Investing in Biotech: USA, Europe... Signs of an Upturn?

Biotechnologies: a crucial sector in a changing world

Biotechnologies today represent one of the most promising and dynamic sectors of scientific innovation. They encompass a range of technologies used to understand, treat, and improve living systems, including the human body. It's a discipline at the intersection of biology and technology, developing solutions in the fields of healthcare, agriculture, environment, biofuels, pollution control...

Towards the end of the 20th century, numerous biotechnology companies emerged. Young firms then experienced rapid initial public offerings. While some of the stars of the period did not survive the crash of the early 2000s, others such as Amgen (which became a world leader) and Genentech continued their journey, and many were absorbed.

Over the last decade, biotechnologies have experienced an unprecedented boom, supported by advances in genomic sequencing, genetic engineering, and bioinformatics. These advances have led to the discovery of revolutionary treatments, such as gene therapies that promise to cure diseases once considered incurable.

The use of microorganisms and enzymes has also expanded to various sectors, ranging from research to the food industry, pharmaceuticals, and recycling, with implications in renewable energy such as methanization.

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A long and uncertain return on investment

The impact of biotechnologies on future lifestyles is immeasurable. They offer possibilities of healing and enhancing both the quality and the lifespan. But beyond health implications, they represent an interesting investment opportunity.

Despite the past two years, companies developing cutting-edge technologies in this sector are still attracting funding, promising significant returns on investment... but only for those who pick the right horses and cash in their gains at the right time.

In the complex and constantly evolving universe of "biotechs", investors often find themselves navigating in both a promising and perilous environment. It’s a sphere where science and business strategy meet. The potential for profitability can be significant, but it remains intimately tied to the success of innovations and their ability to meet unfulfilled health needs.

Sometimes, years of research, which are consuming significant funding, do not lead to anything. Not to forget, it's a notoriously competitive sector, with multiple players vying to dominate specific research niches or to develop the revolutionary treatment of tomorrow.

The economic reality is also one of the significant aspects affecting the entire sector, especially in an inflationary phase like the one in recent months. According to the report « Navigating the biotechnology landscape » published by Novotech in December 2023, the face of the sector constantly changes.

"A convergence of various factors, including economic pressures, intense competition, constantly evolving market dynamics and regulatory changes, is reshaping the industry, affecting highly specialized biotech startups and well-established pharmaceutical giants alike (...). As a result, investments in start-up biotechnology companies decreased by 40% in 2023 compared to 2022, marking an unprecedented drop of 55% compared to the previous two years".

Now, "in this ever-changing landscape, the presentation of improved clinical outcomes and cost reductions has emerged as a crucial criterion for a product development's success".

The assessment and monitoring of companies and projects is a significant part of investing in biotech

In the field of biotechs and more generally health products, past successes do not necessarily guarantee future profitability. Pfizer, which marketed one of the main Covid-19 vaccines, is therefore waking up rather hard.

The Pfizer-BioNTech has allowed the American giant to reap record profits during the pandemic. With the acute phase over, it now faces the depreciation of its stocks and new questions about its growth potential: starting from 2026, some of its notable patents will fall into the public domain, depriving the company of a portion of revenue.

For biotech investors, this case perfectly illustrates the need to go much further in the analysis than just studying financial data. They must look not only at the company's ability to innovate constantly, but also the therapeutic and commercial potential of the products in development as well as on the horizon of its patents.

An essential part of evaluating a biotechnology company lies in the careful analysis of the results of its trials. In terms of health products, clinical trials are key indicators, often precursors to significant variations in short-term stock market valuation and future results.

Three main phases should be given attention: Phase I, which establishes the safety of the treatment for humans; Phase II, which measures its effectiveness; and Phase III, which compares it to the effect of a placebo. Each is crucial for assessing the viability of the new molecule or proposed treatment.

It is also wise for investors in small or medium-sized biotech firms to look for companies that have secured strong partnerships, either with renowned financial institutions or with large groups.

The difficulty for these companies is often related to the lack of diversity of the products developed and the time needed to go from the project to a market launch. The investment here is even more risky. Partnerships, announced by press releases, can serve as a vaccine against uncertainty. Another important piece of information to scrutinize is the arrival (or departure) of key executives for the development of the company or its product.

Finally, the environment is one of the other areas to explore. Is the research sector promising? Are there many competitors and do they have better funding that suggests more suitable means for success?

Biotech: USA, Europe, Asia... Where to invest

After some euphoria during the Covid-19 period, the valuation of American biotech companies has suffered a dip. However, this could only be temporary. In response to the increasing competition from Chinese players, President Joe Biden has signed an order aimed at reinforcing support for local biotechnology companies. The goal is to maintain the leading role of the United States in the sector and ensure the country's long-term economic competitiveness.

In Europe, France is one of the leaders in biotech. The State plays a significant role: the public investment bank BPIFrance granted over 500 million euros of funding in 2022. The sector also falls under the France 2030 plan, endowed with 5 billion euros over 5 years. Biotechs are expected to receive funding totaling around 1.5 billion euros, a major accelerating factor.

Looking at the broader Healthtech sector, which encompasses medtechs and biotechs, the USA significantly dominates the number of initial public offerings over the past 10 years (655 operations amounting to 68.1 billion euros according to the EY Healthtech financing report). China comes second (250 operations amounting to 35.2 billion euros).

The European Union ranks third, with 170 operations conducted, more than a third of which were on Euronext Paris. However, the number of IPOs is tending to decrease. A number of companies have had to postpone their IPOs due to a lack of investor appetite for the sector... But until when?

Investing in biotechs: risks not to be overlooked

Investing in biotechnologies is not without risk. Development cycles can be long and uncertain, and the regulatory landscape is complex. Beyond the volatility of financial markets, some specific risks are noteworthy on both the legal and ethical fronts.

- Strict product regulations: Biotechnology companies must navigate a labyrinth of government regulations to obtain approval for new products. These regulations vary considerably from one jurisdiction to another and can involve long and costly approval processes.

- Protection of patients and study participants: The ethics of clinical trials are paramount. Companies must ensure the informed consent of participants, the protection of their privacy, and fairness in participant recruitment.

- Genetic manipulation: Genetic modification, especially in gene therapy and CRISPR, raises ethical questions about consent, long-term consequences, and even the potential for creating genetic inequalities.

- Data security: With the growing importance of health data, companies must protect against unauthorized disclosure of sensitive patient information.

- Dual use and biosecurity: Biotechnology research can sometimes be used for beneficial or malicious purposes, raising, among other things, biosecurity concerns.

- Intellectual property issues: Patenting biotechnological discoveries, including genetic sequences and living organisms, is a complex area that must balance innovation and public access.

- Environmental implications: GMOs and other biotech products raise questions about their impact on the ecosystem and biodiversity.

- Access to treatments: The ethics of making biotechnological treatments affordable and accessible to all, particularly in low-income countries, is a persistent issue.

Therefore, companies in the sector must stay up-to-date on legislative and regulatory developments while engaging in responsible practices to address ethical concerns.