Who are the winners and losers in biotechnology?
For investors, biotechnology seems to have been 'the next big thing' for decades. But, finally, I think it may be coming of age, as the two worlds of Big Pharma and biotech collide.
The thing is, the biotech industry has something Big Pharma desperately needs -- that is, routes to new medicines, as I described in an earlier article. Specifically, many biotech companies work in the area of biologics, or biological medicines, which form the big growth area in pharmaceuticals.
Because of this there are good reasons to invest in biotech -- you can get substantial organic growth, plus the most promising biotechs may get snapped up by Big Pharma.
Indeed, pharmaceutical companies have already started buying up biotechs, with, for example, Roche acquiring Genentech and AstraZeneca (LSE: AZN) buying Medimmune and Cambridge Antibody Technology.
So here I will go through some of the major players in biotech, and will try to pick winners and losers.
If anyone needs convincing of the risks of investing in this sector, they should just look at the case of Antisoma (LSE: ASM).
This company specializes in drugs for the treatment of cancer, and until recently it seemed to be progressing well.
But its lead cancer drugs failed in late stage clinical trials, the most recent failure being in January 2011. The company's share price has crashed to become a penny share, the workforce has been made redundant, and the company is now a mere cash shell. Anyone who invested in this business would have lost all their money.
There have been many companies like Antisoma: Renovo (LSE: RNVO) is being wound down after its lead drug failed phase three trials, and Ark Therapeutics (LSE: AKT) has been restructuring since the failure of its lead drug Cerepro.
I think small cap biotechs are rather like small cap oil stocks -- in the unlikely event that the company strikes oil/develops a successful drug, you could make a mint. But if it doesn't, you could end up losing your shirt. Look at Asterand (LSE: ATD), for example. Its shares are down more than 50% this morning after it said it was running short of funds.
So let's go up the size scale, to mid/large caps -- for example, UCB. Headquartered in Brussels, UCB transformed itself into a global biopharmaceuticals company with the purchase of Cambridge-based Celltech in 2004.
It has three rapidly growing star drugs: Cimzia, a biologic treatment for Crohn's disease and rheumatoid arthritis, Vimpat, a traditional chemical-based medicine for epilepsy, and Neupro, which treats Parkinson's disease. The growth in sales for these drugs has added to steady performers such as Keppra and Zyrtec.
During the recession UCB trimmed its research and development and marketing departments, and the slimmed down company is progressing steadily, with gross profit up 5% in the first half of 2011.
For me, UCB is a winner. The prospects for future growth of the concern are pretty good as its star drugs continue to outperform, and the stock trades on a reasonable P/E ratio of 15.
I would also argue that the business is a potential takeover target for Big Pharma, as it is big enough to have a substantial drug portfolio and pipeline, but not so big as to give a pharmaceutical company indigestion.
A French biopharmaceutical company, Ipsen, is the second of my winners. This company specializes in niche biological treatments.
For example, it studies in great depth hormonal mechanisms, the engineering of peptides and proteins, and also Botulinum toxin (Botox, to you and me). Its major therapeutic areas are cancer, endocrinology and neurology. Not surprisingly, anti-wrinkle treatments are one of its fastest growing products.
Ipsen's research intensive approach seems to be paying off. In the first half of 2011, the company reported a 22% rise in profits, and analysts predict continued steady growth in the future. The business is on a P/E ratio of 18.
The market capitalisation of Ipsen is £2 billion, which makes it a mid-cap which would make an attractive addition to a pharmaceutical company's portfolio.
Where are all the Brits?
You may have noticed that, for the winners, I have chosen companies from countries based in mainland Europe rather than the UK. My reason is simple -- I could not think of a single independent UK biotech concern that I felt comfortable recommending.
Part of the reason for that is that all the good UK biotechs have already been snapped up by overseas companies. But, you could also argue, this is an indictment of British innovation -- but I will leave discussion of that for another day.
More from Prabhat Sakya:
> Both Prabhat and The Motley Fool own shares in AstraZeneca.