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June 2017

Biotech is at the heart of medicine innovation

Biotech companies play a major role in fighting diseases such as Alzheimer’s and Parkinson’s. Innovation is the key to success in this industry.

Marie-Laure Schaufelberger, Product Specialist at Pictet Asset Management, gives an insight into the biotech industry. 

What is the difference between biotech companies and the traditional pharmaceutical industry?

Marie-Laure Schaufelberger: ‘Biotech companies often focus very strongly on specific domains, like multiple sclerosis or parts of the market for oncology drugs. As a result of
this focus, they can operate with lean and mean business models, which allows for superior profit margins. Another difference with the pharmaceutical industry is that a large part of the biotech-sector is still not profitable because they do not have a product on the market yet. However, a lot of those smaller companies have a promising pipeline. In the future the majority of medicines will be developed in the biotech-industry, putting the sector at the heart of innovation in the drug-sector.’

Which conditions might be better contained or even cured thanks to new drugs that will be hitting the market in upcoming years?

Schaufelberger: ‘The biotech industry emphasizes the development of products for agerelated diseases. Life expectancy is steadily increasing and as a result, the market for
medicines against certain age-related types of cancer is growing rapidly. Over the past 20 to 30 years, a lot of research has been done. Currently, the number of trails of new cancer-drugs outnumbers that of any other disease. In the future, we could even imagine cancer becoming a chronic disease rather than a fatality. Recent advances in PARP for example are significant steps in that direction. In the past we have seen this happen in HIV or in HCV (hepatitis C virus). Another field in which the biotech industry is making progress is in fighting different kinds of diseases related to the central nervous system, such as Parkinson’s disease and Alzheimer’s. Thanks to technological advances, it will be possible to chart how these conditions develop and what effect new methods have in slowing down or even reverse the disease process.’ 

Drug manufacturers have been making headlines because of their high product prices. Is this a threat to the growth of the biotech sector?

Schaufelberger: ‘For one drug that comes to the market dozens do not succeed. Therefore those that get to market need to pay for those that failed. Otherwise there is no incentive. 

Society will always be willing to pay for resources that greatly improve quality of life

Keep in mind that drugs is only 15% of total costs to the system, so there are many efficiency gains to be had elsewhere. The United States are by far the most important marketing area for the biotech sector. Pricing is a result of the negotiations between health insurance and drug manufacturers. In order to prevent health costs from rising too fast, insurers are reluctant to pay high prices or to accept price increases. In some cases that is a sound strategy. For example, the price of insulin has tripled in the United States in the last decade, while there has been no significant increase in its effectiveness. Going forward, innovation will be the main success-factor for the industry. Society will always be willing to pay for resources that greatly improve quality of life or increase the chance of survival, as long as there is no decent alternative available.’

What is your approach to investing in the biotech industry?

Schaufelberger: ‘The gap between innovative companies with products that truly add value and other players will only grow bigger. For the Pictet-Biotech fund, we have a strong investment team with a sound medical background, which allows us to understand the financials as well as the potential of the pipeline of the companies in which we invest. These are companies where proof of concept data in humans are available. This reduces the binary risk. In addition to 10 relatively large positions in established biotech-companies with stable revenues and good earnings visibility, we invest in 40 to 50 smaller players. They too have promising pipelines and a significantly higher risk/reward-profile. This way, we reduce the downside risk without having to compromise on the huge growth potential of this industry.’ 

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