ISENBERGUNDERGRADUATECONSULTINGGROUP

PrinciplesbyIUCG:InvestigatingtheBiotechnologyIndustry

WhatisBiotechnology?Biotechnology refers to theutilizationofbiological andbiomolecularprocesses toinnovateanddevelopproductsandtechnologies.Thisincludesthemanufacturingofdrugs,thedevelopmentofbiofuels,andtheengineeringofagriculture.1GeneralProcess

IndustryBreakdown:Thebiotechnologyindustryisdividedintotwomajorsectors:

Medical AgriculturalMedical biotechnology is the use ofliving cells and its components toresearch and manufacture drugs andproducts that help treat existingdiseases.Itinvolvescreatingadrugforadisease thatdoesnothavea treatmentyet,ormakingapreviouslyestablisheddrugtreatmentmoreefficient.

The agricultural sector involves thegenetic modification of crops toselectively choose characteristics thatappealmoretopeople.Italsorelatestothe non-food uses of crops and otherproducts to develop new sources ofsustainablerenewableenergy.

Research Sample Test MassProduce

Biotechnology

Medical Agricultural

INDUSTRY OVERVIEW

StatisticalInformationRevenuesofEstablishedBiotechCentersWorldwideIn2016 139.4bnUSD

U.S.PublicBiotechCompaniesRevenuesIn2015 112.2bnUSDNumberofpublicbiotechcompaniesintheU.S.in2016 449

DrugClassification:

Drugs

ChemicalCompounds

Generic

BrandName

BrandedGenerics

Biologics

PatentedBiologics

Biosimilars

Biotechnologicalcompaniestendtoonlyproducepatentedbiologicsandbrandnamedrugs

THE MEDICAL SECTOR

PatentedBiologics:

Newlycreatedbiologicdrugsprotectedbypatents

BrandNameDrugs:

Chemicalcompoundsprotectedbypatentsthatcanonlybeproducedandmarketedbypatentholders

DrugDevelopmentProcess

1. Theresearchphaseincludestwoperiodsofresearch:pre-discoveryanddrug

discovery.Pre-discoveryprovidesanunderstandingoftheillnessanddrug.Drugdiscoverysubsequentlyselectsatargetmoleculeforthedrug.

2. Drugdevelopmentoccursthroughaprocessknownasdrugscreening.Thisisanautomaticprocessthatusessystemstotestcompoundeffectiveness2.

3. Duringpre-clinicaltrials,drugsaretestedinlabsandonanimalstodeterminewhethertheyaresafetothentestonhumans.

4. Clinicaltrialsaresplitintothreeseparatephases:a. PhaseI:Thedrugistestedonhumansandisusuallyadministeredto100

healthyvolunteers.b. PhaseII:Researchersattempttoevaluatetheeffectivenessofthedrugin

agroupofspecifiedvolunteers(between100and500).c. PhaseIII:Thedrugistestedonvolunteersfromaroundtheglobe.This

isthelargestandmostexpensiveoftheclinicalphases.Volunteersrangefrom1,000to5,000people.

5. Following the endof clinical trials,Biotech companiesneed to submit aNewDrugApplication(NDA)oraBiologicsLicenseApplication(BLA) togainFDAapproval. These applications contain data and analysis from the clinicaldevelopmentprogramandpreclinical testingresultsalongwithproposals formanufacturingtheproduct.

Research

DrugDevelopment

Pre-clinicalTrials

ClinicalTrials

FDAApproval

Post-ApprovalResearch&Monitoring

6. Acompanymustmaintainpost-approvalresearchandmonitoringevenafterlarge scale production. As long as the drug is being sold, a company mustcontinuemonitoringforeffectivenessandsafety.3

MajorPlayers(MarketShare&Predictionfor2022):

CompanyName 2016 2022Roche 15.8% 11.9% Sanofi 7.7% 7.4% Amgen 9.6% 6.7%

Johnson & Johnson 6.5% 5.9% AbbVie 8.3% 5.8%

Novo Nordisk 7.8% 5.7% Merck & Co 4.3% 5.4%

Eli Lilly 4.1% 4.5% Bristol-Myers Squibb 3.6% 4.4%

Pfizer 5.6% 4.3%

Sinceonlyafewplayersconcentratethemarket,marketpowerisrelativelyhighforindividualcompanieswhichallowsthemtochargehighpricesforeachproduct.Thisgivesrisetoethicalissuesandposesathreatfrompressuregroupsontheindustry.Market concentration of firms is expected to increase for those that are alreadydominating, increasing their price-setting power and elevating anti-competitivebehavior.

