An economic slowdown could crimp spending on exotic vacations, electronic gadgets or monster sport utility vehicles, but analysts doubt consumers will reduce their appetite for promising new heart medications, anti-impotence drugs or pills to restore hair loss…North American biotechnology firms are holding firm to gains established at the beginning of the year, despite a meltdown in high-technology valuations from semiconductors to telecoms and optical equipment manufacturers.
The Toronto Stock Exchange biotechnology sub-group is up 25 percent on the year, while Nasdaq’s biotech index is up 29 percent in 2000, albeit considerably lower than the 79 percent return achieved in the first-quarter. Unlike the short-lived biotech boom of the early 1990s, today’s companies are well funded with plenty of promising products in the late stages of development, analysts say. Biotech financings in North America amounted to over $4 billion in October.
“A lot of money has been raised in the past 12 months and, I think, over the next two years, a lot of of those projects that have been funded will come to fruition,” said Brian Bapty, healthcare analyst at Goepel McDermid in Vancouver.
At least six Canadian biotech companies are poised for initial public offerings, including Nexia Biotechnologies, which is developing a fiber as strong as steel from the milk of goats that have been genetically modified with a spider gene. Analysts believe investors might sell down high valuation biotech stocks to buy some of the new issues, but strong demand is expected to temper the dilution.
At the crux of the biotechnology boom are an aging western world population and drug developments aimed at socially stigmatized disorders such as impotence or baldness. “People are recognizing the dynamics of the biotech industry as being a lot more robust from a demographic perspective and from a steady inflow of cash,” said Bapty.
QLT Inc. is now marketing what could turn out to be a billion-dollar product to treat a form of degenerative blindness that afflicts the elderly, said Bapty. Also, healthcare spending in the Group of Seven industrialized nations remains steady at about 10 percent of gross domestic product, Bapty added.
The robust spending mixed with discoveries based on the human genome project and a better understanding of the immune system enhances the fundamentals of the sector.
“We are seeing a ton of good news and lots of products moving through the pipeline right now, so I think fundamentals are moving the sector,” said Robertson Stephens analyst Steve Harr.
Analysts said more North American biotech companies have drugs in late stages of clinical trials than ever before.
Twenty percent of drugs in phase one clinical trials make it to pharmacy shelves. This rises to about 33 percent for drugs in phase two and over 50 percent for drugs in the last stage, or phase three, of human trials, said Harr.
“When trying to handicap risk, every time you move up the ladder to the next phase you’re increasing your odds of having revenue in the long run,” said Harr. Large drug companies are also looking for ways to expand their product lines, which should translate into an accelerated pace of consolidation that has already started.
For one, Amgen Inc., the maker of blood-cell stimulators Epogen and Neupogen, is showing an appetite for biotech acquisitions with its recent purchase for $170 million of privately held Kinetix Pharmaceuticals, which it bought to advance its small-molecule drug development.
The sector is primed with cash from recent financings and, although this is expected to give companies the confidence to go it alone, a downturn in market valuations could open the door to further acquisitions.
“If there is any weakness in the sector, I think you will see a consolidation wave,” said Harr, adding that he expects this wave to hit over the next two to three years.