Biotech Firms Are Growing More Profitable

June 21, 2002
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GRAND RAPIDS — Biotechnology firms are a major driving force behind the new century’s new economy and are “poised to achieve long-term success.”

GRAND RAPIDS — Biotechnology firms are a major driving force behind the new century’s new economy and are “poised to achieve long-term success.”

That’s the assessment of an industry study Ernst & Young LLP released earlier this month.

The company’s 15th annual review of the biotech industry, “Focus on Fundamentals: The Biotechnology Report,” shows the number of biotech companies has risen, industry employment has grown, revenues have surged and drug approvals have increased.

The industry made more money last year than at any time in its 25-year history, and biotech companies are in the best financial shape ever, according to the report. Industry revenues, which have been increasing an average of 11 percent a year since 1995, increased 12.2 percent from 1999 to 2000, from $23.3 billion to $25 billion.

The number of U.S. biotech companies increased by 105 from 1999 to 2000. Currently, 1,040 private and 339 public biotech companies are operating nationwide. The industry’s birthplace, the San Francisco Bay area, still has the largest concentration of biotech companies in the nation. 

Some 120 biotech products approved by the U.S. Food and Drug Administration are on the market today and more than 300 biotech projects are in late-stage clinical trials, many of them focused on cancer and central nervous system diseases.

The industry spent about $13.8 billion on research and development in 2000, a 29 percent increase over the year before. Ernst & Young estimates the cost of bringing a drug to the market at about $500 million.

Biotech companies raised $33 billion on Wall Street last year, more than the amount invested in all biotech firms in the previous five years combined, the study shows.

Product sales for publicly held biotech firms grew to $16 billion this year, marking two consecutive years of double-digit growth in the sector. Corporate earnings on profitable biotech firms more than doubled in 2000 compared to 1999.

According to the report, some $2.8 billion in venture capital was invested in the sector in 2000, representing an 86 percent increase over 1999 investment. Venture capital funding from January 1999 to June 2001 was $4.2 billion. 

Despite the weakened economy, biotechs are still attracting venture capital. Corporate venture capital investments in the industry surged in 2000, and more and more large pharmaceutical companies are providing biotech startups with funding. In fact, more than half of biotech drugs approved in 2000 were either co-developed or are being marketed by pharmaceutical companies.

Biotech continued to spur posterity in key regions throughout the U.S. with both infrastructure expansion and job creation, the report shows. The number of employees in biotech companies doubled from 80,000 in 1993 to 174,000 in 2000. With the convergence of biotech and IT, the new biotech technician combines a biology background with computer science and engineering know-how.

The industry’s market capitalization reached $330.8 billion on June 29 this year, a 6 percent decline from its record 2000 level of $353.5 billion, according to the report. Fifty-six initial public offerings (IPOs) were completed in 2000 and raised more than $5 billion. In 1999, only 11 IPOs were completed. 

Between July 1, 1999 and June 29, 2001, the AMEX Biotech Index was up 177 percent, significantly outperforming the Nasdaq composite and Dow Jones Industrial Average indexes. The AMEX Internet Index, by comparison, was down 39 percent during the same period.

Shareholders and the public, however, are scrutinizing the industry more closely than ever before, according to Keith Burns, Ernst & Young managing partner of the Grand Rapids office.

“Current market expectations for success eclipse those of the last period of intense investor interest in the early 1990s,” Burns said. “Industry success and continued growth rests on biotech companies’ ability to effectively invest capital raised during the boom in 2000 to bring new products to the marketplace.”

According to the report, biotech firms must focus on business fundamentals if they are to continue to attract future funding and maintain shareholder value. As biotech continues to mature, product revenue performance and R & D achievements will become more critical in terms of the industry’s value to investors. 

The top priority now is generating an attractive return on investment, Burns said. To that end, biotechs are bringing products to the marketplace, acquiring new technologies and expanding their pipelines.

“Their success in this endeavor will translate into more robust product offerings, more profits and ultimately will lead to increased investor confidence,” he said.  

Arthur Levinson, chairman and CEO of San Francisco-based Genentech Inc., sees biotech as trending towards individualized medicine.

“I see a dramatic shift to individualized medicine — the ability to deliver therapeutics on an individual basis through molecular phenotyping of disease subtypes and to predict both patients’ therapeutic and side effect responses to drugs,” he writes in the report.

Jack Huttner, vice president of communications and public affairs for Genencor International of Palo Alto, Calif., predicts that “10 to 20 years from now we will look back and see that biotechnology has contributed as much to reaching industrial sustainability on our planet as it has to the battle against illnesses such as heart disease, cancer and Alzheimer’s.”

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