Investing in the biotechnology sector is an exercise in patience and not for the faint of heart because the timelines are long, the risk is high and the reward is far from guaranteed.
But a rise in global IPOs, an increase in invested capital and some noteworthy success stories have made this sector attractive and ripe for investment in the past couple of years – even in Canada, where choked-off credit continues to be a challenge in the sector.
Ernst & Young's 2013 biotechnology industry report, Beyond Borders, found the global outlook to be positive with $28-billion (U.S.) in capital raised in North America and Europe in 2012, which is down from $33-billion in 2011, but a significant increase over the three years prior.
"Globally, revenues went up," says Mario Piccinin, partner at E&Y. "[Research and development] spending went up as well, though to a lesser extent than the revenues."
There was also an IPO market in some areas in 2012, according to Mr. Piccinin, and the latest data from 2013 show that "within the first half of 2013, there were already more life science IPOs in the United States than the prior year," he adds.
In 2013, the NASDAQ Biotech Index rose more than 50 per cent and U.S. Food and Drug Administration approvals also increased to levels not seen since the mid-1990s.
While there are concerns that a hot market in the United States, Europe and Australia has created a bubble effect in danger of bursting, some experts say an aging global population, disease outbreaks and the need for new and improved drugs and other biomedical technology could keep this sector booming for years to come.
"We're expecting to be somewhere in the area of nine billion people in the next 20 years or so – that's going to create a lot of pressures on society, and going to create a lot of pressure on our environment. We're going to have to find new ways to treat people to keep people healthy," says Andrew Casey, president and CEO of BIOTECanada, the national industry association. "It's a social imperative that's leading to a business opportunity."
It is, however, a sector that requires investors to think long-term, as the rewards are often not seen for years, even decades, says Mr. Casey, speaking from the JP Morgan annual health-care conference in San Francisco.
"It's not unique to our sector," he says, "but because the timelines are so long, you're looking at a 10- to 15-year investment. There are other places you could take your money and get a fairly quick return." Prior to 2012, this was the more appealing option for many investors who saw the quick returns of the mining sector boom and precious metal stocks as more attractive.
As these markets have cooled, investor attentions appear to have been diverted to biotech. But this kind of investment and its rewards are for those willing to balance the risk, says Mr. Casey, which takes research on the part of the potential investor.
"There is payoff, but you know, you've got to get there … so it takes a lot of research, a lot of development and a fairly strong understanding of what the industry is about," he adds.
Investment opportunities range from earlier-stage firms to mature multinational companies with proven products, as well as specialized areas.
"If you look at genomics and the information that's being collected, on personalized medicine in the genomics space, I think the reward if you invest in a company that's doing something in that space could be significant," says Paul Drohan, president and CEO of LifeSciences British Columbia.
In Canada, the story is quite different. Since the start of the global recession, the country's biotech companies have struggled to raise financing and many of the large operators have been bought by foreign investors. Capital raised by Canada's publicly traded biotech companies dropped 26 per cent in 2012 to $422-million from $574-million in 2011 and there were no IPOs in either year, according to the E&Y report. Meanwhile, capital raised by private companies plunged 60 per cent in 2012 from the previous year and R&D spending dipped 12 per cent.
"In Canada, despite the powerful science and great talent that we have, financing for biotech companies continues to be a struggle," Mr. Piccinin says.
Over the past couple of years, many of the country's large companies have slashed their staff and their R&D funding and have seen their stocks plummet. But startups and small- and medium-sized enterprises continue to emerge, focusing on niche markets, with some attracting interest and funding from large U.S. firms.
Despite the depressed numbers, there are still investment opportunities in the Canadian market, says LifeSciences's Mr. Drohan.
But he echoes Mr. Casey's advice of educating oneself about the Canadian biotech sector before diving in. Decade-long timelines mean that investors should have a clear idea of the product, the timelines, and the regulatory process involved.
"And I think the onus is on companies to develop a very well-articulated business plan with milestones and development performance metrics so that investors can see if organizations are on track or if they're missing the targets that they've set for themselves," he says.
Particularly, research in the areas of pharmaceuticals, cancer genomics, stem-cell therapies and HIV/AIDS detection have seen significant development in recent years. For Mr. Drohan, the investment opportunities, the products and the science are changing daily.
"That convergence of life science and IT is something that people really need to be mindful of and keep an eye on," he says, "because the progress that they're making in understanding diseases at a molecular level are increasing by the day."