q

FEEDBACK: (criteria based on Group Project Grading Rubric via Black board)

Extends analysis of the chosen topic beyond a simple recounting of theoretical predictions; demonstrates bot h

considerable sophistication in thinking and sensitivity to context

Provides evidence of balanced thinking by incorporating aspects of several relevant theories discussed in textbook

readings and classroom discussions

Exhibits proper writing style, including correct grammar and spelling with minimal need for improvement, proper

and complete citation of sources, and a logical flow of arguments

References all relevant source material discussed in the course, supplemented with credible academic and popular

media references

GRADE: 96.5% = A

Biotechnology

Interim Strategic Analysis

Kayla Jaffe, Hugh Kelly, Nicholas Zengo,

Abstract:

This interim strategic analysis analyzes the current attractiveness of the biotechnology industry

using a PESTEL analysis and Porter’s five forces model. Based on this analysis, we believe that

the industry will sustain its current record growth rates over the next five years and remain

attractive for investors. In addition, we believe that this industry is reaching maturity, as

evidenced by increasing debt financing as opposed to IPOs, allowing only the largest firms to

sustain competitive advantages while smaller firms, if they are to prove successful, will most

likely to be acquired by larger firms through M&A. Given the changing political environment,

vast opportunities for economic growth, the increased threat of global health concerns and rising

populations, rapid advancements in technology, and patent extensions being offered to delay the

onset of biosimiliars, we have assessed this industry as attractive overall and forecast 5-6%

compounded growth over the next 5 years.

PESTEL Analysis

Political:

The most recent presidential election in the U.S cast intense scrutiny on high drug prices. This

scrutiny reached a pinnacle in September 2015 following the 5,455% price hike by Turing

Pharmaceuticals for the generic drug Daraprim. The swift and substantia l media and public

backlash caused stock prices of drug companies to fall significantly. However, Trump’s upset

over Clinton sent biotech stocks soaring at the end of 2016.

Following the election, biotech stocks posted a 10% gain increasing well ahead of the 1.5% rise

by the broad market benchmark S&P 500 over the same period. President Trump’s promise

during the campaign to repeal-and-replace Obamacare made no mention of prescription drug

prices and the Republican-controlled White House and Congress are not expected to give drug

pricing much attention.

Additionally, President Trump’s plan to enact a one-time tax rate of just 10% on the repatriation

of foreign profits could result in close to a $100 billion U.S drug maker cash infusion. Amgen,

Gilead Sciences, and Merck each have around $34 billion, $25 billion, and $21 billion in cash,

respectively, piling up overseas.

Furthermore, the new administration favors lowering the bar for orphan drugs - a special

category of pharmaceuticals developed to treat rare diseases that have a limited potential for

probability but receive significant incentives from the FDA. Lowering the bar for orphan drug

approval will mean easier regulations for market approval, increased financial incentives, and

extended exclusivity on patents for biotech companies developing rare-disease treatments.

Finally, the new administration is expected to place a greater emphasis on deregulation and

streamlining the approval process across all federal agencies including the FDA, EPA, and

USDA. In turn, these policies are expected to enable biotech companies to get their products to

market faster and with less costs incurred for testing, R&D, and associated expenses.

Economic:

Demand for biotechnology products is driven by 3 major factors: insurer’s willingness to pay for

new medical treatments, the global need to produce more food for a rapidly expanding

population, and society’s desire to find new solutions for complex scientific and medical issues.

All of which show no signs of slowing down. (fragment)

Because of the high cost and lengthy time required to develop and market new products,

companies need substantial funding for some time, potentially upwards of 8 years, before

significant revenues are generated. Then, there is a high risk that a drug won’t get FDA approval

or won’t be successful in the market. However, along with the substantial risk involved, the

potential profits exist to reward those daring enough to invest. This is due, in large part, to

numerous Supreme Court rulings allowing genetically-engineered bacteria to be patented. As a

result, there exists the possibility of massive financial rewards for biotech investors.

The U.S biotech industry is highly concentrated and mature with the largest 50 companies

accounting for more than 80% of revenues as evidenced by the changes in capital financing.

Debt equity has now become the largest source of capital, accounting for 48% of total U.S

capital raised in 2015, with follow-on investments, venture capital, and IPOs accounting for

25%, 14%, and 13% of funding, respectively.