11.90%

7.40%

6.70%

5.90%

5.80%

5.70%

5.40%

4.50%

4.40%

4.30%

15.80%

7.70%

9.60%

6.50%

8.30%

7.80%

4.30%

4.10%

3.60%

5.60%

0.00% 5.00% 10.00% 15.00% 20.00%

ROCHE

SANOFI

AMGEN

JOHNSON&JOHNSON

ABBVIE

NOVONORDISK

MERCK&CO

ELILILLY

BRISTOL-MYERSSQUIBB

PFIZER

MarketShare

MarketShareforBiggestDrugBiotechCompanies4

2022Prediction 2016

Agricultural biotechnology refers to the manipulation of living organisms toaccomplish a specific agricultural task. Subjects range from plants to animals tomicro-organisms. Agricultural biotechnology is broken down into two subsectors:foodandnon-food.Asshownbelow,thisisagrowing,globalmarketthatisprojectedtocontinuetoexpandintothefuture.StatisticalInformation5

Year GlobalMarket(inbillionsofU.S.dollars)2016 29.22017 32.1*2022 53.7*

SectorBreakdown

GeneticEngineering:Researchersanddevelopersidentifydesirabletraitsincertaincropsandtransferthesetraitstoothercropstoimprovetheirharvest.

Agrochemicals:Anysubstanceusedtohelpcontroltheorganismsinanagriculturalenvironment is considered an agrochemical. They are oftenused to increase cropyieldbytargetingecologicalinefficienciessuchaspestsandweeds.

Non-FoodAgriculturalBiotechnology: This subsector refers to the use of livingcells to create industrial products and improve processes. In addition to biofuels,plant-basedplasticsand less toxicpulp(withinthepaper industry)arerealworldexamples.6

Biofuels:Theseare theproductsof researchandmanufacturingof liquid fuelsorenergyfrombiomass.Theirpurposeistocreatealternativestonon-renewablefuels.

AgriculturalBiotech

Food

GeneticEngineering

Agrochemicals

Non-Food Biofuels

THE AGRICULTURAL SECTOR

MarketShareofFood-RelatedSector7

Six companiesownamajorityof theglobalmarket shareof agrochemicals.ThesecompaniesconsistofBayer,BASF,Syngenta,Dow,Monsanto,andDuPont.Basedonsalesalone, these corporations control75%of theglobal agrochemicalmarket, aswellas63%oftheseedsmarket(whichincludescropseedsandgeneticallymodifiedvariations).

RecentmergerproposaldevelopmentsbetweenmembersoftheBigSixhavealteredthisdynamic.BothDowandDuPontaswellasSyngentaandChemChina(apubliccompany)mergedthispastyearfor$130billionand$43billionrespectively.AthirdmergebetweenBayerandMonsatofor$66millionisestimatedtobecompletebyJanuary2018andwouldofficiallydownsizetheBigSixtotheBigFour8

Despite approval from anti-trust organizations, the new presence of increasedmarketpowerwillaffectmarketdominance.Thereareanumberofpotentialnegativeconsequencestoagrochemicalfirmmergersthatneedtobeaddressed.Reducingthenumberof big corporations in the agricultural sector of biotechnology could limitcompetitionandsubsequentlycausepriceincreases.Competitiondecreaseshavethepotential tonegatively impact future innovations should surviving firmsdecide totakea stepback fromR&D. Inan industry thatalreadymaintainshighbarriers toentryallowinglargecompanymergershasthepotentialtoincreasepredatorypricinganddeternewplayersfromenteringthevitalnicheoffood-relatedbiotechnology.

8% 6%

20%

10% 18%

13%

25%

GlobalAgrochemicalMarketShare(2013Sales)

Monsato

DuPont

Syngenta

Dow

Bayer

BASF

Others

26%

21%

8% 4% 3%

38%

GlobalSeedMarketShare

Monsato

DuPont

Syngenta

Dow

Bayer

Others

BigSixData9

*BASFdoesnotspecificallytracktheirseedsales

BiofuelsAlthough a subsector of agricultural biotechnology, biofuels are closely related toproductslikepesticidesandvaccines.Thereisageneralassumptionthatbiofuelsarebetterfortheenvironmentthanfossilfuels,butthisismetwithcriticism.Dependingonthefeedstock,thecreationprocesscantakeupto84timesmorewaterthanfossilfuels. Alongwith this, land that is used in the process is diverted away from theworld’sfoodsupply.9Inaddition,theenergyputintocreatingbiofuelsthroughlandmaintenanceemitscarbondioxide.Speculationleadsonetobelievethatthereisroomfor innovation in the biofuel industry to make it more sustainable and earthconscious.

