Nova workboard

a blog from young economists at Nova SBE

Biotechnology in Healthcare – an overview

Biotechnology is an increasingly important industry in the healthcare sector. Its products are made of substances, which are naturally produced, so as to treat diseases and genetic disorders. In healthcare, this type of speciality has 3 different roles: it can be used in therapies; vaccines may be developed with this technology; and as important, it can be used to diagnose the likelihood of having a disease or a genetic disorder. Relating to my previous article, similarly to alternative medicines, this type of medical application also focuses on the core disease by acting on the cell behaviour rather than on the symptoms.

Comparing it with traditional pharmaceuticals, it invests more 25% in relative terms in R&D. In addition, it also requires special distribution logistics since it is not as stable. Moreover, it targets less common diseases thus having a reduced client base as well as there are 5 times more monitoring and quality tests. All these facts added imply that the cost faced by the end consumer is higher than with traditional pharmaceutical, although with a different array of benefits.

Biotech is currently a “hot” market for Venture Capital investors as it has a considerable potential given the growth in cancer-related diseases associated with eating habits and changes in lifestyle. The effort dedicated to this type of disorders was around 43% in 2012. It is also estimated that half of all new medicines originate in biotech and thus the market is growing at 15% per annum. Furthermore, it already represents 9% of all European pharmaceutical market. In the US there have already been over 30 IPOs of biotech companies in 2013. There is also a tendency of general mutual funds to allocate more resources to this industry, as they realise the potential it has.

Regarding geographies, the UK, Germany and Switzerland account for 40% of all the pipeline developments in the EU with the UK being the leader in pre-clinical phase and in phase 3. The companies that succeed are usually acquired by larger ones. The pharmaceutical industry is in constant need to innovate and as firms usually cannot grow organically (exception to Novo Nordisk which is growing at 15% yearly) they have to partner with smaller firms. As such, these partnerships not only occur in the form of acquisitions, as mentioned, but also on partnerships. Deals are more commonly structured in the ‘biobucks’ form in which part of the payment is contingent on performance of the acquired, representing a real option increasing the NPV of the investment. It is interesting to note that in the US the number of deals in which pharmaceutical companies buy biotech companies is 4 to 1 whereas in Europe is 1 to 3.

All in all, this industry is rapidly growing and considerable investments are being pursued herein. It is assuming an important position in treating and preventing diseases and genetic disorders with high success. The success rate from Investigational New Drug (IND) to market is 20% for biotech against 10% of pharmaceuticals. Nevertheless, these success rates come at higher costs since the value added to investors is lower as biotech firms pursue projects accepting much lower NPVs when compared to pharmaceuticals.

Therefore, the higher costs on research imply that only developed countries adopt these substances, as they are the ones with ability to pay. As a consequence, conventional pharmaceuticals will have to rethink their business models so as to outsource R&D to achieve more efficiency in the allocation of resources.

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Author: studentnovasbe

Master student in Nova Sbe

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