BioPharm Executive: Good Things Ahead

We're going to miss you, 2012. Last year was great for biotech and has set the stage for good things ahead. Just how did the sector shine in 2012, and what might it mean for the future? Let me count the ways...

The stock market exploded last year, at least for biotech. The AMEX Biotech Index (BTK) was up a stunning 42% in 2012. That's almost equal to the nearly 46% it gained in 2009. Unlike then, however, we weren't bouncing off the bottom of a historic market meltdown. Look at it in comparative terms: Back in 2009, the S&P 500 shot up 24% and the Nasdaq Composite rocketed 44%. In 2012, they gained 13% and 16%, respectively.

Sure, that's laudable performance, and even the AMEX Pharmaceutical Index (DRG), while trailing the broader market, posted a stalwart 11% gain. But biotech crushed them all. It showed up in real-world results, too--if you owned the popular iShares Biotech ETF (IBB), you saw your stake appreciate 32% last year.

The marketplace has been friendly to the sector, too. This stock performance didn't just happen in a vacuum. Global biotech industry revenue hit an estimated $229 billion in 2012 according to IBISWorld (although admittedly, this is a very expansive definition of biotech--we should see some more down-to-earth estimates in the coming weeks). Industry revenues have been up around 10% per annum for the last five years, which is already impressive, but indications are that growth accelerated last year.

The FDA has helped the industry by putting more products on the shelves. There were 39 new chemical entities approved in 2012--the highest total since a record 53 approvals way back in 1996. There were eight approvals just in December, which may cut into this year's numbers a bit, but nobody is complaining.

When FDA approved a bumper crop of products in 2011, many pundits called it a fluke. But despite a drop in productivity for much of the past decade, we may really be seeing the fruits of the genomic era--and the beginning of a new golden age for innovative therapies.

In the clinic, companies are getting bolder once more. According to Ernst & Young, biotech R&D spending was up 9% in 2011 after a flat 2010 and a painful 21% contraction in 2009. (Accounting firm BDO has slightly different numbers). No official numbers for 2012 yet, but the total is expected to rise again.

Even Congress lent a helping hand. In addition to healthcare reform bringing the industry new customers without a lot of concessions (those were mostly shouldered by Big Pharma and the device industry), the industry has a confirmed and workable pathway for generic biologics, along with a much-needed extension of FDA user fees and an increase in reviewers.

There could be more help on the way: The Faster Access to Specialized Treatments (FAST) Act and a similar Senate bill, the Transforming the Regulatory Environment to Accelerate Access to Treatments (TREAT) Act, both seek to enhance and expand the accelerated approval pathway FDA has used since 1992. Clearer rules and more expansive definitions of surrogate markers and other accelerated endpoints could be a huge boon for industry. The bills have bipartisan support, so we could see some progress this year.

So if everything is so great, why do I feel so lousy? Behind all this good news--and it really is good news--is the fact that the industry is very much divided into haves and have-nots. Companies that can afford to are spending more on R&D, while some are finding that their higher stock prices are smoothing the way to raising capital (see Money Talk below), and so on. But 2012 was a lousy year for biotech venture capital. Yes, Big Pharma often stepped in where VCs dared not tread, but while there were plenty of deals with big "biobucks" headlines, upfront payments--the real bread and butter for a small company--shrank in 2012.

You'd think that would mean a lot of M&A ahead--the haves snapping up the best assets of the have-nots, R&D-light big pharma replenishing its pipeline from R&D-rich biotech--but that's one of those easy predictions that never seems to come to fruition in a significant way. Buying early-stage assets is a risky business, and even deep-pocketed companies will remain very, very picky.

Nevertheless, 2013 is shaping up to be another good year--certainly, the drug and biotech indices are off to an impressive start in January! Hiring has been creeping back upward--again at the larger companies, not so much the smaller ones--and the renewed sense of confidence that 2012 gave investors could put some wind in our sails for some time to come.

Happy New Year!

-Karl Thiel

Read the BioPharm Executive online newsletter January 30, 2013.

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