The industry is forecasted to grow at an annual compounded rate of 5% between 2017 and 2021.

Profits for the biotech industry remain among the highest of any industry. Biotech has been the

best performing industry, based on stock performance, for the past several years. From 2011-

2015, the S&P 1500 biotechnology index increased by a cumulative total of 309.2% compared to

the broader S&P 1500 which increased a cumulative total of 61.9% over the same period. Gross

margins for the eight biotech companies within the S&P 500 averaged 87.2%, 88%, and 89% in

2014, 2015, and 2016, respectively. Industry growth is forecast to continue in over the next five-

year period as investment in biotechnology from around the world increases, particularly from

emerging economies. Some biotech firms have begun issuing dividends to return excess cash to

shareholders. Amgen became the first biotech company to announce a regular dividend policy in

April 2011, and has since increased its dividend several times, reflecting the company’s strong

and stable cash flows. Gilead Sciences followed suit and started paying a dividend in 2015.

However, there remain challenges maintaining these exceptional growth rates in the coming

future. Challenging comparable products, biosimilars, pricing pressures, and patent expirations

all can potentially negatively affect revenues. Even so, industry catalysts (healthy drug pipelines

and recently approved blockbuster drugs) and large firms posturing to have their own biosimilars

hit the market after their patents expire are both expected to drive significant growth as indicated

in the industry forecasts below:

Source: First Research Industry

Forecast. Date Published: February

2017

Sociocultural:

The biotech industry faces several threats and opportunities from sociocultural factors in the

current climate. First, the industry is heavily reliant on highly skilled labor which, given the

recent worldwide economic downturn, could prove difficult to secure in the coming years. (how

could the current administration’s immigration policies impact the availability of H1-B visas for

highly skilled scientists?) Second is the backlash being levied upon all things genetically

modified as well as the cost of prescription drug prices which were both major campaign points

in recent elections as well as being driven by business which stand to gain from publicizing their

Non-GMO products. Even so, the opportunities for biotechnological medical and agricultural

advances remain abundant. Biotechnology is driving innovation and growth in oncology,

infectious diseases, autoimmune disorders, multiple sclerosis, Alzheimer’s disease, diabetes, and

transgenic crops. Which, when coupled with worldwide increasing populations that are living

longer and increasingly advancing into the middle class, will mean almost unlimited markets to

enter and become profitable in.

Technological:

Technological innovation is a primary industry driver for biotech firms and advances in science

and technology, including information technology, continue to offer exponential growth in this

sector. Promising new technologies include:

· Ribosome nucleic acid interference (RNAi), which involves switching particular

genes on or off,

· Gene-editing technology, known as CRISPR, which enables the cutting and

replacement of parts of a cell’s DNA sequence,

· Stem cell technology which can be used to repair tissues and grow organs, and

· Cancer immunotherapy which makes use of the immune system to avoid cancer by

attacking the tumor cells responsible for cancer development.

With the current pace of technological advancements continuing into the foreseeable future,

there is no reason to expect any slowdown in this sector anytime soon.

Ecological:

The rise of superbugs and rapidly spreading infection diseases such as Zika have prompted the

WHO to declare public emergencies. Many biotech and pharmaceutical companies have raced to

develop vaccines and treatments for these viruses and, consequently, posted increases in stock

values in relation to their response in those endeavors. The rise in livestock production to feed

increasing populations have led to a direct increase in these kinds of infectious diseases making

their way from animal to human in record times. While this presents opportunities for biotech

companies to advance treatments, the challenge is meeting the demands quickly and effective ly

or else risk severe financial and reputational damage.

Legal:

In general, patents for genetically altered life forms are fundamental for industry profitability to

continue in this sector. Without them, large firms would see zero benefit in investing huge sums

of capital and risk in proprietary R&D that can last years before generating any revenues. They

are also among the most important benchmarks of progress in developing new biotech products

as they are critical for raising the capital for R&D. In the U.S, several drugs have been issued

new patents that extend their product lifecycles and are likely to keep cheaper alternatives off the

market indefinitely. This is in striking contrast with Europe which has established a regulatory

agency to approve biosimilars which are already competing in markets within Europe. With

several patents set to expire in the next few years, many larger firms are gearing up by launching

their own biosimilar operations in anticipation that their patents do not get renewed.

