By Marek Poszepczynski and Ailsa Craig, co-investment managers of the International Biotechnology Trust
The global economy has witnessed extreme turbulence in recent years, and the pharmaceutical and biotechnology spaces have been acutely impacted as a result. However, investors must not overlook the tremendous growth opportunity still present in these sectors.
The global medicine market surpassed a trillion dollars in sales in 2014 and is expected to reach $1.6trn by 2025, fuelled by a steadily ageing population and unabated scientific innovation. The biotech industry and its financial backing originated in the US, and the region has since become the global epicentre for
investment in innovation.
Preferred by pharma companies due to the prevalence of free pricing and private insurance, the US is also the largest market for healthcare products in the world, with drugs sales corresponding to about 40% of the global tally.
Nevertheless, demand is growing in other regions, but it would be wrong to think that a global portfolio of investments is needed to access the vast untapped potential in emerging economies. We believe biotech investors can ensure a healthy degree of geographical diversification by investing predominantly in US listed biotech companies with the potential to distribute their products globally.
Here, we discuss the areas worth understanding in greater detail.
Developing nations drive growth
The sheer volume of people living outside leading biotech markets including the US, UK and Japan offers a fantastic opportunity for future growth, and as these economies grow, there will be an inherent tendency for a higher proportion of GDP to be spent on healthcare and innovative drugs. In particular, the growth in spending on medicines in developing markets is predicted to outpace developed nations over the coming years.
While the percentage of global drug sales represented by developing nations is already relatively high, access to highly innovative treatments is still largely limited to affluent members of society, with the majority dependent on low cost, off-patent drugs.
In fact, only 1.8% of new drugs launched between 2015-2020 were sold to developing economies. As these countries develop and their inhabitants become wealthier, a greater number of patients will demand access to the most cutting-edge treatments.
For example, China is one of the fastest growing regions – not only in sales, but also in R&D spending. As such, leading innovators in the biotech and pharma sectors will increasingly target the region, and new, highly attractive investment opportunities will emerge. While Chinese companies will undoubtedly benefit from this trend, so too will the US listed global pharmaceutical and biotech companies selling innovative drugs to Chinese consumers.
For example Amgen has partnered with Chinese company BeiGene which gives them the potential to distribute oncology drugs into China.
Local expertise critical When looking to tap into this global growth, global companies can go it alone using in-house expertise, or some choose to partner with local companies to achieve the appropriate level of local expertise, seeing as drug marketing and distribution regulations vary greatly between countries.
Global companies aren’t limited to those originating in the US. Some local companies choose to effect a dual listing in the US and at home, enabling them to access capital in the US more easily and opening the door for them to become a global player. For example, the Belgian company ArgenX has listings on Euronext and NASDAQ and is aiming to distribute its products globally.
In UK and Europe, now the second-largest healthcare market in the world representing about 20% of global sales, regulations surrounding the sector differ greatly from the US – and even from one country to the next. Despite the EU being served by one common regulatory agency, drug pricing and reimbursement rules must be adopted on a country-by-country level.
While Europe’s regulatory landscape is complex, the region presents an attractive investment opportunity for global pharma companies. Although profit margins are somewhat lower than in the US, this is mitigated by reduced marketing costs, due to tighter marketing restrictions, and offset by the potentially enormous demand opportunity.
Consequently, most US companies are actively targeting sales in Europe themselves, or in partnership with a local company. For example Incyte entered into a deal with European company Novartis to distribute its JAK inhibitor in Europe. In other regions such as Japan, local expertise is not only preferable, it is paramount.
Historically, the country’s opaque regulations around drug trial designs and reimbursement systems have led Western pharmaceuticals to license their drugs or entire portfolios to a local player with the know-how needed to make the drug successful. Given Japanese healthcare makes up a considerable 7% of global sales, these companies can provide investors with exposure to a large and lucrative healthcare market.
For example Amgen and the Japanese company Takeda have a collaboration that allows Amgen to tap into Japanese demand for its products.
Patients will always want access to the best possible drug for their condition, and as their ability to access innovative drugs increases, so the distribution of new drugs will become increasingly global. Sales of local less effective alternatives will likely decline in favour of the newest therapies.
It is the global companies with access to cutting edge innovation that will ultimately benefit from this trend and most of them are headquartered in the US. So gaining exposure to the growing global demand for therapeutic drugs does not necessarily mean creating a global portfolio of investments.