While many markets are suffering from the global economic downturn, biotechnology is forging ahead. Charles Piggott reports.

In the middle of one of the worst bear markets in living memory, biotechnology may be one of the few growth sectors. Despite global difficulties in venture capital funding and a slowdown in the once raging flows of cross-border investment, select areas of the biomedical sector are still registering 50% year-on-year growth (Singapore’s bio-medical manufacturing grew 48% in 2002 alone).

Die-hard optimists see figures like these and the excitement about scientific advances, such as the sequencing of the human genome, as signs of hope. Could biotech one day help to reignite global economic growth just as excitement about the IT-dotcom boom did in the latter half of the previous decade?

Reasons for hope

There are several good reasons for optimism. First, the long-term view shows a record of consistent growth in the biotech sector for the 20 years until the end of 2001. Figures prepared by the Biotechnology Industry Organization (BIO), which represents more than 1000 biotechnology companies, academic institutions and state biotechnology centres and related organisations, show growth in almost every measure tracked: from world-wide biotech revenues and the number of drug and vaccine approvals, to biotech employment levels and the world-wide number of biotech companies. Even in 2001 (the last year for which there is consistent data), long after the dotcom crash, the average US biotech company earned more than in any other year.

A second reason for optimism is that large pharmaceutical companies are maintaining high levels of investment in the biotech arena. The world’s largest pharmaceutical companies are under pressure to expand their pipeline of drugs in development, so aggressive pharmaceutical investment in research and development (R&D) is not going to dry up in the near future. Moreover, the pharmaceutical industry cannot afford to withdraw investment from the early stages of scientific discovery if companies are to sustain their massive sales operations. Competition to strike deals with the most promising biotech companies is more intense than ever before.

Third, while most sectors of the global economy are suffering from a net surplus in manufacturing capacity, biotech manufacturing (and R&D) capacity still appears to be growing. Many of the large pharmaceutical companies and biotech groups are expanding large high-tech manufacturing plants in regions such as Singapore, Ireland and Puerto Rico.

R&D opportunities

Yet another reason to be optimistic is that the life sciences in general are creating enormous opportunities in attendant areas of research, for example computational biology (bio-informatics as it is known in the industry). A report by Boston Consulting Group produced on behalf of Heidelberg-based bio-informatics company LION bioscience suggests that molecular genetics could generate more than 10 petabytes of data by 2010, equal to more than 40 times all the information in print today. In time, this figure could increase 1000-fold. The economic implications of building that kind of computing capacity are clear.

The continued strength of the biotech industry’s fundamentals, despite a slowdown in funding growth, provides further optimism. A 150-page report by Ernst & Young, Beyond Borders: The Global Biotechnology Report 2002, concludes that the biotech sector is in good shape, that companies are still cash rich and that prospects are good for a recovery of public market activity.

Jörg Reinhardt, head of global development at Swiss life sciences group Novartis, thinks that optimism in the biotech sector is justified. “There is a lot of good science going on in the biotech sector right now and the scientific developments of the past four or five years are certainly not going to go away,” he says.

According to BIO, more than 350 biotech products are in late stage development, many representing significant medical advances in the treatment of some 200 diseases. As long as the scientific advances continue, investment dollars will follow.

Investment levels

Dr Elmar Konz, head of global technology licensing and alliances at Franco-German pharmaceuticals group Aventis, says that levels of investment in biotechnology will be determined by scientific success. “Overall, we expect stable levels of investment in early stage biotech alliances,” he says. Last year, Aventis spent about E100m. However, he also says that the investments in biotech ventures will be partly governed by “the scientific outcome of the research alliances as this will be reflected in the milestone payments Aventis has to make”.

Although anecdotal evidence suggests that in the late 1990s investment in biotech was growing at around 15% a year, total R&D budgets at most of the large pharmaceutical companies and government bodies are largely stable with some modest increases for 2003. However, much of the venture capital funding has dried up as nervous investors sit on cash.

Gaps to fill

Most of the large pharmaceutical companies have concentrated R&D efforts on identifying and filling the gaps in their in-house biotech research with joint ventures and commercial alliances. Hans Hultberg, associate professor at Stockholm University and head of global discovery alliances at AstraZeneca, says: “We are looking for gaps in our [drug] pipeline and at this stage it is difficult to say whether our investment in alliances will drop off or continue to grow. In part, this will be determined by the growth of the pharmaceutical industry as a whole and I don’t see any drop off across the industry as it looks for new technology.”

However, pharmaceutical companies are becoming subject to two potentially conflicting pressures: first, to expand their drug pipelines and, second, to improve efficiency in the drug development process. “The Street [Wall Street] is demanding that pharmaceutical companies develop more products and we are looking for gaps in our pipeline,” says Dr Alan Proctor, vice president in charge of strategic alliances for Pfizer, based in Connecticut.

This has intensified the search for partnerships with biotech companies involved in early stage R&D. “One theme on the horizon is the evaluation of early stage, pre-clinical candidates in the biotech sector. However, it is getting tougher to do these deals,” says Dr Proctor.

“A large part of the [pharmaceutical] industry is looking at the biotech sector, where not all of the companies will have the money to make it to market. Some of the companies are less than realistic about their prospects, particularly where their lifeblood depends on just one compound.”

Investor preferences

While investors have made it clear they want to see pharmaceutical companies fill gaps in their drug pipelines, they also want drugs companies to reduce the estimated $800m cost of bringing a new drug to market. In many cases, this may mean reallocating investment away from early stage biotech R&D and putting it into areas such as manufacturing technology and bio-informatics.

“There is a current preoccupation throughout the industry with the movement of technology and investment away from early stage investment to overcome some of the hurdles further down the development chain,” says Dr Proctor. “While we are still looking at early stage investments in the biotech sector, we are also concentrating more on gaps in our development process, for example on safety screening procedures or chemical manufacturing.”

Some in the industry are worried. “In boom years, a huge bubble of money was thrown at interesting ideas. Now investors are much more focused on practical issues such as product development. A move away from early stage investment towards more pragmatic development issues could lead to a shortfall in the drug pipeline in future years,” says Dr Proctor.