Review & Outlook

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Navigating the Biotech Boom

29 August, 2013 by Ben O'Brien in Commentary

A recent Financial Times article reports that Biotech companies are raising money at the fastest rate since the dotcom boom of the 90’s. So far 22 companies raised $1.7 billion in initial public offerings this year, up significantly from the last two years, the Times reports. But what exactly is a biotech? How are they different from traditional drug companies? Do O’Brien Greene portfolios have any biotech exposure?

Biotech companies have grown from what was considered for a long time a speculative medical niche to a major area of healthcare with substantial revenue and profit. A recent article in Barron’s said that six of the top ten selling drugs are now biotech drugs and the whole pharmaceutical industry is increasingly moving from chemistry to biology.

But what exactly is a biotech? Biotechnology is the manipulation of organisms at the genetic level to create new medical products on a large scale. Traditional pharmaceuticals on the other hand are simply chemical compounds. The use of fungi, bacteria and other living organisms to stimulate chemical reactions needed to process certain foods or medicines has actually been used for thousands of years. One common example from the 1940’s is penicillin. The growth and commercialization of biotechs was sparked by a 1980’s Supreme Court decision to recognize patent rights on genetically altered life forms. The mapping of the human genome in 2003 further fueled the industry.

While biotechs are “the wave of the future” in pharmaceuticals the investment opportunities for biotechs are very tricky. Valuations are high and many promising independent companies are being bought up by large companies. Biotechs are also notoriously difficult to evaluate because of the specialized scientific and regulatory questions involved. Companies must invest vast amounts in drugs that may never pass the rigorous regulatory process, making the business inherently risky.

One way to access the growth of biotechs without the high risk or premium valuation is through large cap pharmaceutical companies like Johnson & Johnson, Abbvie and Sanofi. Owning these blue-chip, diversified pharmaceutical companies is how most of O’Brien Greene’s clients have had exposure to biotech so far, but that may change now that biotechs are moving into a more mature stage.