SAN FRANCISCO – The biotechnology industry has yet to turn a profit but investors are pouring billions into the development of genetically engineered drugs needed by major pharmaceutical companies to reinvigorate their product lines.
Biotech companies worldwide raised nearly $30 billion in 2007, including a record $5.5 billion in venture capital funding for U.S. biotech businesses, according to a report released Tuesday by Ernst & Young.
The worldwide financing, up almost $2 billion from 2006, set a new high for the industry with the exception of the so-called genomics bubble of 2000, which burst like the dot-com bubble that same year.
The industry is luring investors despite its ongoing losses because pharmaceutical companies facing a “cliff of patent expirations” are looking to biotech drugs to fill the gap, the report said. These investors could see big paydays if a biotech drug, or the company developing it, is bought.
“They know there’s an appetite of potential buyers in the big pharma world … ready to pay handsomely,” said Glen Giovannetti, head of Ernst & Young’s global biotechnology practice.
The interest of pharmaceutical companies in snapping up the latest genetic innovations means biotech companies are less likely to feel the pain of the current economic downturn, Giovannetti said.
And while the stock markets are buffeted by looming uncertainties, private investors taking the longer view are more likely to keep their wallets open in search of the next big breakthrough, he said.
Other analysts pointed to forces driving the health care market that are unaffected by the current economic outlook, including an aging population, unmet medical needs and chronic illnesses.
“In a tough environment for the economy, you might not buy the new car. You might not buy the big screen. But you’re going to buy the cancer therapy for the people in your family who are dying,” said John T. McCamant, the Berkeley-based editor of a medical technology newsletter for investors.
An increasing number of conventional drugs going generic will also benefit biotech by freeing up health care dollars for more expensive genetically engineered treatments, McCamant said.
Still, as thousands of startups vie to make the next breakthrough discovery, the biotech industry as a whole continues to spend more money than it brings in.
Companies racked up $2.7 billion in net losses in 2007, a much smaller loss than the $7.4 billion posted a year earlier as revenues rose above $80 billion for the first time, according to the report.
Since the industry first emerged in Silicon Valley more than 30 years ago, biotech companies have lost tens of billions of dollars, despite massive returns posted over the years by industry leaders like South San Francisco-based Genentech Inc. and Amgen Inc. of Thousand Oaks.
Even those two companies, with a combined market capitalization of nearly $120 billion, saw earnings decline in 2007. Growth in sales of Genentech’s top cancer-fighting drugs slowed as analysts worried about market saturation, while new safety warnings dealt a serious blow to sales of Amgen’s best-selling anemia drugs.
The number of dollars going toward biofuel development, meanwhile, fell significantly from the year before.
Despite the buzz surrounding efforts to bring ethanol, biodiesel and other plant-based alternative energy sources into the mainstream, funding for biofuel ventures fell to less than $300 million in 2007 from more than $500 million in 2006.
Even so, the fledgling biofuel industry had never seen more than a few tens of millions of dollars in annual funding until a “perfect storm” of high oil prices, conflict in the Middle East and calls for action on climate change altered the investment landscape, the report’s co-authors said.
“Two years do not yet make a trend,” Giovannetti said. “I think there’s still a lot of interest in biofuels.”
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