The main theme for the biotech sector in 2002 will be consolidation, according to Kristine Bryan, fu...
The main theme for the biotech sector in 2002 will be consolidation, according to Kristine Bryan, fund manager of the Schroder Medical Discovery fund.
The market has already shown its willingness to back mergers between suitable rivals, she says, pointing to MedImmune's purchase of Aviron, which led to both share prices increasing before the acquisition went through.
A wave of further consolidations is likely to follow, predicts Bryan. She says: 'The biotechnology industry may be set for a period of consolidation, which first became noticeable at the end of 2001. Such movements can have an extremely positive effect on share prices.'
Joe Anderson, head of global health and biotechnology at First State, also sees consolidation as likely this year but does not think pharmaceutical companies will buy biotech firms. This is because M&A activity risks market disfavour and is a potential knock-on to currently high valuations.
He says: 'Pharmaceutical companies have high valuations and the big pharmaceuticals do not want to dilute their earnings by spending in this area.'
Bryan points out that share prices in the biotechnology sector tend to be weaker in the earlier part of the year, when newsflow is at its weakest.
She says: 'Historically, the first quarter carries the weakest returns for the biotech sector. As more medical conferences convene and new clinical trial information is disclosed, the sector tends to follow with stronger share price performance.'
Despite a potential seasonal strengthening as the year progresses, parts of the biotechnology sector will continue to struggle, according to Anderson. He says those companies that sell proprietary technology to biotechnology and pharmaceuticals companies have not prospered and do not offer much potential this year. After suffering last year, he adds, biotech stocks are starting to be seen more as healthcare propositions than technology stocks.
Bryan believes the longer term position of healthcare companies is positive. She says: 'To give an idea of the potential increase in world healthcare spend, the average healthcare cost of a US male aged between 50 and 54 is $4,454, compared to $15.28 for those aged between 30 and 34.'
She adds that shifting demographics mean that by 2020, 25% of the population will be aged 50 to 65, compared to 10% in 1960.
Biotech companies have been able to move ahead of the big pharmaceutical companies in terms of new product development, according to Anderson. They have capitalised on the shrinking research and development pipelines of the bigger operators such as Pfizer, he says.
Anderson cites Idec, a company that sells a lymphoma drug, as an example of a good biotech holding with potential for growth going forward. He says it is making the most of this drug by getting it into markets where it was not formerly used.
The drug is now available to those with medium and low grade blood problems, as well as those with more serious problems. But, Anderson says, development of new drugs is also important to the company and Idec has developed a more potent, radioactive version of the drug, called Zevalin, which has yet to be launched.
Biotechs expanding into other areas.
Merger activity will boost share prices.
Sector strength on back of clinical trial data.
Companies are valued highly.
Technology platform firms are in for a rough ride.
Biotechs showing less interest in R&D spend.
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