Global approach key to tapping biotech growth
At International Biotechnology Trust, we are often asked why such a large proportion of our trust is invested in the US. In this month’s blog, we aim to answer that question. We will also explore the robustness of the supply and demand drivers for the sector and its resultant defensive nature amid times of global financial, geopolitical or epidemiological turmoil.
Born in the USA
The biotech industry and its financing originated in the US. As the first generation of biotech entrepreneurs raised funds, they naturally located themselves in the proximity of universities – where ideas are born – and capital markets. As the US venture capital system evolved, it became the main source of early-stage funding. Ambitious scientists, drug developers and entrepreneurs with innovative ideas from across the globe followed the money to the US and launched companies there.
The rest of the world fell behind the US in spite of other nations’ historical excellence in pharmaceutical development and academic science. While there is now a thriving venture capital industry in London and, to a lesser extent, other European capitals, the US’ head start has enabled it to remain the go-to source of financing for global drug development.
Having started their financing journey with US venture capital funds, many companies then sought further capital from the public markets. The US-based NASDAQ platform led the way in attracting young tech and biotech companies seeking public market financing, due to the fact it requires only a short financial history in order for companies to list.
As the number of companies listed on the NASDAQ grew, so did investors’ interest in the sector. US institutional and retail investors began viewing healthcare as a core element within investment portfolios. By contrast, in Europe, healthcare and biotech remain a marginal element of most investment portfolios, considered an optional higher risk investment rather than a core component.
As such, the gravitational centre of investment in biotech and pharma is now undoubtedly the US – more specifically, investment hubs such as the San Francisco Bay Area and the Boston-New York complex.
While the headquarters of most biotech and pharma companies are concentrated in the US, what drives the fortunes of businesses in these sectors is not where their base is situated, but the sales they generate – which are increasingly global.
The majority of biotech treatments have the potential to address the global population, so obtaining product approval in different regions is key to making global sales. However, having local knowledge is of paramount importance to successfully market and distribute treatments in foreign countries. This is why biotech companies often struggle in the initial stages of their launch.
Global pharmaceutical companies, on the other hand, usually have extensive expertise in distribution in all key consumer markets, which is why biotech companies are frequently acquired by pharmaceutical companies once they have gained regulatory approval. The acquiror is attracted to the ‘de-risked’ asset and can afford to pay multiples ranging from 5-10x potential peak sales.
Financial safe haven
During the last couple of years, the global economy has witnessed unprecedented turbulence. Stock markets have suffered bouts of severe volatility, particularly impacting listed pharmaceutical and biotech companies. However, as we explained in our February blog, this is more a reflection of the sector’s highly sentiment-driven nature than company fundamentals themselves.
The global medicine market surpassed a trillion dollars in sales in 2014, and is now expected to grow at 3-6% to reach about $1.75trn as soon as 2026.
Source: IQVIA Institute, www.iqvia.com, The Global Use of Medicines 2022 outlook to 2026, Dec 2021
This comes as no surprise. The long-term drivers that support the sector have remained very much intact throughout the last two years of market turbulence. The projected doubling of over 65s during the next 50 years, in combination with developing economies demanding greater access to healthcare, underpins robust demand for the biotech sector moving forward. Meanwhile, on the supply side, scientific innovation continues to expand exponentially.
In terms of how this stability feeds through to the companies in the sector, we continue to see a steady and increasing growth in sales, hardly affected by external factors. As such, healthcare can in many ways be considered a financial safe haven amid turbulent times.
Gauging geographical disparities
Source: EFPIA – European Federation of Pharmaceutical Industries and Associations. www.efpia.eu. The Pharmaceutical Industry in Figures, 2021
- US ($580BN)
The US is by far the biggest market for healthcare products in the world. In 2021, drug sales in the country exceeded $580bn, corresponding to about 40% of all global sales in the world and 65% of new drug sales. It is unsurprising all major pharma and biotech companies operate in this region, as in contrast to many other countries free pricing is allowed and private health insurance is prevalent. This has resulted in the US charging the highest prices for drugs in the world, often at multiples of the price for the same drug in other regions. Unsurprisingly, the US also has the highest utilisation of cheaper off-patent drugs.
