About the Biotech Sector

The biotechnology sector has matured signiﬁcantly since the ﬁrst companies were started in the United States ("US") in the 1970s. The NASDAQ Biotechnology Index comprises 125 companies with a combined market value of $387bn as at 31 August 2011. The index contains a number of companies with market capitalisations of greater than $10bn. Drugs developed by biotechnology companies now generate tens of billions of US dollars in sales annually. Approximately two thirds of all new drugs currently being approved by the US Food and Drug Administration ("FDA") have been developed by biotechnology companies, rather than their more traditional large pharmaceutical company counterparts.

The ultimate driver for the biotechnology sector, as with the pharmaceutical sector, is the requirement for novel more effective drugs to treat the rapidly growing number of people afﬂicted by modern highly complex diseases associated with living longer and unhealthier lifestyles with diseases such as diabetes, cancer, heart and lung diseases. At the same time rapid advances in the understanding of human molecular genetics are
also enabling the development of new drug treatments for highly debilitating early-onset diseases caused primarily by relatively rare inherited genetic make-ups.

According to the Centers for Medicare and Medicaid Services, spending on healthcare in the US – for the time being the world's largest healthcare market – topped $2.6 trillion (17.6% of GDP) in 2010 and on current projections is set to grow to $4.6 trillion (19.8% of GDP) in the ten years to 2020. Under President Obama's initiatives to reform the provision of healthcare in the US, the country's insurance based system is set to be expanded over the coming years to cover a greater proportion of the population, further enlarging the market.

The larger pharmaceutical and medical device companies are striving to deliver more effective healthcare. However, in-house research and development ("R&D") investment is struggling to deliver enough innovative products. At the same time, highly proﬁtable branded portfolios are being damaged by generic competition. The larger companies have become increasingly dependent on the innovation of their smaller biotechnology and emerging medical device counterparts, accessing new products through high value licensing deals or merger and acquisition ("M&A") activity.

Investment in smaller biotechnology and emerging medical device companies carries higher risk than investments in their larger peers since earlier-stage companies typically have more limited product portfolios and cash resources. Product successes or failures can therefore have a signiﬁcant effect on the prospects for these companies. While the odds are stacked against success in new drug development, the rewards for successful companies are very large, particularly for highly effective drugs and devices that treat unmet medical needs.