Valuation and other biotech mysteries – Part 26: Some Final Thoughts
[Ed. This is the twenty-fourth part in Wayne's series. You can access the whole thing by clicking here.
As with all commentary on this blog, these comments do not consider the investment objectives, financial situation or particular needs of any particular person, and investors should obtain professional advice based on their own individual circumstances before making any investment decision.]
It has now been 35 years since I earned my Ph.D. in chemistry and started wondering how I would make a living and what my career path would be. I sent out over 50 letters to the pharma companies in Canada in 1977 – I got one reply, from Eli Lilly I think – to fill out a form. After 30 years in the pharma/biotech and financial industries, I have had the opportunity over the last few years to sit back and observe those industries, as well as having drinks and chats with many friends who are still working in those industries. Here are a few final thoughts for your consideration.
- The only constant is change – whether it is disease treatments, the pharmaceutical industry, capital markets or your career paths.
- The pharma industry is alive and well. Annual global sales of prescription and non-prescription drugs are over $1 trillion and still growing at a higher rate than GDP growth. The U.S. will remain the single largest market at over 30% and Canada will remain at about 2% of the global market.
- In 2005, the industry spent almost as much on share buybacks plus dividends as it did on R&D.
- The pharmaceutical industry has historically and will continue to adapt to dramatic scientific, medical, economic and political changes. Just consider a few things which have shaped the industry we see today.
- Antibiotics from fungal sources
- Vaccines for polio and smallpox in the 1950s
- Thalidomide, increased government regulation and the focus on safety in the 1960s
- Rational drug design
- The blockbuster era starting about 1980 with the first billion dollar drug Tagamet
- The U.S. Drug Price Competition and Patent Term Restoration Act of 1984, usually referred to as the Hatch-Waxman Act, and the emergence of generics
- Biotech equivalents of natural human proteins, including HGH, insulin, G-CSF and EPO
- The emergence of monoclonal antibodies
- The biotech boom of 1999-2001
- Annual drug costs approaching $500,000 annually for certain orphan diseases
- Restrictive formularies and comparative efficacy analysis by governments and other payers
- The blockbuster patent cliff
- M&A is not a new growth strategy for pharma – just look at the list of companies bought by Pfizer over the last 30 years.
- In the 1980s, the big pharma companies sold off everything that did not look like a blockbuster. Now they are buying back those assets for steady revenue and growth.
- We could not predict the timing of past biotech booms and we probably cannot predict when the next biotech boom will occur. In my opinion, the biggest boom was just luck – proteomics and genomics came along just as a huge capital pool was exiting the tech boom and looking for an alternative high return investment. Other smaller booms have risen and fallen along with the broader capital markets.
- The biotech industry had dreams of being different and perhaps better than pharma in terms of development success rates and clinical impact of the products. Its tools were initially different and some independent biotech companies thrived. However, there is really only a single industry with some company differentiation based on therapeutic focus and types of products.
- The fate of most biotech companies is to fail. Most junior mining companies doing exploration over the last few years have failed to make discoveries which justify building a new mine. It is just a fact of life in these industries.
- Successful biotech companies will most likely face the ‘acquire or be acquired’ situation. The fate of most successful biotech companies is to be acquired. Investors usually prefer the premium share price that goes with being an acquisition target. Management would naturally prefer to be the acquirer and keep their jobs.
- Is there an alternative to acquire or be acquired? Is it possible to give 10% of the revenue stream from a licensed drug to the management and let them try to repeat their success, while 90% of the revenue stream is distributed to shareholders?
- Nobody in pharma or biotech or among their investors can consistently pick winners. Some are more selective in their initial investments and others may exit their losers more quickly.
- One of the hardest lessons to learn in biotech investing was ‘good companies are not always buys’.
I hope this blog series has been at least interesting and perhaps even useful to its readers by pointing out the many questions which you need to ask.