Health, biotech will be the market's new 'Internet'
Michael Denny
National Post
International Business Machines recently announced it is building a $100-million (US) computer of stunning proportions. It will be a million times faster than the average desktop, performing one million billion mathematical operations per second. Known as Blue Gene, this mega-machine will seek to solve the mystery of the structure of proteins, the building blocks of our bodies. It will help us understand how viruses such as hepatitis and HIV attack the body.
Blue Gene's creation is the most dramatic evidence to date that, in the new century, health care and biotechnology will be growth industries that will eclipse the Internet's impact on our lives.
Five years ago, no biotechnology or health-care company in Canada was worth more than $1-billion. Today, there are four: BioChem Pharma, Biovail Corp. International, MDS Inc. and QLT Phototherapeutics. With spectacular prospects for further growth, they have provided Canada with a toehold in a global market of virtually limitless scale and scope.
Within five years, the number of $1-billion companies will at least double, and Canada's biotech and health-care industries will attract Internet-scale valuations. But biotechnology and health care will revolutionize the world in a way the Internet cannot. Certainly, we can all benefit from online buying of books from Chapters or discs from Sam the Record Man. However, biotechnology will enormously change how we care for, and cure, ourselves. Biotechnology will do more to enhance the quality of life for individuals and society as a whole than any other innovation in the past 1,000 years.
As companies emerge to cure illnesses that have plagued humankind -- from cancer and AIDS to schizophrenia and spinal cord injuries -- entrepreneurs will emerge who will emulate, and perhaps even surpass, Bill Gates. Biotechnology and health care will be to the 21st century what the steam engine was to the 19th century and the automobile and silicon chip were to the 20th.
Despite recent weaknesses, Canadian health care and biotechnology stocks will outperform the TSE indices over the next few years. In the U.S., according to the definitive 1998 Ernst & Young U.S. industry review, aggregate sales for the biotech industry exceeded $10.6-billion (US) for the period ended June 30, 1998 -- a 20% increase over the prior 12 months. So, going forward as more companies mature, 20% a year is a conservative baseline for continued growth.
Historically, most pharmaceutical and biotech companies have discovered molecules they could turn into products, but more or less by serendipity. They are now taking a more structured approach -- using new technologies such as high-throughput screening, combinatorial chemistry, rational drug design, genomics, bioinformatics and proteomics -- to discover new molecules with commercial potential. These tools allow scientists to identify the best candidates for success at the test tube stage, saving time and investment funds and freeing up talent to focus on other projects. These technologies have also accelerated the development process by putting additional candidates in the pipeline in case the initial lead candidate fails.
Pharmaceutical development no longer pushes one drug through the clinic as quickly as possible. Now researchers weed out "pretenders to the throne" as early as possible, so that the best candidate wins. A drug reaching clinical trials has a much higher probability of success.
The regulatory approval process for drug products also shows significant improvement. In the U.S., the FDA now lets clinical sponsors (corporations) pay the FDA to review their files. With these user fees, the FDA engages additional reviewers to speed up the approval process, thus bringing a wider range of products to market faster and more cost-effectively, to the benefit of consumers and investors.
Europe has similar reforms. There, the European Agency for the Evaluation of Medicinal Products requires its scientific committee to decide a drug's merits within 210 days. Canadian governments could support knowledge companies, and quality jobs, by adopting similar policies.
The increasing use of contract research organizations (CROs) will also dramatically improve the development of therapeutic products. CROs enable drug companies, like automakers, to outsource key developmental activities. These CROs have the infrastructure and experience to get a drug through all three phases of clinical trials, saving the drug companies time, people power and capital. In addition, CROs are great equalizers, giving smaller, development-stage biotech operations access to the same expertise enjoyed by the larger, more mature pharmaceutical firms.
Finally, demographics will significantly multiply the demand for drugs and other health-care services well into the 21st century. Not only will more Canadians need health care as the Baby Boomers age, people will also have greater financial resources to spend. While studies show that the elderly consume the greatest proportion of established health-care resources, Boomers are also spending more on their health, even before they reach old age, which will certainly increase the scope of health care and take it in new and unique directions.
Internet and technology visionaries will soon be looking for the next place to invest their money. With the potential of health care and biotechnology and their relative neglect by the market, the smart money will be in this sector.
Michael Denny is director of investment banking: health care at Yorkton Securities Inc., an independent investment dealer.
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