Is it the Right Time to Buy Biotechnology Investments?

July has been a good month for biotech investors. Share prices in the biotech sector as measured by the NYSE Biotechnology Index are up 24% compared to the 6.6% gain for the S&P 500. Earlier in the month, Amgen (AMGN) reported better-than-expected results from a trial of its experimental bone-protecting drug denosumab in patients with advanced breast cancer. Amgen’s shares vaulted 16% on the news.

In the week just ended, the momentum in biotech shares has continued further. While a host of favorable clinical trial results was the bigger driver, a large buyout announcement added the icing to the cake.

Clinical Trial Results

Bringing back memories of the dotcom era, shares of Human Genome Sciences (HGSI) rose nearly 300% to .50 a share after the company reported favorable results for its experimental lupus drug Benlysta. Targacept (TRGT) shares more than doubled to .25 a share after its depression drug candidate met its goals in a mid-stage trial. Onyx Pharmaceutical (ONXX) reported encouraging results for its breast cancer treatment Nexavar to push its shares higher by 21%. Shares of Celgene (CELG) jumped nearly 16% after the company announced significant improvement in progression-free survival of patients taking Revlimid as a first-line treatment for multiple myeloma.

Buyout

Continuing the trend of major pharma-biotech mergers, as in Roche (RHHBY.PK)-Genentech, and Eli Lilly (LLY)-ImClone, Bristol-Myers Squibb (BMY) announced it is buying Medarax (MEDX) for a share. The Medarex takeover implies a net price tag of over billion. Medarax shares jumped nearly 90% on the announcement.

Is it too Late to Board the Biotech Bandwagon?

Given strong gains in biotech shares in recent weeks, it is logical to ask if it is too late to get on the biotech bandwagon. I believe the answer, generally speaking, is no. Notwithstanding uncertainties surrounding health care reform, the fundamentals for biotech companies are reasonably favorable. Yet, one needs to take appropriate care in getting the timing right and in choosing proper investment vehicles.

Fundamentals

Several factors favor the long-term growth of biotech companies. These include an aging population, rising incidence of cancer and other degenerative diseases, and growing recognition that biotech products offer the best solutions for management of these diseases.

Several biotech drugs like Roche’s Avastin and Amgen’s Enbrel have the potential of becoming major blockbuster drugs by 2014. Biotech companies are seeking to expand uses of their approved drugs to treat more diseases. And, unlike drugs made by major pharmaceutical companies, biotech drugs

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On the Brink of Generic Biotech Drugs, What’s the Cost to Innovation?

In a recently published report, the Federal Trade Commission suggested that the current allotment of a 12- to 14-year regulatory exclusivity period for product innovation to develop products at biotech companies is“too long to promote innovation.”

The same report, published June 4, also indicated that developing generic biotech drugs would help bring down the cost of U.S. health care. These less expensive versions are expected have prices discounts that are “between 10 and 30 percent of the pioneer products’ price,” the FTC said in its report, available here.

Shortly after report’s publication, President Barack Obama mentioned in a speech to the American Medical Association that creating a pathway at the FDA for approving generic biotech drugs would save the United States “billions of dollars.” But, as Arlene Weintraub was quick to point out in BusinessWeek, “How many billions? And how fast would those savings be achieved?”

With the advent of biotech generics, or follow-on biologics (FOBs), an impact on the economy is guaranteed, albeit unquantifiable. Industry insiders highlight that the biotech sector also stands to undergo some immeasurable changes itself.

“I am worried that the generic biotech companies make it less attractive to innovate,” said Mouli Cohen, entrepreneur and founder of Voltage Capital, a private equity innovation fund. Cohen’s firm invests in biotech startups and added, “Innovation and the ability to drive the process towards quantifiable outcomes is the hallmark of business in the U.S. Cannibalizing this process could reduce us to a mediocre player.”

Indeed, as PharmaTimes noted in reporting on the June 11 hearing by the House Energy and Commerce Subcommittee on Health, concerns have risen as to whether or not innovator biotech companies will be able to recoup their Research and Development investments, were FOBs were permitted to “come speedily to market.”

“R&D is increasingly expensive,” Cohen said. “The major pharmaceutical companies have reduced their efforts. This shifts the burden onto biotech and academia. In the end, someone or some entity has to sponsor the work. The cost will shift, but just like the medical system, the industry will break down if the compensation and the regulatory constraints become increasingly unfavorable.”

This means that biotech, although recently predicted by EvaluatePharma to achieve the largest growth of the any drug industry over the next five years, faces some massive obstacles in terms of funding.

“Two thirds of the future clinical pipeline for patients resides in small biotech companies – companies without profits, companies relying heavily on

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