Monday, October 23, 2006

Biotech Industry Closing Gap on Profitability

Analysts are saying that the Biotech industry will finally post a profitable year sometime in the next 5 years or so. This article is a re-hash of some of the arguments in the Brookings Institution Report from a few years ago. However, it does have some updated numbers from E&Y.

California pulls in most biotech money
Report lauds success of industry, but it has yet to turn a profit
Saturday, October 21, 2006


California remained biotechnology's favorite place of business last year as other states unsuccessfully tried to woo a disease-fighting industry that has yet to turn a profit, according to a report issued Thursday by an industry promoter.

The California Healthcare Institute found that biotech, broadly defined to include diagnostic companies and makers of medical equipment and devices, accounted for $62 billion in revenue in the state last year. The report didn't say how much the industry lost in that time.

Nearly half of the $5.9 billion in venture capital invested in the industry nationwide flowed to California companies. Many of the companies are developing so-called biological drugs to combat such diseases as cancer, diabetes and arthritis. These biological drugs are often derived from genetically engineered microbes, rather than chemicals used in traditional pharmaceuticals.

California scientists also landed $3.6 billion in National Institutes of Health grants in fiscal year 2004, the report found.

"California's biomedical industry is a vital and growing component of our state's high-tech economy," Gov. Arnold Schwarzenegger said in a foreword to the report.

With the average salary rising to $70,400 from $60,000 10 years ago, Florida, Arizona and other states have put biotechnology atop their economic-development lists.

In North Carolina, a major biotechnology research center being developed north of Charlotte will focus on food and the nutritional applications of biotechnology. The state's three major research universities - the University of North Carolina at Chapel Hill, North Carolina State University and Duke University - have said they plan to create research facilities at the campus.

Yet, for all its prestige, biotechnology remains an unprofitable, niche industry that analysts said can't single-handedly boost a sagging economy. Despite being home to 2,700 companies, most employ fewer than 100 workers.

With 260,000 of California's 15 million workers, it's a bigger employer than the aerospace, movie and computer industries individually but smaller than the labor force in government, manufacturing and services.

"It's an industry not growing very rapidly in terms of the number of jobs it's adding," said Joseph Cortright, a Portland, Ore., economist. "It's a relatively small component of the metropolitan economy."

Biotechnology companies are clustered around just a few cities, the three biggest being San Francisco, San Diego and Boston.

To a smaller extent, other companies have their homes in Austin, Texas, Seattle and North Carolina's Research Triangle Park.

Winston-Salem is also developing its downtown research park as a biotech hub.

In the California Healthcare Institute report, compiled by PriceWaterhouseCoopers, there was scant mention of profitability - something that has eluded a large majority of the state and country's biotechnology companies.

Since the industry's inception 30 years ago, U.S. biotechnology companies have lost a combined $52 billion.

The losses continued to mount last year when the sector finished another $2.1 billion in the red, according to a report issued earlier this year by Ernst & Young.

The report did note that the rate of loss was slowing compared with losses of $4.9 billion in 2004 and $6.4 billion in 2003. The Ernst report didn't break out losses by state.

"From a profit standpoint, these companies have very long gestation periods until they actually start selling products," said Tracy Lefteroff, a partner in Ernst & Young and the report's author.

He predicted that the industry as a whole will break even within five years and begin showing an overall profit within 10 years as smaller companies begin receiving regulatory approvals for their drugs.

A handful of biotechnology companies, such as Genentech Inc. of San Francisco and Amgen Inc. of Thousand Oaks, have hit it big after modest beginnings, making their initial investors wealthy.

But they remain an exception. What's more, the high prices of their drugs, especially to treat cancer, are coming under political pressure and several patents on pioneering drugs are set to expire.

"Though the biomedical industry is a solid, significant and growing component of the state's economy, California's life- science leadership is fragile," said David Gollaher, the institute's chief executive.

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