BACK in the boom days of 2000, soaring biotech stocks, particularly those of the high-flying genomics superstars, drove bullish speculators to think the unthinkable: that a biotech might buy out a major pharmaceutical company.
The reasoning ran something like this. Biotech companies, like Internet companies, represented the future of the new economy for the 21st century. If AOL, founded in 1985, could engulf the traditional media giant Time Warner, why couldn’t Amgen, Genentech or even genomics upstart Millennium Pharmaceuticals pocket a Bristol-Myers Squibb, Eli Lilly or Schering-Plough?
Investors bet heavily on the new technology. In two years, from 1998 to the close of 2000, Amgen’s market capitalisation leapt from $21 billion to $71 billion. Millennium’s skyrocketed from $770 million to $14 billion. Stocks of pharmaceutical companies also improved, but much more modestly.
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The phenomenal increase in biotech values proved short-lived. The genomics companies – most less than 10 years old – led the surge with dazzling scientific revelations about human development. They also led the retreat when investors realised that commercial applications could take years, or in some cases decades, to reach the market.
Biotech, however, is still the future of 21st-century healthcare. The industry’s recovery in the stock markets was a sure bet. The questions were when and what would be the trigger. Both were answered this year. This time around Amgen, Genentech and other established biotech companies such as Chiron, Genzyme, Biogen, IDEC Pharmaceuticals, Gilead Sciences and MedImmune are leading the rally with escalating sales of their existing medicines and new drug approvals: MedImmune’s Flumist for influenza; Genzyme’s Fabrazyme for Fabry’s disease; Biogen’s Amevive for psoriasis; Genentech’s Xolair for asthma; Gilead Sciences’ Emtriva for HIV; and Amgen’s expanded use of its arthritis drug Enbrel to treat other diseases.
These are the world’s biggest biotech companies and the industry’s pioneers, having demonstrated over 25 years biotechnology’s value in creating unique medicines. Their successes this year have attracted even greater investor enthusiasm than in 2000.
At the close of the second quarter of 2003, Amgen, Gilead Sciences, Genzyme and Chiron were trading above their year-end 2000 prices, while Genentech was about the same. Pharma stocks, on the other hand, have dropped: Schering-Plough’s value plummeted 75 per cent during the same period; Bristol-Myers Squibb 67 per cent; and Lilly 40 per cent. The result is that big biotechs now rank with major pharmaceutical companies.
In addition to their scientific successes, these biotech companies have improved their business acumen. An analysis of eight biotech and five pharmaceutical companies in Ernst & Young’s Resilience: Americas Biotechnology Report 2003 shows the former operate more efficiently. On average, biotech companies earn more revenue per employee, but spend almost twice as much on R&D per employee and a greater percentage of revenue on R&D.
As a result, investors are valuing biotechs at a premium, and the companies trade on average at more than eight times their revenues, while pharmaceutical companies trade at about five times revenues. The implication is clear: investors believe more in the long-term growth potential of biotech companies than pharmaceutical companies.
In 2003, based on market capitalisation at the end of October, Amgen was 5th among the world’s top 12 drug makers and Genentech was 11th. That makes Amgen more valuable than AstraZeneca, Lilly, Abbott Laboratories, Wyeth and Bristol-Myers Squibb. Genentech is valued at twice as much as Schering-Plough and nearly as much as Bristol-Myers Squibb. Gilead, Genzyme and Chiron also are knocking at the clubhouse door. All have market capitalisations topping $10 billion.
Big biotech companies have muscled their way into contention with the pharmaceutical giants. A biotech company buyout of a pharmaceutical company may have been shocking three years ago. Today it’s not nearly as far-fetched.