With such a massive market, the stakes are very high, and the significant upfront cost to launch a product reflects this. The US is the only major country in the world – other than New Zealand – that allows direct-to-consumer advertising, which is a costly endeavour. As such, the strategy for global companies is often to get a new drug first approved in the US and establish a high price level, before broadening out to other regions across the world.
- UK and Europe ($210BN)
The UK, Europe and the EU as a unit is the second biggest market in the world, worth $210bn and about 20% of global sales. It is important to note that since its departure from the EU, the UK is now using its own regulator, which may streamline the process for drug approval, pricing and reimbursement going forward, as was seen with Covid-19 vaccine approvals.
Despite the EU being served by one common regulatory agency, drug pricing and re-imbursement rules must be adopted on a country-by-country level. In addition, parallel imports are permitted, making it much more complicated to establish an accurate per capita spend. Drugs in the region are not sold through free pricing but by tender offers, due to the fact the government and regions are the sole buyers and providers of healthcare. The consequence has been individual countries may refuse to pay the price on offer, or not grant the re-imbursement of the drug, which can delay its launch.
While profit margins are lower in this region than in the US, this is mitigated by reduced marketing costs, due to tighter restrictions, and offset by the potentially enormous demand opportunity.
- Japan ($85BN)
The Japanese region is the only one still dominated by incumbent traditional Japanese companies. Historically, the country’s opaque regulations, including trial design and re-imbursement systems, led Western pharma companies to license their drugs or entire portfolios to a local player with the know-how needed to make the drug successful in Japan. With slowing population and GDP growth, Japan has become a more marginal player and constitutes sales of $85bn, contributing about 7% to global sales.
- China and rest of the world ($354BN)
While the percentage of global sales of all drugs represented by the rest of the world is relatively high, the access of these countries to new treatments is limited, with only 1.8% of new drugs launched between 2015-2020 sold to developing economies. However, the number of people living outside the US, EU and Japan offers a fantastic opportunity for future growth. Moreover, as these economies grow, there will be an inherent tendency for a higher proportion of GDP to be spent on healthcare and innovative drugs.
Source: All data points sourced from IQVIA Institute’s website
Source: WHO website. Apps.who.int. Global Expenditure on Health – Public Spending on the Rise 2021
The developing world is currently highly dependent on off-patent drugs, which are somewhat effective and low cost, but also less innovative. At present, access to highly innovative treatments is limited to affluent people in these regions, but as economies develop, a greater number of patients will demand access to the most cutting-edge drugs.
Chinese pharmaceutical sales reached $169bn in 2021, worth about 10% of global sales. These sales mainly consist of bulk and generic drugs, but China is nonetheless one of the fastest growing geographies – not only in sales, but also in R&D spending. While Chinese companies will undoubtedly benefit from this trend, so too will the US listed global pharmaceutical and biotech companies selling innovative drugs to Chinese consumers.
Source: IQVIA Institute, www.iqvia.com, The Global Use of Medicines 2022 outlook to 2026, Dec 2021
At International Biotechnology Trust, we continue to invest the bulk of our portfolio into US-listed biotech stocks, most of which target the global market. While these companies make the bulk of their sales in the US, where the prices are highest, they are also looking to roll out products across the world. They are at the heart of global innovation, have superior access to funding from the stock market, and champion robust ESG standards. Additionally, although US company shares are priced in US dollars, the geographical breadth of their sales provides them with income in a wide variety of currencies, offering a layer of currency hedging.
We will continue to also invest in companies headquartered elsewhere, especially as Chinese biotech matures and grows, but with careful consideration of ESG factors.
We are proud to announce that Kate Bingham has been awarded the National Venture Capital Associations 2022 excellence in healthcare innovation award.