From?
The EpiPen is one of the greatest commercial successes to come out of the biotech industry. But now, the question arises, where will the next big thing come from?
As discussed earlier, this industry is wholly dependent on research so money is crucial for its subsistence. Biotech firms generally have large cash reserves to fund its R&D but it also attracts substantial external funding. Medical biotech, unlike agricultural biotech, receives the larger chunk of investor dollars so the field will continue to deliver ground-breaking technologies.
Averaging $6–8 billion in VC money, the biotech industry is still not a prominent feature of the startup identity in the US. Although it does house San Diego, that has evolved into the biotech hub of the world, VC funding does not wholly devote itself to biotech in the US.
As a result, the title of the next big thing in biotech might shift eastwards to the startup nation of the world, Israel.
The country’s politicians are convinced that that the next big innovation from its startup sector will be in the biotech industry. There are some 1,350 startups in the country’s sector, 80% more than a decade ago. Add to that, every year an additional fifty more biotech startups spring up.
Israeli life-sciences companies also manage to pool in just as much money on NASDAQ as biotech firms in the US — a phenomenal feat for a country with a population of only 11 million.
There are many keys to Israel’s success in the sector, such as the 509 original patent applications filed by a host of research institutes and hospitals in the country. In addition, pharma giant Medtronic, in collaboration with IBM, set up a digital medicine incubator in Haifa that was launched as MindUp and the government itself is offering grants for biotech.
As it stands, with all the excitement and money that is pouring into innovation in this space, there are few countries better positioned to take advantage of this opportunity and build a better world — than Israel.