Biotechnology uses of biological processes in the development or manufacture of a product or in the technological solution to a problem. Since the discovery of DNA in 1953, and the identification of DNA as the genetic material in all life, there have been tremendous advances in the vast area of biotechnology. Biotech has a wide range of uses including food alterations, genetic research and cloning, human and animal health care, pharmaceuticals and the environment.
The biotech arena has not been without controversy. In the 1970s, researchers were forced to stop doing certain types of DNA experiments, and other countries banned the use of genetically modified agricultural products. More recently, we've seen the controversy over cloning as well as stem-cell research. Perhaps the biggest development in the biotechnology field (as far as investors go) occurred when, in the 1980s, the U.S. Supreme Court ruled to allow for patenting of genetically modified life forms. This means that intellectual property will always be at the forefront of biotechnology - some argue that the scope of patent protection actually defines the industry.
Because of extremely high research and development costs coupled with very little revenue in the years of development, many biotechnology companies must partner with larger firms to complete product development. Over the past decade, the biotech industry, along with the hundreds of smaller companies operating in it, has been dominated by a small handful of big companies; however, any one of these smaller companies have the potential to produce a product that sends them soaring to the top.
R&D Expenditures RevenueGenerally speaking, the higher the percentage spent on R&D, the more is being spent developing new products. Thus, the lower this is, the better. This ratio is useful when comparing one company to another or to the industry in general. (To learn more, read The Ins And Outs Of In-Process R&D Expenses.)Medicare/Medicaid: This national health insurance program is responsible for reimbursing individuals for certain health related costs. Any sudden changes in funding and reimbursement rates can have profound effects on the biotech industry. (For more insight, read What Does Medicare Cover?)Orphan Drugs: These are drugs designed to treat people with rare diseases and infections (occurring in less than 200,000 individuals). Once the drugs are marketed to the public, orphan drug makers might not benefit from huge demand, but governments will usually subsidize many of the costs of producing these drugs.(For more reading, see Chasing Down Biotech Zombie Stocks and Using DCF In Biotech Valutaion.)Because drug development is an important aspect of biotechnology, understanding the process of approval of drugs for sale to the problem is also an important part of investing in the biotech industry.intellectual property. The nature of their business does not force them, unlike other industries, to rely on suppliers. Scientific tools, materials, computers and testing equipment is highly specialized, but the likelihood of these companies invading on their line of business is not very high. One snag is that marketing alliances have often proved to be problematic. Small biotech firms don't have the distribution capabilities to promote their new drugs, so they are forced to license their drugs to other suppliers.
- Power of Buyers. The bargaining power of customers has different levels in the biotech arena. For example, a company that sells pharmaceutical drugs has thousands of individual customers and doesn't need to worry too much about a buyer revolt. After all, when is the last time you were able to bargain with the pharmacist for a better deal? On the other side are the biotech firms, which sell highly specialized products to governments and hospitals. These large organizations have a lot more bargaining power with biotech companies.
- Availability of Substitutes. The threat of substitutes in the biotechnology field, again, really depends on the area. While patent protection might stop the threat of alternative drugs and chemicals for a period of time, eventually there will be a company that can produce a similar product at a cheaper price. Generic drugs, for instance, are a problem: a company that spends millions of dollars on the creation of a new drug must sell it at a high price to recoup the R&D costs, but then along comes a generic drug maker, which simply copies the formula and sells it for a fraction of the cost. This is a big problem in foreign countries where there is a lack of government control. Organizations will illegally produce patent protected drugs and sell them at much lower prices.
- Competitive Rivalry. There are more than 1,000 biotech companies operating in North America. With the top 1% of these companies making up a majority of the revenue, it's a tough industry in which to make a mark. The fight to see who can cure a disease or condition has researchers working day and night. Trade secrets are also extremely valuable. In short, the rivalry is extremely intense.