There is no question that biotechnology is a hot sector right now. The anecdotal evidence is everywhere, from attendance at industry conferences to coverage in the mainstream financial press. But recent data from the biotechnology analysts at the respected trade journal Signals say it just might be the hottest the sector has ever been.
In 2010, biotechnology companies both public and private raised $32.7 billion, an all-time record for funding.
The previous high-water mark came (not surprisingly) at the technology blow-off top in 2000, when $31.4 billion was raised - more than the preceding six years combined. That was a bubble.
While today's funding may sound like it's reached bubbly proportions, since we're back at 2000 levels, the comparison isn't really apt. Interest in the sector today has yet - for several reasons - to hit the kind of fever pitch associated with a true speculative mania.
One key difference between the earlier spike and today's total is that 2000 marked a real change in the landscape. While funding did fall off precipitously following the 2000/2001 tech crash - the next year funds raised dropped by more than 53% - it never again returned to the single-digit range (in billions) that was par for the course prior to the tech boom.
The yearly average from 1990-1999 was just $4.3 billion. Though 2000 was a manic aberration - a 633% increase over that average - every year since has seen over $10 billion raised; in five of the ten years, the total was more than $20 billion; and even at the dead bottom in 2008, the sector still pulled in an impressive $10.8 billion, 27% higher than even the best year of the '90s.
To put it mildly, the first decade of this century established a new normal for biotech funding that can't be compared to what went before. In the nine years between 2001 and 2009, average funds raised rose to about $18.6 billion annually, with a high of $26.5 billion achieved in both 2006 and '07. That puts 2010's new record high in perspective. Yes, it's a huge jump over the $4.3B average and $8.5B high for the '90s. But it's just a 74% increase from the average since the 2000 bubble - an average that includes the precipitous drop of funding across all industries that 2008 saw - and is just 23% above the '06-'07 highs.
The sector is hot right now, but those kinds of swings are relatively common in this highly volatile sector. The swings from 2002 to 2003 (+60%) and from 2008 to 2009 (+106%) were comparably dramatic. It's just the nature of the industry. The jump in funding between 2009 and 2010 (+47%) would have to have been much closer to that between 1999 and 2000 (+369%) before we could safely say we're in bubble territory.
Another key difference between the prior run-up in funding and today's new high is the overall size of the biotech industry. Annual prescription drug sales - including both traditional and biologics - have risen in the US from $40 billion in 1990 to over $290 billion today. Similar growth trends are in place in the EU, Japan, and other industrialized nations as well, as most of the world faces an aging population. And in the developing nations of the world, the numbers of people with access to modern health care are rapidly increasing, bringing entirely new patient populations into the market.
Third, the cost of bringing a new therapy to market has increased dramatically, necessitating far more fundraising than ever before. According to the Tufts Center for the Study of Drug Development, the average price for developing a new drug and getting it to patients was up from about $500 million in 1996 to over $1.2 billion for a biologic compound in 2006. (This figure excludes marketing and advertising expenses associated with a launch, which often add hundreds of millions to the bill.) That's a reflection not only of higher laboratory costs, but also a regulatory gauntlet which is more difficult and more expensive to navigate these days. Companies need more money to get through that 12- to 20-year slog from the discovery of a new compound to the day it can be marketed for use in humans. Thus, an increase in overall funding levels is to be expected.
However, these differences don't mean there is no risk for investors with all this new money sloshing around. With more funding comes far more new ventures. And with all new ventures there is inherent risk - and opportunity. More players means both more successes and more failures.
America's Food and Drug Administration (FDA) continues to be a major bottleneck to the industry as well, approving about the same number of therapies as in previous years. According to monthly drug-approval reports on the FDA's website, 21 new drugs were approved in 2010, down from 25 in 2009 and 24 in 2008, but higher than the recent low of 18 in 2007. With thousands of drugs under development and consideration by regulators, this does not bode well for the average company.
And as noted, biotechnology is a volatile sector. One only has to take a look at the share performance of the ten largest biotechnology Initial Public Offerings (IPOs) of 2010 to see that:
Clearly, the right investments in this sector can pay off big-time for investors. This is the primary reason money has been increasingly flowing into this sector for the past 20 years: It's one of the few places where a multibillion-dollar business can be grown from scratch out of one discovery in a public or private lab around the nation.
Sure, funding levels are increasing. And much ado is being made about the new high. We may even have the early stages of a biotechnology bubble of sorts on our hands. It is a growing sector where knowledge, work, and R&D funding can produce value far greater than the cost of the investment, creating great wealth in the process. Increasingly, investors are taking note, driving speculative valuations through the roof in some cases.
These are exactly the conditions that we as speculative investors want: both liquidity and excitement in a market where strong understanding of the right companies and right technologies can give us an edge in picking winners.
As Alex wisely observes, biotech may be in the very early stages of a bubble; if it is, there's plenty of opportunity to profit from it. He and his tech team sift through and sort all the players to bring Casey Extraordinary Technology subscribers the very best picks. A trial subscription will put their expertise in your hands - and it's risk-free. Learn more here.
