Not long ago, actually until 1980, European firms were defining the biomedical industry, both in terms of presence as well as in innovation. The 80s however saw the U.S surging ahead, not because of an accident but due to some very industry-friendly federal policies - a well defined and transparent policy of regulatory approvals, absence of price controls, a well thought-out intellectual property regime and outstanding research universities that could attract the best talent from across the world. The resulting ecosystem of partnership between universities and industry, entrepreneurship and private equity finance led to the U.S. surging ahead of Europe.
Biomedical Science - The Sector
Biomedical science is an all encompassing field, the application of the principles of the natural sciences to medicine for improving health and treating disease. It covers current and relevant research as well as biotechnology, which has a worldwide wide impact.
The industry includes small point-of-care medical device companies like Biolase (BIOL), Tear Lab Corporation (TEAR), Endeavor Power Corp (EDVP.PK) and Delcath Systems (DCTH), to multinational pharmaceutical and biotechnology firms like Johnson & Johnson (JNJ), Novartis (NVS) and Roche (RHHBY.OB), from private research institutes to world famous universities. In short, the biomedical industry includes all activities and applications of science to clinical medicine, including development, production and commercialization of diagnostic systems, devices and pharmaceuticals and biotechnology.
The U.S. Biomedical and Biotechnology Industry
The United States is a global leader in biomedical innovation. The revolution in the industry is mostly attributed to the Bayh Doyle Act of 1980, which led to clusters of small firms springing up around universities in Boston, Washington, D.C., Raleigh Durham, Seattle, San Diego and elsewhere.
Genentech Inc., an American company founded in 1976 is considered to have founded the biotechnology industry. In 1990, Roche, a Switzerland based company, acquired a majority stake in Genentech and later, in 2009, bought the remaining shares that it did not already own. Another Swiss firm, Novartis AG, established a major research hub in Cambridge, MA in early 2000s. Recently, the French multinational pharmaceutical company, Sanofi (SNY), acquired Genzyme, a Cambridge-based biotech firm.
Tables below sourced from here.
The increase in the innovative capacity of the U.S. - the dramatic change from European to U.S. dominance is reflected in the following table
From a 31% share in new chemical entities produced in 1970s, the U.S. share increased to 57% in the 2000-2010 decade.
California, Massachusetts and Pennsylvania received the maximum venture capital investment in the first three quarters of 2012. Overall investment in life sciences (biotechnology and medical devices) increased 64% in Q3 2012 as compared to the same quarter prior year, with $1.2 billion invested in 116 deals.
However, investment in the medical device segment has been declining continuously for the last three quarters. In Q3 2012, the decline was 37% with $435 million going into 65 deals, the lowest investment in dollar terms since 2004.
Medical Device Companies
Whereas American companies tend to dominate the industry, growth in the number of multinational companies reveals that the industry is generating handsome profits from their efforts in outreaching overseas markets. Johnson & Johnson, which was valued at $17.7 billion in 2006, is currently valued at $214.47 billion, the most valued company in the sector. Within the U.S., the medical devices and diagnostics segment of the company uses 34 out of its 139 facilities operated by its subsidiaries. JNJ acquired Synthes Inc., the multinational medical device manufacturer based in Solothurn, Switzerland and West Chester, Pennsylvania, United States.
Medtronic, Inc. (MDT) is a medical technology company engaged in the business of manufacture and selling device-based therapies. Valued at $46.55 billion, it is the largest company in the medical equipment sector. With a market cap of $10.19 billion, Boston Scientific Corporation (BSX) is the second most valuable medical device company. BSX is a developer, producer and marketer of medical devices used in Interventional Cardiology, CRM, Endoscopy, Peripheral Interventions, Urology/Women's Health, Neuromodulation, and Electrophysiology.
Besides large companies, there is a long list of smaller medical equipment companies including Biolase, Tear Lab Corporation and Delcath Systems. BIOL is engaged in lasers and dental imaging equipment whereas Tear Lab is an in-vitro diagnostic company engaged in commercialization of a tear testing platform.
Delcath is a development stage medical equipment company with a focus on oncology. Endeavor Power is another development stage biomedical company with a focus on point-of-care testing. Headquartered in Cambridge, Massachusetts, Endeavor Sciences, an Endeavor Power company, has an FDA approved innovative technology platform for rapid, qualitative and quantitative, high performance point-of-care diagnostic tests, which deliver extremely sensitive and accurate results while testing close to a patient within 15 minutes. Each diagnostic test requires only a single pinprick of whole blood. Recently the company announced the appointment of its new CEO, J. Michael Redmond, who has successfully grown early stage company in his career spanning 29 years.
Endeavor has been changing its business in the last few years. Finally, in November 2012, the company and its wholly owned subsidiary entered into a merger agreement with Parallax Diagnostics, Inc., a development stage company engaged in the business in the biomedical sector. Endeavor Holdings acquired 100% shares of Parallax and in exchange Endeavor issued 90,375,750 shares of its common stock to the Parallax shareholders at par value $.0001, representing approximately 60% of Endeavor's total issued and outstanding shares. After the merger, the company intends to pursue Parallax operations as its primary business.
Recently the company announced the development of its mobile point of care test using the Target System's proprietary Controlled Flow-Through platform, the PROMISE CD4®. The test is rapid and qualitative and has been designed to determine the immune status of patients with HIV infection, a major global health challenge. PROMISE CD4® will evaluate whether the patient needs antiretroviral treatment and also for monitoring its effects on the patient. The company hopes that with healthcare cost becoming a center stage political issue PROMISE CD4® will prove to be a cost effective alternative and deliver comparable services.
Conclusion: Where To Invest In This Sector
Venture capital investment in medicine device has been declining in the last four quarters. According to Tracy T. Lefteroff, Global Managing Partner of the Venture Capital Practice at PwC U.S., the likely contributing factor to this decline in the past four quarters is "… the long time horizon often required for a liquidity event, regulatory challenges, and large amount of capital" needed for funding biomedical companies.
In such a scenario, smaller development stage companies and startups that find it difficult to fund their ongoing and/or future projects can at best hope for a takeover by multinational giants.
At the same time, established and well funded companies such as Medtronics have handsome operating and profit margins -29.35% and 21.24% respectively. In the most recent quarter (ended January 2013), Medtronics surprised the market with better than expected quarterly results and posted $0.05 increase in its quarterly EPS. The stock has registered gains of more than 21% YTD. With a dividend yield of 2.26%, and potential for reasonable future appreciation, MDT is an ideal stock for inclusion in a retirement portfolio.
Boston Scientific Corporation, on the other side, has recently announced positive results for safety and efficacy trials of its WATCHMAN® left atrial appendage closure device in patients with nonvalvular atrial fibrillation. The device (developed by Atritech, a company that BSX acquired in March 2011) is already available for sale in 40 countries. In U.S. however it is still in investigational sale. Boston Scientific will be applying for approval by the U.S. FDA. Once approved, the company is likely to see a surge in revenues and start making profits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.