Markets In Action

How biotech investment is revolutionizing health care treatments

An estimated 5.4 million Americans are living with Alzheimer’s disease. As the Baby Boomer population ages, that number is expected to nearly triple in the coming decades.

The degenerative brain disease is a challenge for families, caregivers and public health programs like Medicare and Medicaid. But what if this devastating condition’s progression could be slowed or even prevented by a vaccine or other pharmaceutical treatment? It’s a question researchers around the world are striving to answer.

According to the Pharmaceutical Researchers and Manufacturers of America (PhRMA) industry association, U.S. researchers are pursuing dozens of potential biopharmaceutical treatments-that is, medicinal products derived from a biological source, rather than chemically synthesized-to help Alzheimer patients. While not all those products will survive the development process and come to market, one or more of these products may achieve real breakthroughs.

Biopharmaceuticals are one component of the growing biotech industry, which seeks to apply the biological and life sciences to solving problems in areas like health care, agriculture, environmental protection and cleaner energy. And a key factor driving expansion in this critical sector is the infusion of private capital from investors who hope to see both public gains and profits.

The challenge of developing pharmaceuticals

Whether a pharmaceutical is derived from biological or synthetic sources, one thing is sure: the process of bringing new medicines to market is long, expensive and risky.

Research and development carry heavy costs, and it’s a tough reality that most new pharmaceutical concepts will never make it to market. The development process, which can stretch out over 10 to 20 years, includes painstaking series of clinical trials and regulatory hurdles.

If and when a viable product can be delivered, there remains the substantial challenge of commercialization-that is, getting the medicine into the hands of physicians and patients who will benefit. It’s common for smaller firms that develop a drug to form a licensing partnership with larger established pharmaceutical firms at this stage to take advantage of the bigger company’s marketing and distribution expertise.

The next time you see a pharmaceutical ad on television, think about how that marketing campaign is the culmination of a decades-long development effort that required hundreds of millions or billions of dollars in investment, before a penny of that investment could be recouped through sales.

That means pharmaceutical concerns have large capital needs in their early stages. So the question is, where is the funding for the early stage development going to come from?

How to pay for it

Government research grants, venture capital and angel investor funds, and philanthropic foundations supply a substantial amount of early-stage investment for all kinds of pharmaceuticals.  For example, government incentives are critical for developing “orphan drugs” needed to treat rare diseases and conditions.

But these sources, though critical, may be inadequate to meet the need. For example, government funding for research remains the largest pool of funding for early-stage pharmaceutical research, but is limited by federal government budget constraints.

Meanwhile, private venture capital firms and non-profit organizations, while also a critical funding source, have a relatively limited capacity.

That’s why access to broader private sector capital raised in the public markets in biopharmaceuticals can help to bridge the gap. In reality, private investment for biotech solutions is critical to creating the path to liftoff needed to get these products to market. (For comparison’s sake, consider how the Internet, which started as a government information technology network, only grew to its current state after it was opened to the private sector for development and commercialization).

There are two principal avenues a firm can use to acquire access to larger pools of funding in the capital markets-debt and equity. Pharmaceutical and biotech start-ups have benefited from both of these methods, taking on debt through public issuance of corporate bonds (which in the recent environment of low interest rates, can be quite affordable) or raising capital from equity investors through an initial public offering (IPO).
Recent years have seen a steady growth in the number of biotech IPOs, with more than 200 deals since 2011, according to one estimate. The years 2013 and 2014 were particularly strong, according to an analysis by Bloomberg: 2013 saw 50 biopharmaceutical IPOs that raised a total of $7.1 billion. In 2014, a record 81 offerings brought in a total of about $6 billion. The number of IPOs has slowed from those heights, but the sector continues to show vitality.

An industry with a big impact

Biopharmaceutical investment brings a multitude of benefits. First, and perhaps most obvious, is the greater accessibility of groundbreaking medical treatments and technologies. Those treatments may be in the form of vaccines, therapeutic drugs, diagnostic substances or other types of treatment. Along with the aforementioned effort to tackle Alzheimer’s, researchers are seeking biopharmaceutical solutions to a wide range of debilitating conditions, like cancer, arthritis, diabetes, hepatitis and others.

And while it may be less obvious than the medical benefits, don’t overlook the substantial economic benefits this innovative industry is delivering. A May 2016 industry study by TEConomy Partners LLC (commissioned by PhRMA), based on 2014 data, found the following economic impacts from the biopharmaceutical sector:

  • Nearly 854,000 individuals were directly employed in biopharmaceuticals in the United States. These jobs generated $105.1 billion in wages and benefits, or $123,017 per worker. That’s more than twice the average for U.S. private sector workers.
  • An additional 3.5 million U.S. jobs were supported by the industry’s supply base and through industry and employee spending.
  • The industry accounted for more than $1.2 trillion in U.S. economic output. In addition, worker incomes in the biopharmaceutical industry generated more than $67 billion in federal, state and local taxes.

Those are significant economic impacts that are only likely to grow in the future.

Equity and debt financing, through IPOs and bond issues, are critical to continue growth of the sector as the biopharmaceutical industry matures and investors grow more confident in returns. That investment will help to create jobs, drive economic growth-and contribute to the advancement of needed medical treatments to improve health for all of us.

Project Invested doesn’t provide investment advice; the above article is an informational look at a critical and growing sector. If you’re interested in making biotech investing part of your portfolio, talk to a financial professional who can help you understand the risks and opportunities involved.