Trend: investments in biotechnology
Where should a private investor invest?
Investors who bet on information technology and telecom in the 90s won much more than those who invest in IT now. A new mass trend that will change the economy and people's lives in the next decade is biotechnology.
Maxim Reliable, investment expert (previously did projects for Google, BP, HSBC, Standard & Poor's, Booking.com Heinz, Nissan, Citibank and others), analyzed the advantages and risks of the most promising biotech industries.
According to McKinsey's definition, biotechnological innovations cover four areas:
- biomolecules — mapping, measurement and engineering of molecules;
- biosystems — engineering of cells, tissues and organs;
- biomachines — interface between biology and machines; Biocomputing is the use of cells or molecules, such as DNA, for computing.
Based on this, biotechnologies are used in various sectors of the economy and are growing faster than IT in the last 20 years. At the same time, the cost of technology is constantly decreasing. For example, sequencing (decoding) of the human genome took 13 years and $2.7 billion. In 2009, commercial kits for sequencing was worth $100 thousand in 2019 — $1 million
But, unlike IT, biotechnologies require significant initial costs and promise profit not earlier than in 10-15 years. Difficulties for investors arise at the initial stages: without specialized education, it is usually difficult not only to assess the prospects of the project, but also to understand the product itself. Evaluation of biotech startups is also difficult: the usual method of discounted cash flows for evaluating, for example, pharmaceutical companies is most often not applicable here.
The general problem of biotech is the reassessment of companies. As soon as reputable venture funds invest in a startup with a good idea, everyone else starts investing. The company is inflated, and its reassessment is taking place. But there is no profit and there will be no profit in the coming years. So many projects are choked with money, and investors suffer losses.
Outright fraud is also not uncommon. Now the trial of the founders of Theranos continues in the United States. The beautiful idea of a painless and instant blood test for hundreds of different diseases attracted eminent investors, existed for 15 years and was estimated at $ 9 billion, but turned out to be fake from beginning to end.
Usually, as soon as tests confirm the operability of a technology or formula, the company's value soars. Then begins a series of repeated tests, obtaining licenses, patents and scaling, which last for years, and investors can only be patient.
It pays off: unlike IT, biotech products and technologies affect all life processes in all spheres. They are not just introduced into traditional industries and transform them, but change the essence of things, and when combined with innovations in other areas (the same IT), they give a synergistic effect.
The very first investors of biotech companies literally got rich. For example, the shares of Amgen, a major drug manufacturer, have grown 170 times in 30 years. The British Genus, specializing in genetic technologies, has risen in price 54 times in 20 years.
FoodTech and Agriculture
Genetic engineering of agricultural crops, biochemical plant protection products and products based on artificial protein became popular in the middle of the twentieth century. Now the FoodTech market is estimated at more than $190 billion and is one of the most promising technology markets, promising to double its volume by 2025.
The most promising projects in the industry are centered around the giants: BASF, Bayer/Monsanto, Dow/DuPont and ChemChina/Syngenta. According to AgFunder's report, investments in the FarmTech segment increased by the end of 2020 to $7.9 billion, exceeding the previous year's figure by 41%.
Advantages: there are many preferences for development in accordance with the global ESG agenda.
Risks: high cost of products.
Biological methods of production of fabrics, materials and biofuels are becoming more popular from year to year. As a rule, developers try to keep their projects as long as possible at the level of laboratory models, test new formulas for various applications, creating multi-products.
The most difficult stage of financing industrial biotechnologies is the transition from experiments to the creation of working demonstration plants that allow assessing commercial attractiveness and scaling possibilities.
Advantages: short implementation time compared to medicine, less uncertainty in the final result, the possibility of gradual product improvements.
Risks: the emergence of more advanced technologies, the need to build pilot plants and lines. This is also an advantage that allows you to eliminate shortcomings with small means.
Medications and therapy
90% of all biotechnological products in the world relate specifically to medicine and healthcare. Interest in the industry has grown even more since the beginning of the Covid-19 pandemic. In 2020 alone, more than $13 billion was invested in biotech medical companies.
Over the past five years, investors' interests have shifted to later stages, when companies move from the stage of clinical trials of drugs and technologies to the stage of growth and expansion. Only large venture funds can afford large investments at early stages. But the profit in case of successful implementation increases many times and dramatically.
Advantages: a high level of understanding of performance in the early stages. As soon as the drug shows a clinical effect, the company's shares can be bought.
Risks: huge development and testing costs. More than 90% of all new drugs do not pass preclinical tests.
Unlike the creation of new drugs and innovative treatment methods, the diagnosis and analysis of diseases is not so strictly regulated by national and international laws. Marketing plays an equally important role here than the know-how itself.
A new technology for diagnosing a particular disease may be theoretically attractive, but unknown to a wide range of specialists until a large company like Abbott or Johnson & Johnson buys it and begins to replicate it.
Advantages: shorter implementation period, stable income prospects for local companies operating in certain regions or clinics.
Risks: difficulties with evaluation and scaling.
The editing of human DNA (CRISPR) and the successful fight against hereditary diseases are just the tip of the iceberg of opportunities that genetic engineering opens up to humanity. The technology allows you to "turn on" and "turn off" the work of certain genes to obtain the desired results. Moreover, this can be done both with cultures of individual cells in the laboratory, and by acting on a living organism with certain drugs, for example, to combat aging.
It is no coincidence that it is here that there is an explosive increase in the inflow of private capital from the largest family funds in the financing of fundamental research. DNA editing can revolutionize healthcare, when instead of long courses of expensive treatment, only one, albeit expensive, procedure will be needed.
Advantages: low entry threshold in the early stages.
Risks: ethical (eugenics, cloning, human "improvement" and "hacking" of hereditary information) and regulatory (experiments on humans are prohibited almost everywhere).
What else needs to be considered
Regardless of the biotechnology industry and the form of investments (direct investments, mutual funds or venture funds), when choosing an object for long-term investments, you need to pay attention to the following characteristics of biotech companies:
- The project team. In the 40s of the twentieth century, world leaders realized that physicists are not scientists, but the army. The pandemic made everyone believe that biochemists are also a branch of the military. Talents decide everything here.
- Flexible organization. In many countries, R&D has significant tax benefits, so the jurisdiction of the company is important. But it is equally important that the core of the project is located near a large biotech cluster (which are concentrated mainly in the USA), and employees could work from anywhere in the world, regardless of their place of residence and citizenship.
- Commercial execution. Biotechnologies are good because the same formula, process or product can be used in a variety of industries. It is useful when a company diversifies its research and development for different applications.
According to McKinsey, 60% of the physical resources in the global economy can be produced using biomolecules, biosystems, biocomputers and biomachines. 45% of all known diseases can already be cured with the help of existing developments.
Investments in bioeconomics have already literally become investments in the future. Moreover, thanks to the efforts of the same biotech companies, this future will come for the current generation of investors. The main thing is not to be late.
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