Duetothewiderangeofsourcesbeingusedtocreatebiofuels,thismarketisnotascleanly divided as the other sectors of biotechnology. Though, from a globalstandpoint,productionlevelsshowtheUnitedStatesasaclearfrontrunnerinbiofuelproduction.10

Company 2015Sales($millions) MergerPartnerSeeds Agrochemicals

BASF 0* 6,211 NoneBayer 819 9,548 MonsantoDow 1,409 4,977 DuPontDuPont 6,785 3,013 DowMonsanto 10,243 4,758 BayerSyngenta 2,838 10,005 ChemChina

0 5000 10000 15000 20000 25000 30000 35000 40000

UnitedStatesBrazil

GermanyArgentinaIndonesiaFranceChina

NetherlandsThailandCanada

Productioninthousandsmetrictonsofoilequivalent

CountriesLeadinginBiofuelProductionin2016

Althoughbiotechnologyisarapidlygrowingindustry,startupsattemptingtoenterthemarketdonotnecessarilyhavefaceguaranteedsuccess.Successratesarelowfornewentrants.Highfixedcostscombinedwithlongperiodsoftimebeforepayoffdetersmaller businesses from entering the Biotechnology market. Research anddevelopment costs comprise a high percent of spending for most companies,regardlessofitsrelationtoanewdrugorgeneticallyengineeredseedorbiofuel.Biotechnologyisabroadfield,but irrespectiveofwhataspect isbeingconsidered,therewillbealargermarketforcompaniestofightforinthenearfuture.Barrierstoentryarehigh,butbarrierstoexitareminimal.Marketpowerofindividualfirmsisalsoexpectedto increase, intensifyinganti-competitiveness.Thismakesitaratherrisky industry tobe involved in. This isdueto thevolatilenatureof theproductscreatedinthisindustryandtheirlifecycle.ToillustratethegeneralprocessinvolvedinproductioninBiotechnology,ageneralproductlifecyclewascreated.

It seems that there ismuch room forgrowthand innovation in thebiotechnologyindustry, especially with regards to biofuels. Despite benefits in terms of GHGreductionandfossil fuelreplacement,concernshavebeenraisedabouttheoverallsustainability of biofuels. Competition with food production, water use, and thedestructionof landandbiodiversitytoclear landareallmajorconcernsregardingbiofuels.Thismaybeapotentialsectionofthemarketfornew,innovatingplayerstoemergefromanddisrupt.

OUTLOOK

1. Diehl,Paul.“BiotechnologyandBiotechIndustryOverview.”TheBalance,TheBalance,26June2017.

2. AMGEN. “Discovering and Developing Medicines.” How Are BiotechnologyMedicinesDiscoveredandDeveloped?|AnIntroductiontoBiotechnology.

3. PhRMA. “Biopharmaceutical Research & Development.” PharmaceuticalResearchandManufacturers,2016.

4. Statista.“GlobalTopBiotechCompaniesbyRxMarketShare2016and2022|Statistic.”Statista,Statista,2016.

5. Bergin,John.“AgriculturalBiotechnology:EmergingTechnologiesandGlobalMarkets”.BCCResearch.Mar.2017.

6. NationalResearchCouncil.“EnvironmentalEffectsofTransgenicPlants.”EnvironmentalEffectsofTransgenicPlants:TheScopeandAdequacyofRegulation,2002,pp.220–259.

7. “Mega-MergersintheGlobalAgriculturalInputsSector:ThreatstoFoodSecurity&ClimateResilience”.ETCGroup.Sept.2015.

8. MacDonald, James M. “Mergers and Competition in Seed and AgriculturalChemical Markets.” United States Department of Agriculture EconomicResearchService,USDA,3Apr.2017.

9. Biofuel.org.uk. Biofuels - Biofuel Information - Guide to Biofuels.Biofuel.org.uk,2010.

10. Statista.“Leadingcountriesbasedonbiofuelproductionin2016”.Statista,2016.

REFERENCES