The biotechnology industry is finally getting closer to an elusive goal: breaking even.
Despite its reputation for developing lifesaving drugs and providing high-paying jobs, the industry has lost tens of billions of dollars since Genentech, the first genetic engineering company, was founded 30 years ago this Friday.
Although the biotechnology giants Genentech and Amgen are now profitable, as are about four dozen smaller players, the overall industry has been kept afloat only by the willingness of investors to finance research and development.
"Investors have been very patient with the biotech industry, which has been one of the biggest money-losing industries in the history of mankind," Arthur Levinson, the chief executive of Genentech, told analysts last month. "The cumulative loss by this industry from its inception in 1976 is nearing US$100 billion."
But perhaps the tide is turning. Publicly traded US biotechnology companies lost only US$2.1 billion last year, down from US$4.9 billion in 2004, according to the latest annual scorecard compiled by Ernst & Young, the accounting and consulting firm.
More important, the firm said, the loss last year was equivalent to only 4 percent of the US$47.8 billion in combined revenue from the 329 public companies in the biotech industry. That is the first time that figure has ever been below 5 percent.
"We still feel pretty bullish that profitability for the entire industry, at least in the United States, will occur by the end of this decade," said Donn Szaro, leader of the global biotechnology practice for Ernst & Young. The prediction is for profitability on a yearly basis, not an erasure of three decades of cumulative losses.
For investors, of course, what matters most is what happens to the share price, not profits. Even shares of unprofitable companies can rise substantially -- at least for a while -- based on prospects for new drugs.
The stock of New River Pharmaceuticals, for instance, has more than quadrupled since its initial offering in 2004, propelled by hopes that the company's experimental drug for attention deficit hyperactivity disorder will be safer than alternatives. The stock closed Monday at US$33.51, up US$0.30.
Moreover, investors generally seek out particular stocks, not the industry as a whole, and big hits can pay off well. Amgen and Genentech, the two largest biotech companies, have market values of more than US$85 billion, exceeding those of many of the traditional pharmaceutical companies.
At the end of last year, the market capitalization of those two companies alone accounted for nearly half the total US$410 billion for all publicly traded US biotech companies. And much of the improvement in the industry's bottom line last year came from an increase of US$1.8 billion in the combined net profit of Amgen and Genentech.
The US industry is generally far ahead of its competitors elsewhere in sales and product development and market value. Oddly, however, the biotechnology industry in the Asia-Pacific region eked out a small profit of US$7 million, according to the Ernst & Young calculations, because big profits from an Australian company, CSL, more than offset small losses from many other companies.
The accounting firm's calculation of income favors the industry because it leaves out private firms, which tend to be in earlier stages of development, and therefore more likely to be in the red. The 1,086 private US biotech firms lost US$2 billion last year, about the same as the public companies, but on revenue of only US$2.9 billion.
On the other hand, the data from Ernst & Young may also be shortchanging the industry because some successful biotech companies end up being acquired by larger pharmaceutical companies and are no longer counted.
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