Is biotech the new high-tech?

Biotech

While Indian investors and mutual funds go gaga about FANG stocks, a new global investment theme seems to be in the making. Is biotech emerging as the new ‘high-tech’ for stock market investors?

Historically, innovation-driven biotech companies have been high-risk-high-reward bets. They usually have long gestation periods and earn unattractive return on shareholders’ equity for considerable time.

Will biopharma companies gain more ground post COVID?

 

GMO

Data as on April 22, 2021
(Source: Bloomberg)

In layman’s language, biotech is nothing but using scientific knowledge to develop new processes and products to deal with specific challenges and make human life better.

As global leaderships are willing to invest more resources in R&D, international biotech companies are expected to enjoy the spotlight in future.

The novel coronavirus is indeed proving to be a noble virus for them.

Scientific research in strategically important areas such as medicine, healthcare, energy and agriculture to name a few is now being perceived crucial in maintaining a country’s economic competence and societal cohesion.

The Joe Biden administration in the US is willing to spend 2% of the country’s GDP on R&D activities. At present, the world’s largest economy is investing only 0.7% of its GDP in scientific research. AI (Artificial Intelligence), quantum computing and biotech are the focus areas of the Biden government.

In fact, President Biden called on Congress to commit USD 50 billion to the National Science Foundation (NSF) to create a technology directorate for fostering innovation. Furthermore, USD 40 billion will be spent on upgrading laboratory research infrastructure.

Liquidity, deficits and economic stimulus have earned a bad reputation amongst economists lately, yet it seems the US government is borrowing from the future (by running deficits) hoping to build a sustainable future for future generations.  

On this backdrop, India’s recently launched vision document—National Biotechnology Development Strategy {2021-2025]—merits a closer inspection.

Some prominent objectives of India’s biotech strategy 2021-25 are:

  • To feature amongst the top 5 biotech destinations in the world by 2025 (currently it’s among the top 12)
  • To become a USD 100 billion global bio-manufacturing hub by 2025
  • To achieve import substitution in medical devices, reagents and components
  • To develop 10 technology clusters and 10 biotech parks and manufacturing hubs
  • To develop 10 Partnership centres for research
  • To develop University Research Joint Industry Translational (URJIT) clusters
  • To launch 100 PG courses
  • Develop 100 bioresource technology clusters
  • To develop 115 Kisan hubs in aspirational districts

Government sets an ambitious target for the biotech sector

Bio Tech

E: Estimated
(Department of Biotechnology)

 The strategy 2021-25 has a four-point agenda:

  • Build physical infrastructure and human resources capabilities to cater to the needs of emerging technologies
  • Strengthen and nurture strong basic-research-innovation-driven ecosystem involving public and private research institutes, labs, start-ups, small-industry and large industry
  • Develop a product development and commercialization ecosystem through Public-Private-Partnership (PPP) model
  • Create a robust pipeline of new knowledge to take the translational work forward. i.e. to put scientific research into practice

Segmental break-up of the India’s biotech sector

Genomics

(Department of Biotechnology)

Is biotech policy backed by adequate initial financial resource allocation?

The Budget 2021 has made a provision of Rs 14,794 crore to the ministry of Science and Technology. Moreover, the National Research Foundation will get Rs 50,000 crore over the next 5 years, i.e., Rs 10,000 crore a year on an average. India’s nominal GDP is likely to be ~Rs 215 lakh crore in the current fiscal.

It means India is currently spending just 0.1% of its GDP on R&D.

Irrespective of the good intent, setting ambitious policy targets without earmarking commensurable financial resources is just like signing a cheque dated 30th February.

To be fair, India’s tax-to-GDP ratio at 9.8% is one of the lowest in the world. The US has a tax-to-GDP ratio of 24.5% and that of the OECD nations has been 33.8% on an average. Just to put the scale into perspective, the Joe Biden’s USD 1.9-trillion-COVID-relief package released in March was 65% of India’s FY22 estimated nominal GDP.

Way forward…

Many experts have called Production-Linked Incentive (PLI) scheme launched for various manufacturing sectors a game changer. But in the case of Biotechnology, will a similar approach hold any ground?

In a capital starved country like India, an entity investing in R&D and taking the risk of capital is most likely to dominate the commercial decisions pertaining to product pricing and monetization of intellectual properties.

During the first wave of the coronavirus pandemic, India’s narrative was life over livelihood and it still hasn’t changed. However, sights during the second wave aren’t pleasing—hospitals running out of oxygen and oxygen companies making fortunes at stock market, prices of life-saving drugs running wild and vaccines being sold at differential prices.

Let alone biopharma, even in agri-biotech, terms and conditions pertaining to the use of patented GMO seeds has often been a bone of contention between farmers and seed manufacturers in the developed markets.

At a time when the country’s healthcare system is gasping for fresh air and struggling to find quick fixes to contain the second-wave, there is certainly an opportunity to address some issues permanently. Isn’t modern research, especially in the biopharma space which touches upon critical areas such as genomics and DNA sequencing, too precious to be funded majorly by private capital? The law of capital is simple: the one who feeds the cow, milks the cow!

Concluding thoughts

Undoubtedly, innovation has reemerged as the cornerstone stone of economic competitiveness and should be treated at par with other national priorities for budgetary support, if India aspires to be a soft power superpower. 

From the investors’ perspective, Indian mutual funds might look at launching dedicated schemes to capture global biotech opportunities some time in future. Until then, the best way to play the global innovation theme for Indian investors would be to consider Contract Research Organizations (CRO) and bio-IT companies on case-to-case basis. At present, this segment constitutes 15% of India’s biotech industry.

You may also like to read: Is data becoming the new API of the pharma industry?

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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