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TITLE:  The biotechnology bubble machine
SOURCE: Nature Biotechnology, Vol 21 (4), p. 355-356, by David Rasnick
DATE:   April 2003

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The biotechnology bubble machine

The Biotech Advisor newsletter1 informs potential investors that
biotechnology is "not the stuff of which bubbles are made." The reason
biotechnology is so exciting, and such a great investment, we are
assured, is because...

"[I]t's for real. It's substantial. It's not going away. Biotech
companies aren't run by twenty-something MBAs with green hair whose
lifelong goal is to cash in and retire by age 30. Biotechnology companies
are managed by some of the smartest - and most ethical - people in the
world: scientists, physicians, and top managers who have dedicated their
lives to improving human health. These folks are smart enough to realize
that the only way they're going to get rich is if the stockholders get
rich. And the only way the stockholders are going to get rich is if their
products work - if they pass five to eight years of testing that costs
upwards of $800 million, culminating in approval by the toughest
regulatory agency on earth, the US Food and Drug Administration."

Even within the pharmaceutical industry, biotechnology is different.
Unlike the 'meds' in your bathroom cabinet (pills, creams, tablets,
etc.), which pretty much only treat your symptoms, biotechnology products
offer the potential for effective, long-lasting treatment for the root
causes of such chronic diseases as cancer, diabetes, and heart disease.
In some cases, biotech products (e.g., gene therapy) could even cure
certain illnesses. That's the hope and the promise - the reason large
pharmaceutical companies like Merck and Pfizer continue to pour billions
into biotechnology, through partnerships and through their own home-grown
biotechnology efforts. And that's also why individual investors also need
to give biotechnology stocks a hard look1.

However, the depressing regularity of biotechnology failures has led to
the realization that, "Far from delivering on its early promise of
effective cures for exotic diseases, biotechnology has instead proved to
be a complex endeavor, with high costs and long lead times requiring the
financial stamina only big corporations can usually deliver"2.

While biotech continues the Sisyphean effort to realize its promise, the
healthcare industry as a whole appears to thrive in a period of economic
malaise. In a recent article in the New York Times, Henry A. McKinnell,
the chief executive of Pfizer, said that while "The telecom industry and
the financial industry have crashed[,] [w]e're still growing"3 . Some of
the people who once worked in the Northeast's technology sector have
found a refuge in the healthcare industry. The Northeast has a higher
proportion of healthcare workers than any other region of the country. In
New York City, for example, 40% of the largest private employers are
medical institutions. In Philadelphia, the figure is 70%2 . But this is a
temporary refuge at best because the entire healthcare industry in the
United States is set for a major fall and biotechnology will likely lead
the way.

There are 1,457 biotechnology companies in the United States, of which
342 are publicly held4 . The total value of publicly traded biotech
companies was $224 billion as of early May 2002. The biotechnology
industry has more than tripled in size since 1992, with revenues
increasing from $8 billion in 1992 to $35.9 billion in 2001 (ref. 5 ).
The US biotechnology industry currently employs 179,000 people; that's
more than all the people employed by the toy and sporting goods
industries. Many biotechnology companies are small startups that
disappear in a couple of years only to be replaced by a new crop of
startups eager to recycle the highly skilled workforce.

Biotechnology is one of the most research-intensive industries in the
world. The US biotech industry spent $13.5 billion on research and
development in 2001 (ref. 5 ). The top five biotechnology companies spent
an average of $89,400 per employee on R&D in 2000. Yet, in spite of its
colossal size, favorable publicity in the popular media, and two decades
of effort, biotechnology's real contributions to human health and
economic growth are pitifully few. Only one of 16 regions in the United
States where biotechnology has a significant presence showed net income
for 1999 (ref. 6). And that income was largely due to Amgen (Thousand
Oaks, CA) and a handful of other companies5, 6. Overall, publicly held
biotechnology companies showed a loss of more than $5.3 billion in 2001
(ref. 5).

