Biotech stocks are coming back into favour within the pharmaceuticals sector, and it is the largest ...
Biotech stocks are coming back into favour within the pharmaceuticals sector, and it is the largest stocks that offer the higher security.
Pharmaceuticals rely on a consistent output of new and lucrative products to replace those that lose their patent and become far less profitable.
Antony Milford, manager of the Framlington health fund, thinks that, with some exceptions, there have been few such failures to come up with new products. But he believes pharmaceuticals will have a much harder time in the next five years and biotechs are well positioned to supplement the supply lines of the pharmaceuticals.
Advances in genetics have given biotechs a much broader spread of research avenues to pursue and many are small enough to want to go for niche products especially in the lucrative areas such as cancer, Aids and other fatal illnesses, according to Framlington.
The pharmaceuticals have responded with the SNP consortium, set up in April, and comprising many of the biggest players, including AstraZeneca, Glaxo Wellcome, Novartis, and SmithKline Beecham. They are to produce a shared research database of human genetic make-up. This could intrude on the specialised knowledge of the biotech market and risk its profitability over time.
Milford says the rate production of R&D in biotechs is often better than that in pharmaceuticals. Biotechs are more likely to research the kind of high-urgency drugs that can be put on a fast track through the minefield of securing the Food and Drug Administration approval.
He says: "Around 16 biotechs are making money. In two years that could rise to 40 or 50."
Biotech have been recovering since a low in mid-1996. However, this year the sector has done particularly well, gaining 25% in the year to date, relative to the overall market's 11%.
There have been several big deals so far this year. In January there was a $2.1bn takeover of Californian biotech Agouron, which has a marketed Aids drug, by Warner-Lambert. Pharmacia & Upjohn bought cancer specialist Sugen in June for $650m and Abbott bought California-based Alza for $7.3bn.
James Abate, portfolio manager for Credit Suisse, thinks although biotechs profit from
distribution deals with pharmaceuticals further outright acquisitions are unlikely because of the size of the risk taken with the smaller companies.
Small cap health companies generally did not recover until this year though the big caps started picking up earlier. The large cap biotechs have a great deal of earnings potential, though they are becoming expensive, according to Milford. The small caps, while riskier, have a number of growth opportunities, he adds.
Milford says: "At the small cap end, the sector has been through a tough period. It has been difficult to raise money but that is just part of the general malaise in the health industry. We'll see many mergers in the future. There will be more biotech to biotech deals and there has always been a lot of licensing activity."
He predicts successful biotechs will either develop sales forces and become fully-fledged manufacturing companies or remain in R&D, licensing their drugs to be distributed by the pharmaceuticals as late along the development line as possible to ensure the best deal.
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