Biotech Industry Could Turn Profitable This Decade, argues Michael Hildreth - with some lucky breaks and a regulatory fix!

EXCERPTS:

In 2002, in fact, the entire U.S. biotechnology industry racked up a collective net loss of $11.6 billion - a 71% increase over the $6.8 billion net loss it posted the previous year.

The report also noted that a full third of public U.S. biotechs had less than a year of cash on hand at the end of 2002, a level not seen since the end of the industry's last slump in 1999.

...the industry will need some lucky breaks in order to eventually break even, Mr. Hildreth admits. ...Mr. Hildreth warned that the industry will require some favorable regulatory decisions as well.
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Biotech Industry Could Turn Profitable This Decade
Dow Jones Newswires/The Wall Street Journal, June 12, 2003
by David P. Hamilton
http://www.quicken.com/investments/news_center/story/?story=NewsStory/dowJones/20030612/ON200306120120000295.var&column=P0DFP

SAN FRANCISCO -- The U.S. biotechnology industry could turn a net profit within five to seven years if it gets a break on both regulatory and technological fronts, the author of a new report on the industry said.

Profitability would be a first for the quarter-century-old biotechnology industry, which is dominated by money-losing companies that can take a decade or more to develop their first products. Only about 50 of the 318 public U.S. biotechnology companies were profitable in one of the last three years, and of those only about 20 reported sustained profitability in all three years, according to data in the report from Ernst & Young, titled "Resilience:  Americas Biotechnology Report 2003."

In 2002, in fact, the entire U.S. biotechnology industry racked up a collective net loss of $11.6 billion - a 71% increase over the $6.8 billion  net loss it posted the previous year. But Michael Hildreth, E&Y's biotechnology director for the Americas, said that rising net loss was inflated by  restructuring charges in 2002, and argues that favorable trends will soon buoy the industry to overall profitability.

E&Y's industry-profit figures include both restructuring charges and writeoffs related to so-called in-process research and development, Mr. Hildreth noted. Setting aside those charges, the industry's 2002 net loss would be roughly the same as its 2001 net loss, he said.

Mr. Hildreth said that several other trends fuel his optimism. U.S. biotechnology revenues have increased at a compound annual growth rate of  16% since 1989. Revenues rose 14% in 2002 in the midst of the industry's three-year slump. In addition, he noted, the industry has 250 experimental drugs in late-stage, "phase III" human trials. Even if only one in four of those drugs are approved, he said, "you would expect to see revenue growing significantly between now and the end of the decade."

But the industry will need some lucky breaks in order to eventually break even, Mr. Hildreth admits. For instance, he expects drug development to become faster and more efficient thanks to advances in genomics and proteomics over the last few years, although he admits that so far such efficiency gains are "promises" rather than a hard fact.

Mr. Hildreth warned that the industry will require some favorable regulatory decisions as well. In particular, he noted that the Food and Drug Administration will need to approve new drugs more quickly and Medicare must avoid crimping drug prices by clamping down on its reimbursement policy. The industry could also be adversely affected if the FDA permits competition from "biogeneric" drugs as leading biotech medicines lose their patent protection.

"Personally, I'll be surprised if the industry isn't overall profitable in the next five to seven years," Mr. Hildreth said. His prediction, however, isn't stated explicitly in the E&Y report. Mr. Hildreth said the omission was mostly due to publication deadlines, adding that the firm would continue to track the industry's progress toward profitability and might (sic) include the information in future reports.

For now, the E&Y report paints a mixed picture of the industry. Its data show that venture-capital funding in biotechnology declined in 2002 for the second year in a row, but also noted that each such deal raised an average of $15 million - far more than similar deals yielded in the 1990s. The report also noted that a full third of public U.S. biotechs had less than a year of cash on hand at the end of 2002, a level not seen since the end of the industry's last slump in 1999.