Biotech makes a buck

There are various comments about how investors as a whole often don’t make money on sectors. Bill Frezza, an entrepreneur and venture capitalist, says that wireless investors, for instance, put in more money than they got back.

“The winners made a fortune for other investors while laying the foundation of a huge and profitable industry. This industry employs hundreds of thousands of people, makes our lives better, and generates billions in taxes,” he notes. For him, that’s the way venture capital works — “in the VC industry we privatize losses and socialize gains.”

I’ve heard the same thing said for either electronics or semiconductors, though I can’t find it — something like, if you add up all the money spent since the beginning of the industry, it’s a negative number.
But now we know that it’s true for biotech. Drawing on data from publicly-traded companies, Peter Winter, editor at the biotech merchant bank Burrill & Co., put together a report that found biotech as an industry made money in 2008, about $9.4 billion in net profits.

That might seem like bright sign for biotech, given what a bad year 2008 was for so many industrial sectors. But, as Winter tells us in this podcast, biotech in the black, 2009 could be much worse. After all, only 67 biotech companies were actually profitable in 2008. Worse, almost all the profits, about $8 billion, went to three companies: Genentech, Amgen and Gilead.

Winter says that the 298 companies in biotech lost a combined $6 billion (these are, of course, just the publicly traded firms). He expects a very challenging next 12 to 18 months for the capital-hungry biotech sector. He thinks as many as 200 biotech firms are in trouble, and perhaps one-third of all biotech firms will disappear, through acquisition, merger or just plain death.

“The industry will be totally different 12 months from now,” Winter says.

One promising thing for those starting out now: the Big Three of biotech all got going during tough times — Genentech in 1976, just after the vicious 1973-75 recession, Amgen in 1980, as America dipped in and out of recession, and Gilead in 1987, the year of a major market crash. When Genentech started, almost nobody believed in biotech. If nobody believes in you now, maybe in 40 years you’ll be looking at an entire industry that’s finally making money.

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