Pharmaceutical companies are increasingly turning to biotechnology ventures to help them rescue their flagging profits.
Investors are looking at biotechnology companies to reinvigorate a moribund drug industry in a way the big pharmaceutical giants have failed to do over the last two years. Observers say companies such as America’s Pfizer or Britain’s GlaxoSmithKline, known as big pharma, can no longer come up with a steady stream of new products from their extensive pipelines of drugs in testing as they did in the 1980s. Consequently, they have produced flat profits.
Niall Kirk, director of American equities at F&C, says: “Big pharmaceutical companies are increasingly looking around to buy biotech companies. This has been a trend for some years, but big acquisitions are still taking place.”
In June, American company Pfizer, the biggest pharmaceutical business in the world, bought Vicuron Pharmaceuticals for $1.9bn in cash to broaden its line-up of infection treatments. And in October, American drug maker MGI Pharma bought biotech company Guilford for £180m in cash and shares to take advantage of its cancer treatments.
Anne Marieke Ezendam, a healthcare specialist at Threadneedle Healthcare, says: “Big drug companies have made these purchases because it allows them to spread risk to smaller biotech companies who have already made strong advances in particular areas.”
Other observers say that because big drug companies have produced flat profits over the last two years, buying larger biotech companies is a cost cutting measure and a more cost-effective way of putting new treatments on the shelves.
In comparison the best American biotech companies are making year-on-year sales increases of around 20 per cent. And even in Britain, sales increases range between 10 and 15 per cent at the better-run companies.
Bringing new drugs to market is expensive high-wire work. It can take between £50m and £450m and anything up to 12 years to develop a new drug, once extensive research and testing is taken into account.
Kirk says: “In Britain, it is a lot harder to make the kind of returns American companies do. In America the markets are more liquid and the managements are very good. The result is that companies like Amgen, Guilford and others regularly bring drugs to market and make profits. So when we talk about investing in biotech companies, we are really talking about America.”
Kirk says that Cambridge Antibody Technology (CAT) is one of the few British companies to have produced a drug that is selling in large numbers. “Its rheumatoid arthritis drug, Humira, is sold in partnership with American drug maker Abbott Laboratories,” says Kirk. “However, it only receives a small proportion of the profits, because it sold much of its rights at an early stage of development.”
Indeed, CAT is currently in legal dispute over the size of its royalties with Abbott. Its case will be heard in the Court of Appeal in London from 24 October.
Each time a biotech company passes one of three key stages, the value of the company rises in the market place. Kirk says: “When a company passes stage one, it mainly relates to safety data. Passing this stage really means that it is safe for people to take.”
Stage two is where a drug has to show that it can have a positive effect on the illness you are trying to treat. And stage three is the most expensive stage, because this is where the drug is tested on 4,000 people or more in different parts of the world over a number of years.
The purpose of stage three is to test side effects in different types of people. Different sexes and racial types have slightly different chemical balances, which may react differently towards the same drug.
At this stage a biotech company always strikes a partnership deal with a big drug company, because only they have pockets deep enough to carry out research this extensive.
One of the areas where most research is being carried out is oncology, or cancer treatment. And there are economic, as well as humanitarian, factors behind this.
Because cancer is a life or death illness, unlike depression or the common cold, authorities allow companies smaller testing samples in order to get these drugs quickly to market in order to treat terminally ill patients. These test schedules are, of course, less expensive to fund.
As Threadneedle’s Ezendam says: “Cancer treatment is still a very active area. There are a lot of companies doing research in this area.”
Investors continue to look towards biotech businesses, particularly in America, to make the medical breakthroughs and provide the returns that big pharma used to make as a matter of course.