Sales of products defined as biotechnology are reality in the US healthcare market, but it will be some years before similar UK efforts pay off investors to the same degree suggests Evan McCulloch, manager of Franklin Templeton Investments' Franklin Biotechnology and Global Health Care funds.
McCulloch, visiting the UK for research purposes, has told IFAonline that this is because while there are some interesting biotech efforts ongoing in the UK, firms in the US are in a stronger position with regard to both financial strength and in terms of the sheer number of products either on the market or in advanced stages of R&D.
”Many US biotechs raised significant cash in the dot.com years. Since then they have been going about their business. Meanwhile the big pharmas have seen their position weaken because of pipeline issues. This means that biotechs are actually in a stronger bargaining position with regard to pharmas,” McCulloch says.
This means that firms such as GlaxoSmithKline, Europe’s biggest pharmaceutical company, are looking to biotech firms to get products to market sooner than their own new blockbuster drugs, some of which are many years away from being given approval by regulators.
Because the biotech firms are not in desparate need of cash but the pharmas are in need of new products, it acts to increase the market value of the biotechs, McCulloch says.
”We expect 17 [biotech] products to gain approval in the US this year,” he says.
”There are about 1,000 products in testing, and about two-thirds of these should make it through to market in future years. Another 800 products are in the advanced testing stage, which should see them come to market by 2006 to 2008.
Key product areas at present include cancers, RNA and nanotechnology.
Biotechnology is still considered a non-core fund holding by most investors, but McCulloch points out the possible returns linked to approval for individual drugs.
One example of the money involved is Avastin which costs doctors $4,800 per month to give to patients with one particularly aggressive disease: metastatic colorectal cancer.
The drug prolongs the average patient’s life by 5 months, which essentially means taking it over a 10-month period, meaning a total cost of about $50,000 per patient. The market in the US alone is considered to be about 100,000 patients, which means sales of $5bn every 5 months, McCulloch says.
Genentech, the US developer of Avastin, has seen its share price rise from about $25 in mid-2002 to about $131 this year, with a current market capitalisation value of about $63bn.
Investments elsewhere, either in Europe or the rest of the world are considered to too early-stage for the purposes of the Franklin Biotech fund, especially with regard to some of the valuations that are being placed on the firms concerned.
Outsourcing provides another route to investing in biotechs that is growing in importance. As bigger firms look to outsource non-cutting edge R&D to third party laboratories in places such as Singapore, there may be ways to take advantage of this shift as an investor.
Japan, a huge healthcare market, is off the radar as far as biotech investment returns are concerned because of the time it takes to get regulatory approval for new drugs sold there McCulloch says. Typically approval processes would see drugs sold first in the US market, then the EU, then, much later, in Japan.IFAonline
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