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6 Key Drivers for Biotechnology's 2012 Outlook


The record number of products in clinical trials is one many factors supporting biotech's continued favorable outlook for the year.

In 2008, the Dow Jones Industrial Average (^DJI) recorded its worst annual performance since 1931, and the NASDAQ Composite had its worst year since inception in 1971.

On the heels of such a miserable year, it may have seemed counterintuitive to provide a positive outlook for the speculative biotechnology industry in 2009, but that's exactly what we did. Our bullish thesis was reiterated for both 2010 and 2011.
The AMEX Biotechnology Index (^BTK) ended 2008 at 647.17 and climbed to 1,091.42 by the end of 2011 for a gain of approximately 69% during this three-year period. Comparing this performance with the general market, the NASDAQ Composite increased 65% from 1,577.03 to 2,605.15 during the same period.

My favorable outlook for the biotechnology industry remains intact for 2012 and is based on the following key drivers, which build upon many of the catalysts we first proposed in 2009:

1. Sector's defensive characteristics and impact on future economic growth

2. Improving number of annual new product approvals since the low set in 2007

3. Record number of products in clinical trials and annual industry R&D investment

4. Improving access to capital

5. Brisk pace of industry consolidation and licensing transactions

6. Many micro, small and mid-capitalization companies remain undervalued

Defensive Sector and Economic Driver
During periods of economic uncertainty, the biotechnology sector is often portrayed as defensive given that disease is relentless in both good economic times and bad. Despite recent medical advances, there remains a need for quality, innovative products to diagnose and treat a broad variety of diseases such as cancer, central nervous system disorders, cardiovascular diseases, diabetes, and respiratory and infectious diseases.

Beyond its defensive characteristics, the sector plays a critical role in the US economy. Innovative new medicines developed by life science companies provide better patient outcomes, improved quality of care, and increased life expectancy, and they lead to economic gains and job creation.

While the strengths and weaknesses of the US health care system remain the subject of great debate, my firm believes new medicines should be viewed as investments in the future, not only in patient health – but also in economic recovery and growth. For example, as indicated in my article "Innovative New Medicines are Key to Economic Growth," a permanent 1% reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion, and a cure would be worth about $50 trillion.

New Drug Approvals
As highlighted in recent years, legislation passed in 2008 gave the Food and Drug Administration more money and resources, but hiring and training hundreds of new employees takes time. With that process well under way, combined with increased familiarity of the risk evaluation and mitigation strategies (REMS) program, my firm and I expected the drug approval process to gradually improve.

Encouragingly, the total number of approvals for new molecular entities and biologic license applications by the FDA's Center for Drug Evaluation and Research in fiscal year 2011 was 35. This is an improvement from 21 approvals in 2010 and 25 approvals in 2009. In fact, according to a press announcement by the FDA, this is among the highest number of approvals in the past decade, surpassed only by 37 approvals in 2009.

However, an article in Nature Reviews by Asher Mullard listing the annual number of drug approvals going back to 1996 shows that 36 approvals in 2004 (not 2009) was the record for the past decade. The same article also shows that new drug approvals peaked at a high of 56 in 1996.

Notable new drug approvals in 2011 include Johnson & Johnson's (JNJ) Zytiga (abiraterone) for late-stage prostate cancer; Roche's Zelboraf (vemurafenib) and Bristol-Myers Squibb's (BMY) Yervoy (ipilimumab), both for melanoma; Human Genome Sciences' (HGSI) Benlysta (belimumab) – the first new drug for lupus in 50 years; and Seattle Genetics' Adcetris (brentuximab vedotin) for a rare lymphoma known as systemic anaplastic large cell lymphoma.

Record Pipeline and Investment
According to the latest report by the Pharmaceutical Research and Manufacturers of America, there are a record number of biotechnology product candidates currently in development. In the US alone, there are more than 900 biotechnology products in development, including 300 monoclonal antibodies, 298 vaccines, 78 recombinant proteins, 50 gene therapy products, 64 cell therapy products, and 23 antisense products. More than one-third of these product candidates are targeting cancer and related conditions, and more than 20% are targeting infectious diseases.

Annual research and development expenditures by PhRMA member companies for 2009 was an estimated $45.8 billion, more than tripling the $15.2 billion level of investment in 1995. However, skeptics will point to the fact that despite growing R&D expenditures, the number of new drug approvals has declined since the mid-1990s (see chart below).

Click to enlarge

Access to Capital
During the second week of January, more than 8,000 registrants gathered in San Francisco for the thirtieth annual J.P. Morgan Healthcare Conference to hear 25-minute presentations from 395 life science companies. For industry executives and investors, the annual event typically serves as a good barometer for the rest of the year.

Between meetings, we roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored social media outlets throughout the event. In general, the plane flights and networking receptions were crowded as usual, industry observers tweeted a sense of optimism, and attendees appeared more upbeat than in 2011.

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