Biotech Industry is Finally Profitable! What Does That Mean?

The Biotech Industry is Finally Profitable! So What Does That Mean?

A recent report from Ernst and Young acclaimed that the biotechnology industry finally reached profitability for the first time in history with a net income of $3.9 billion in 2009 (Beyond Borders: Global Biotechnology Report 2010). This is a significant milestone and welcome news! However, to put this in perspective, Wal-Mart, General Electric and AT&T individually had net incomes of about 3-4 times the total biotech industry ($13.4 billion, $17.4 billion and $12.9 billion respectively).

The biotech industry is only about 35 years young. However, in spite of reaching profitability, some still say the biotechnology business model is broken. They cite inefficiencies in generating significant profits from the industry as a whole, absent a handful of successes. It is true that the path to biotech commercialization is littered with hundreds of companies we no longer know the names of—yet this can be said of many industries. The fact is that the vast majority of biotechnology companies are early-stage and they still consume—rather than produce—capital.

Criticism arises from comparing the biotechnology industry’s profitability timeframe to non-science based businesses, without respect to the length of the industry’s unique product development cycle. If the business of biotechnology is measured in the same timeframe as say the IT or computer industry, then the critics are corect. However, biotechnology products have a development timeframe that can extend 10 to 15 years. This is much different than a product which can be commercialized within 2 to 3 years. My hypothesis is, that if time-to-reach-profitability was measured in “multiples of product development cycles”, the biotech industry fairs just as well as other industries.

The biotechnology industry’s ability to quickly hone in on successful drug targets or molecular markers will no doubt improve, which will then increase the success rates and decrease the time to commercialization. The concept of young industries working to improve targeting efficiency is common. In the petroleum industry’s early days, oil companies simply dug holes in the ground in the most likely places—with few successes. Today, oil companies use sophisticated sonar and high technology geological devices to improve the likelihood of a drill hitting oil. The difference between the oil industry and the biotechnology industry is the length of time it takes to learn the well is “dry”. Biotech companies may not discover that the well is “dry” until their drug candidate completes phase III clinical trials—this may be 8 to 12 years from the beginning. Unfortunately, biotechnology product development stages cannot run in parallel. Just as you cannot put two 4 ½ month pregnant women together to get a baby—some things just require time.

THE TAKEAWAY TIDBIT

In spite of this criticism, the biotechnology industry contributes a value that cannot be measured in near-term profits. Many biotechnology products have life-saving medical significance and these products were inconceivable decades ago. Regardless of its business model, the biotech industry will continue to grow, as long its products and services attract willing financial markets that value their contribution enough to support them to maturity. As more biotechnology companies mature, no doubt this industry will improve in overall efficiency and profitability. But more importantly, its life-saving products will have already made a significant impact on the health and welfare of all society.