The US green energy sector rose out of the ashes of the pandemic in 2020 with a strong year for investment and valuations. Will 2021 deliver on the technology?
The global biotechnology sector was valued at $449 billion in 2019, with the sector mainly dominated by US and Canadian firms, followed by Europe and Asia. The market is now expected to achieve an 8.3% compound annual growth rate (CAGR) into 2025, reaching a near $730 billion valuation.
In the Asia-Pacific region, the market is expected to have a 9% CAGR over the same period, with India and China being the drivers of that growth. China’s biotech sector is forecast to hit $60 billion by 2025. An example of the changes taking place can be seen in the market cap of biotech companies listed on the Hong Kong and Shanghai exchanges, where the market cap reached $217 billion in December 2020, which was up from only $12 billion in 2017.
Over the last few years, China has grown to become a leader in patents for new medicines. China now files almost nine times the biotech patents of Europe. The US comes in at three times the patents of Europe.
The emergence of coronavirus in 2020 turned the drug and pharma industry upside down with companies diverting their efforts to work on vaccines. The successful companies are now going to be flush with cash and seeing their stock rise in the global business world.
All change for pharma business models
The year 2020 was full of upheaval for business models in the biopharma industry. The sector still had to initiate the same measures as other industries with shifts to remote working and efforts to minimise the disruption in global supply chains for existing drugs. The industry has also had to stay focused on innovation to keep finding new treatments and cures amid all the virus distraction. Companies have had to take steps to keep drugs flowing, provide virtual support to physicians and trials, realign existing drugs, and develop vaccines with a high efficacy rate. All of this was done under the global spotlight.
The overall result is a sector that has had to rewrite their business models and operating procedures. The pandemic has brought the spotlight to biopharma industry as the world’s press and public scrutinized every detail of the trials and progress. This has now raised the bar for the biotech companies as they will now have to continually produce high efficacy vaccines in shorter timeframes.
The effects of the economic damage may also hit pharmaceutical companies once the virus has passed. Governments and economies that are under financial pressure may be forced to re-consider allocations and the same spotlight on the companies could see pressure to speed up their efforts for reduced commitments.
The industry will also have to stay committed to the digital working environment in the same way that other industries have. This could see less investment in infrastructure, which will allow the monies to be reallocated.
R&D efforts will see some upheaval
The global pharma industry has one of the largest research and development levels in global business. Global R&D is expected to reach $203 billion by 2024, up from $165 billion in 2017. The leading companies in this area are Swiss companies Roche and Novartis, followed by US-based Johnson & Johnson.
2020 was a big year for biotech investment with venture firms and hedge funds driving new investment into the sector to take advantage of government spending and vaccines. Biotech firms saw a huge rise in investment compared to other areas of the healthcare sector as investors chase the next breakthough in cures. The biotech sector saw $350bn in transactions in 2020, with the nearest sector coming in at around $100bn. Investors are increasingly interested in gene therapy and new areas such as CRISPR and RNA.
(Source: Nasdaq)
Getting a return on that investment has been harder in recent years, however. Deloitte said in 2018 that companies saw their lowest investment return in almost a decade at 1.9%, down from 10% in 2010. Smaller firms outperformed the large companies and that could relate to higher risk taking as majors face corporate scrutiny. In the same timeframe, the cost of getting new drugs to market has also doubled, from $2 billion from $1 billion in 2010.
The pandemic has probably brought a long-term change to the industry where higher investment will come into the sector, but the financiers and shareholders will likely scrutinize business models more thoroughly and pressure firms to chase higher returns.
Will politics upset the sector?
One of the potential problems for the biotech sector is the current vaccination efforts across the world. There is a risk that the companies involved could see their business brands tarnished by the vaccination drive or could ruin their lobbying ability with governments.
Anglo-Swedish firm AstraZeneca has been a clear example of this after the company has been dragged through the mud with the ongoing blood clot issues. Countries have either halted, or cancelled the drug, but the same problem then emerged with the Johnson & Johnson vaccine. The extreme pressure on companies to deliver fast results in the covid vaccination race could ultimately be their downfall. For the first time ever, the public have been questioning GPs about the manufacturer of their jab and in many cases, refusing to show up for appointments if it was a particular drugmaker. On the political front, AstraZeneca has also been caught up in many spats with governments, particularly the EU, as politicians sought to divert attention from their own failures to order enough supplies. Pressure to provide record amounts of vaccine sin a short time, also saw production delays and threats of export bans, so this will leave a sour taste for years to come.
The coronavirus response may ironically hurt the vaccine makers the most, while the best investment opportunities could be seen in smaller, and more nimble companies. These firms will now be flush with cash and will look to align their business with the hot sector trends and the projects with the biggest windfall potential. Those smaller companies could also benefit from not being first to the table with coronavirus drugs. Taking more time to develop and trial cures could see them take the place of the major company offerings in later years.
