Biotech Poised to Benefit in 2005 From Shifting Landscape

03 January 2005 00:01  [Source: ICB Americas]

With a modest yet profitable year behind it, the biotechnology industry is poised to harness the benefits of a changing health care landscape in 2005 and beyond. An emphasis on safer, more effective and cheaper therapeutics in an increasingly competitive industry is driving health care spending from hospital-based care to drugs offering convenience.

US health care spending is expected to surpass $3 trillion and account for roughly 18 percent of GDP by 2012, according to projections by the Centers for Medicare & Medicaid Services, Office of the Actuary. “Americans are spending more on health care, and drugs are estimated to consume 14 percent of total health care spending by 2010,” notes Navdeep Jaikaria, an analyst with Rodman & Renshaw.

Yet despite a wellspring of opportunity in the market, biotech will need to endure certain hurdles, such as the increasing scrutiny on drug safety and pricing pressure by different authorities.

“Biotech drugs are expensive. Many cost between $10,000 to $20,000 per year,” says Mr. Jaikaria, who notes that the Medicare Prescriptions Act could conceivably increase the role of the US government in drug pricing.

“The bottom line is that there is increasing pressure on drug/biotech prices. Companies will have to reduce the cost of drug development,” he states.

“More pressure from payors (managed care, CMS, various country health ministries) will result in more product bundling, more personalized medicine, and less ‘blockbusterology’ (fewer “one size fits all” drugs),” says Steven Burrill, CEO of Burrill & Company, a private merchant bank specializing in the life sciences.

However, momentum in the biotech sector is expected to pick up. More than 20 new biotech products were approved last year, with others still pending. Nearly 80 are in late-stage development with expectations for approval and launch in the near term.

Another important issue that the industry is expected to tackle is the approach of biogenerics. In the next five years, five major biotechnology products with combined worldwide revenues of $11 billion in 2002 are expected to come off patent. Analysts are already projecting that revenues from generic versions of these five products could surpass $1 billion annually.

However, biogenerics will still have to overcome their own major hurdles in reaching the market, among them a lack of clear regulatory guidelines for establishing clinical bioequivalency. The increasing scrutiny by regulatory authorities on new drugs entering the market will also apply to biogenerics, analysts say.

Looking toward 2005, the biotech industry is expected to see further biotech-to-big-pharma consolidation and more biotech-to-biotech consolidation as a response to the drug industry’s drying pipeline. “An improved partnering environment for biotechs with even larger values attributed to earlier stage compounds (including preclinical) is expected,” Mr. Burrill predicts.

As projected, further marquee-level mergers took place in 2004, akin to that of the Biogen/Idec merger in the previous year, notes Mr. Burrill. Leading the major deals seen in 2004 was UCB’s roughly $2.7 billion acquisition of Celltech Group PLC, one of Europe’s leading biotech firms. Through the acquisition, UCB gets CDP 870, Celltech’s anti-TNF alpha antibody fragment, which is in Phase III clinical studies for rheumatoid arthritis and Crohn’s disease.

Other marquee level deals in 2004 include the $1.5 billion merger of Charles River Laboratories International Inc. and Inveresk Research Group Inc. The combined company will be a leading provider of preclinical and clinical drug development products and services to the pharmaceutical and biotech sectors.

Meanwhile, biotech leader Amgen Inc. acquired Tularik Inc. for $1.3 billion, which bolsters Amgen’s position as well as its pipeline of clinical-phase products. Tularik has five compounds in clinical development for a variety of therapeutic categories, including oncology, metabolic disorders, inflammatory disease and obesity.

As market pressure emphasizes the need for stronger product pipelines and less dependence on single-drug blockbusters, analysts are bullish on the biotech industry’s growth. They note that biotech will drive innovation and provide the means through which the drug industry can continue to grow.

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