Five Forces Analysis

The nature of the industry requires firms to allocate large sums of money into research

and development with little guarantee of a return on the investment. Recently, the biotechnology

industry has become an oligopoly; forcing smaller firms to pair with the dominating larger firms

in order have a competitive chance. On average, it costs one million dollars(?) to develop a new

drug, and with patents, strict protocols from the FDA and government, it can make the process

extremely difficult for new and existing firms. (A new report published by the Tufts Center for

the Study of Drug Development (CSDD) pegs the cost of developing a prescription drug that

gains market approval at $2.6 billion) Porter’s five forces model of competition can be used to

determine the industry profit potential of biotechnology. It is a good tool for firms and analysts

to use to address the attractiveness of the industry, and develop a basic understanding if they

could maintain a competitive advantage in any aspect of the industry. All five forces below

should be analyzed.

Threat of Entry:

Threat of entry is high in biotechnology. Due to the large amount of solid financing required to

even research a drug, most small companies don’t have the resources and shy away from biotech.

For larger firms that have a steady inflow of funding, or smaller firms who pair with dominating

firms, they stand a chance. One way around the high threat of entry is for firms that specialize in

a specific field. Having extensive research or developments in a field that is relatively unknown

in the industry can help create a competitive advantage. (there’s a lot of VC money looking into

biotech start-up)

Power of Suppliers:

The power of suppliers is the force in Porter’s model that captures the pressures that the industry

suppliers can exert on an industry’s profit potential, which can affect a firm's ability to obtain

superior performance. Normally the risk of powerful suppliers is that they can capture part of the

economic value created by firms, but because the value in the biotech field is mostly intellectual

property, firms do not rely on suppliers, and therefore the power if suppliers is low. Smaller

biotech firms who which do not have the ability to of marketing or distributing their products

often do enlist larger biotech companies as their suppliers.

Power of Buyers:

The power of buyers in biotech should be looked at in two areas. For firms that market generic

drugs, the power of the buyers is low because of the vast amount of customers and the wide

reach the firms have. (with generic drugs, switching costs for consumers is low b/c the product is

an undifferentiated commodity. Therefore, the power of buyers is high.) However, for the

specialized firms that research and produce non-generic products, the power of the buyers is

high because of the pressure customers can put on firm by demanding a lower price or higher

product quality. (with specialized drugs, switching costs for consumers is high b/c suppliers of

specialized drugs are limited since products are highly differentiated)

Threat of Substitutes and Rivalry Among Existing Firms:

The threat of substitutes is an ongoing issue in biotechnology because firms may be able to

secure a patent for a short period of time, which reduces the threat of substitutes, but once the

patent is not longer in place, generic drug makers become a high threat because they can produce

the same drug with no research and development costs. Their revenue potential is extremely high

while the original maker’s revenue potential barely existed (unclear). Rivalry among firms is

extremely high, but for small firms this is often not a deterrent. Although the majority of revenue

in the biotech industry is controlled by the top few firms, it only takes one break in research or

drug to allow a company become a leading firm.

Bibliography

Kerppola, Raili. "SWOT Analysis - Biotech." Greater Rochester Enterprise (n.d.): n.

pag.Rochester Biz. Web. 7 Mar. 2017.

Loo, Jeffrey, CFA. (2016). Industry Survey: Biotechnology. S&P Global Market Intelligence.

S&P Capital IQ NetAdvantage. 1-41. Web. 28 Feb. 2017

Molloy, P. L., & Johnson, L. W. (2016). Biotechnology, a Strategic Planning Orphan: Towards

an

Effective Strategy Framework for Biotechnology Firms. Journal Of Commercial

Biotechnology, 22(3), 118-125. doi:10.5912/jcb748

Mergent. First Research Industry Profile. (2016). Biotechnology Product Manufacturing.

"Biotechnology." Encyclopedia of Global Industries. Farmington Hills, MI: Gale, 2015. Business

Insights: Essentials. Web. 28 Feb. 2017.

Staff, Investopedia. "The Industry Handbook: Biotechnology." Investopedia. N.p., 07 Jan. 2004.

Web. 05 Mar. 2017.

Weisman, Robert. "Biotech Leaders Cite Threats to Industry’s Funding Model." Boston Globe.

Boston Globe Media Partners, 15 June 2015. Web. 07 Mar. 2017.