What does biopharma mean?

Biopharma is closely related to biotechnology, which describes any technology or product that is based on biology. Though associated with modern science, biotechnology has been around as long as civilisation — from ancient farmers artificially selecting crops to Alexander Fleming discovering antibiotics. In its current applications, biotech can help to treat disease, enhance the natural environment and optimise manufacturing processes.

The difference between biopharma and pharma is often blurred, given that biopharma is a subfield of the pharmaceutical industry. In biopharma companies develop new medicines in living organisms such as bacteria, yeast, and mammalian cells. The “bio” prefix differentiates the field from mainstream pharma, which mostly relies on chemical synthesis to develop drugs.

In this article, we explore economic trends that could transform biopharmaceutical industry — as well as what the future holds for investment in biopharma. 

Cyclicality in biopharma

In economics, a cyclical industry is one that is sensitive to the general macroeconomic conditions. 

During a recession, for example, the profits of a cyclical company tend to drop along with its share price. In contrast, non-cyclical companies tend to do well during an economic downturn because they have essential consumer products that are always in demand.

To drive innovation and get drug approval, biopharma R&D departments require substantial investment — either from the company itself or from outside sources such as government grants. In the case of biopharma startups, the cash usually comes from venture capitalists (VCs). However, the painstaking biotech methods employed in biopharma R&D mean that the timeframe between funding and drug approval can often take years — making it harder for biopharma companies to demonstrate return on investment (ROI).

What’s more, research in biopharma is far from a linear process. According to the latest data from the Tufts Center for the Study of Drug Development, the average cost researching and developing each successful drug is estimated to be $2.7 billion. This number takes into account the cost of failures, including all the thousands or even millions of compounds that ultimately proved unsuccessful. Another study also found that the probability of new drug approval after clinical testing is as low as 11%. Unsurprisingly, this can have a huge impact on funding.

When capital dries up (as it did during the 2008 global recession), investors and VCs are less able to play long-term bets and act as a funding vehicle for the development of new drugs. Because public spending decreases during a recession, governments are more likely to pull the plug on funding, too. In this sense, the biopharma sector is dependent on wider economic cycles — making it a cyclical industry.

In truth, healthcare has always been inextricably linked to economic forces. Areas as diverse as drug development and hospital staffing are ultimately paid for by wealth creation elsewhere in the economy.

In order to combat the uncertainty of fluctuating economic forces and to improve their market share, biopharma companies are thus looking towards the long-term reliability of their supply chain.

Is the biopharma sector becoming less cyclical?

While most pharma companies formerly focused their R&D efforts on traditional disease categories (e.g. Arthritis and Respiratory Diseases; Cardiovascular and Metabolic Disease; Oncology), major players such as Pfizer have started to shift their portfolio towards rare diseases — an area in which opportunities for major breakthroughs are ripe. 

As reported by Forbes in April 2019, biopharmaceutical companies have found that a new drug targeting small, niche patient populations can command a high price — as long as it truly is life-changing for the patient. For investors, this makes biopharma R&D an increasingly attractive proposition.

Positioning R&D endeavours towards rare diseases has been shown to yield a number of benefits for the biopharma industry. A report by the IQVIA Institute for Human Data Science found that the clinical success rate for rare disease drugs was 26% — a huge increase from the 11% industry figure. Compared to broad areas of therapeutic research, rare disease R&D requires far fewer patients for clinical trials (saving time and money) and improves access to advocacy groups that can help drive marketing for new drugs.

Meanwhile, the increasing use of artificial intelligence (AI) and machine learning among biopharma companies is making the drug discovery process even quicker, cheaper and more effective than ever before. Given that some of the new drugs targeting rare diseases will go to market for relatively high prices, VCs can invest in biopharma R&D with more confidence.

As biopharma R&D becomes more advanced, the less cyclical the industry becomes — and the more robust it becomes, too. According to the IQVIA report, so-called emerging biopharma (EBP) companies patented almost two-thirds of the new drugs approved in 2018 while registering 47% of them. On the other hand, large pharma companies patented just a quarter of the total. Though further uncertainty in the sector cannot be ruled out, the future seems to bode well for biopharmaceutical innovation.

Conclusion

Biopharmaceuticals are among the greatest achievements of modern science. The complex biological structures of these drugs ensure they perform their jobs extraordinarily well, opening up new avenues for patient care and further pharmaceutical research.

Research and development (R&D) in biopharma has directly led to the commercial availability of vital therapeutic biopharmaceuticals such as blood-clotting proteins, hormones (such as insulin), vaccines, allergenic drugs for treating allergies, monoclonal antibodies, and interferons (IFNs). Because they are structurally the same as human compounds, biopharmaceuticals have the potential to cure diseases rather than merely treat symptoms.

Of course, drugs are always in demand, meaning that the wider pharmaceutical industry is typically non-cyclical. However, biopharma R&D is a time-consuming process that’s largely contingent on securing enough funding to proceed. When the economy fluctuates, so too does the availability of funds — leading to increasing cyclicality.

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