Amgen's Epogen and Neupogen, which stimulate the bone marrow to produce
more red and white blood cells, respectively, are biotechnology's biggest
moneymaking drugs. One of the main uses of both drugs is to treat the
toxic effects to the bone marrow caused by chemotherapy for cancer and
AIDS. Developing drugs to treat the toxic effects of other drugs has
become a growth industry. Since 1996, 11 such drugs were approved by the
US Food & Drug Administration (FDA; Rockville, MD) (ref. 7).

Genentech (S. San Francisco, CA) - one of the companies that pioneered
the biotechnology sector and produced such groundbreaking products as
recombinant insulin and human growth hormone - also brought us tissue
plasminogen activator (tPA), a recombinant human factor used to prevent
blood clots after heart attacks. The company has spent massive amounts of
money on clinical studies in an effort to demonstrate the superiority of
tPA over its competition and to justify its high cost. Because tPA works
no better than streptokinase, a bacterial enzyme used for the same
purpose that costs ten times less8, Genentech has spent millions of
dollars marketing tPA aggressively.

Biogen, the world's oldest independent biotechnology company, is still
trying to find a use for its otherwise highly profitable recombinant
interferons, which have been sold for 17 different types of cancer, viral
infections, hepatitis, hairy cell leukemia, Kaposi's sarcoma, AIDS, and
multiple sclerosis.

These examples epitomize the triumphs of biotechnology. Most of the
remaining 140 or so biotechnology products are not moneymakers either
because FDA approval is for rare diseases with small markets or because
they just plain don't work.

Because biotechnology had so little to show after two decades and
billions of dollars spent, it used to puzzle me that most people working
or investing in biotechnology companies never seemed to lose money. The
reason for this, I came to realize, was the sector's incestuous nature.
The way money is made is for certain biotechnology companies to merge
with or acquire other biotech companies. Some bioscience companies are
acquired by large pharmaceutical companies eager to obtain the special
capabilities of the smaller fish. With each merger and acquisition, money
and stock change hands. A recent example is Amgen's $16 billion
acquisition of Immunex (Seattle, WA)9 . A sure way to make money (though
less glamorous) is by providing the technical reagents and equipment used
by other biotechnology companies.

In order to forestall the eventual implosion, a new breed of
biotechnology company has chosen to abandon the painstaking and often
spotty laboratory approach to research in favor of using higher
mathematics to exploit a genetic map of the human genome to 'better
target' that research. The recent surge in bioinformatics companies may
set a record for swiftness of disillusionment. Bioinformatics is gambling
that the secrets to health and disease are waiting to be deciphered from
the labyrinth of the human genome and proteome. The bioinformatics fad is
based on the same misguided belief used partly to justify funding of the
genome project: that complex human diseases, such as cancer and
arthritis, are caused by 'bad' genes. Gene therapy - replacing bad genes
with good - would be the logical solution to such diseases. But, the
naive belief in gene therapy for complex diseases is inexplicable given
that it has not even been attempted in a real, well-recognized gene
disease, such as hemophilia.

How long this self-referential, pyramid structure of the pharmaceutical/
biotech industries will remain standing is anyone's guess.


1. The Biotech Advisor (Charter Financial Publishing Network, Shrewsbury,
NJ, 2002).
2. Ackerman, J. A promise unfulfilled in biotechnology: decline and fall
of Alpha-Beta speaks volumes about pitballs of industry. The Boston
Globe, February 10 (1999).
3. Leonhardt, D. Northeast Quietly Becomes a Health Care Corridor. New
York Times, December 30 (2002).
5. Lähteenmäki, R. & Fletcher, L. Nat. Biotechnol. 21, 551-555 (2002).
6. Feldbaum, C.B., Convergence: Ernst & Young's Biotechnology Industry
Report, Millennium Edition (E&Y, New York, 2000).
8. Lee, K.L., et al. Ann. Intern. Med. 120, 876-885 (1994). | PubMed |
9. Federal Trade Commission. Resolving Anticompetitive Concerns, FTC
Clears $16 Billion Acquisition of Immunex Corp. by Amgen Inc. (FTC,
Washington, DC, 2002).

David Rasnick is chief science officer of Boveran (San Ramon, CA) e-mail: