Biotech ETF’s and some observations on biotech stocks

Filed under: Biotech ETF

If you are an investor in Biotech ETF’s, these developments should be of interest to you. The expectation this year has been that returns to investors on biotech will not come from research and development activity but from merger and acquisition activity. This is because organic growth within the industry is expected to remain at around 5% annually and merger and acquisition activity growth rate has far outstripped this growth rate. Virtually every major pharmaceutical company had completed an acquisition in the year 2010 and this trend is expected to continue and indeed accelerate. Pharmaceutical companies have been aggressive in new product development and trying to replace revenues that have been lost because of the expiry of existing patents. They are also looking to actively penetrate emerging markets where the growth rates are high and mergers and acquisitions are important weapons in achieving these objectives.

If a major pharmaceutical company wants a potential blockbuster drug for its product pipeline, it is far cheaper for the company to acquire a biotech company with a promising product rather than make staggering investments that are required in research and development as well as the testing process to produce the drug from scratch. The biotech industry is of course far more than just medical and medical related activity and also includes companies it are conducting research for fields such as agriculture and the development of biofuels. For example, the German company Bayer that is famous for aspirin actually earns most of its revenues from its crop sciences activity. However, pharmaceutical and medical activity will continue to dominate the biotech industry.

One of the major challenges for the pharmaceutical industry will be to replace the revenues generated by drugs on which patents have expired. In 2011 itself, drugs that will lose patent protection account for revenues in excess of $30 billion and include blockbuster drugs such as Lipitor. More drugs are set to lose protection in 2012 and experts estimate that by 2015, drugs that currently generate revenues of over $140 billion will face competition from generic drugs as they go off patent. It is extremely unlikely that the pharmaceutical industry will be able on its own to find new drugs that can replace these lost revenues.

The other major challenge will be to adjust to the shift in world markets. The industry expects the growth of between 5% and 7% in 2011 the bulk of which will come from the emerging markets and the developing countries. Sales growth of 15% is expected in markets such as India, China, Brazil and Indonesia because of increased government spending on health care as well as expanded coverage for workers. Growth in the countries including Europe and Canada is going to be much lower and growth in the United States will only show a marginal increase from about $310 billion to about $325 billion. The developed countries are expected to introduce even tougher regulation because of the growing spate of product recalls and public concern about drug safety. Both governments and insurers in these countries are pushing hard to cut the costs of health care and it is extremely unlikely that the markets in these countries will grow in any significant fashion.

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