What Is Biotechnology?

Biotechnology is a science-driven industry sector that uses living organisms and molecular biology to produce healthcare-related products. Biotechnology companies also develop therapeutics or processes (such as DNA fingerprinting). Biotechnology is best known for its role in medicine and pharmaceuticals, but the science is also applied in other areas such as genomics, food production, and the production of biofuels.

Key Takeaways

  • Biotechnology is the branch of applied science that uses living organisms and their derivatives to produce products and processes.
  • These products and processes feature in healthcare, medicine, biofuels, and environmental safety.
  • Biotech stocks are risky investments since biotech firms often spend massive amounts of time and money developing drugs that might never get to the market.
  • The top U.S.-based biotechnology firms in terms of market capitalization are Johnson & Johnson, Roche ($304.60 billion), Pfizer ($218.11), and Novartis ($201.21).
  • A valuation of a biotech firm should consider the size and development stage of the asset pipeline.

Understanding Biotechnology

Biotechnology involves understanding how living organisms function at the molecular level, so it combines a number of disciplines including biology, physics, chemistry, mathematics, science, and technology.

Modern biotechnology continues to make significant contributions to extending the human lifespan and improving quality of life, including providing products and therapies to combat diseases, generating higher crop yields, and using biofuels to reduce greenhouse gas emissions. Hungarian engineer Karl Ereky reportedly coined the term “biotechnology,” which is often referred to as “biotech,” in 1919.

Companies in the biotech space tend to face significant barriers to success. One critical reason for this is that research and development costs for biotechs tend to be incredibly high. While a company is focusing its time and money in these areas, there's usually little revenue. It's not uncommon, therefore, for biotech companies to work together with larger, more established firms to achieve their research and development goals.

Biotech vs. Pharmaceutical Companies

Biotechnology and pharmaceutical companies both produce medicines. However, the medicines made by biotechnology companies are derived from living organisms while those made by pharmaceutical companies generally have a chemical basis.

The term biopharma describes companies that use both biotechnology and chemicals in their research and development. Common products of biopharmas are anything made of plastic, laundry detergent, vaccines, beer, and wine. Common products of pharmaceutical companies are drugs and vitamins.

Biotechnology firms use the processes of living organisms to solve problems with new products. The use of DNA has helped to create pest-resistant crops, biofuels like ethanol, and gene cloning.

On the pharma front, the Cleveland Clinic recognized the top 10 medical advances for 2021. These included a new class of drugs for migraines called calcitonin gene-related peptide (CGRP) and PARP inhibitors for the treatment of prostate cancer. Also, a new treatment for postpartum hemorrhage, the vacuum-induced uterine tamponade, will greatly help women in developing countries who have limited access to other treatment options.

Top biotech companies include Exelixis, Novavax, and Regeneron Pharmaceuticals. Top pharmas include Johnson & Johnson, Pfizer, and Roche.

A History of Biotechnology

Biotechnology in its basic form has existed for thousands of years, dating back to an era when humans first learned to produce bread, beer, and wine using the natural process of fermentation. For centuries, the principles of biotechnology were restricted to agriculture, such as harvesting better crops and improving yields by using the best seeds and breeding livestock.

The field of biotechnology began to develop rapidly from the 19th century with the discovery of microorganisms, Gregor Mendel’s study of genetics and groundbreaking work on fermentation and microbial processes by giants in the field such as Pasteur and Lister. Early 20th-century biotechnology led to the major discovery of penicillin by Alexander Fleming, which went into large-scale production in the 1940s.

Biotechnology took off in the 1950s, spurred by a better understanding in the post-war period of cell function and molecular biology. Every decade since then produced major breakthroughs in biotechnology. Some of the highlights are the following:

  • The discovery of the 3D structure of DNA in the 1950s
  • Insulin synthesis and the development of vaccines for measles, mumps, and rubella in the 1960s
  • Massive strides in DNA research in the 1970s
  • The development of the first biotech-derived drugs and vaccines to treat diseases such as cancer and hepatitis B in the 1980s
  • The identification of numerous genes and the introduction of new treatments in decades for managing multiple sclerosis and cystic fibrosis in the 1990s
  • The completion of the human genome sequence in the 1990s, which made it possible for scientists worldwide to research new treatments for diseases with genetic origins like cancer, heart disease, and Alzheimer’s

Biotech Today

The biotechnology sector has grown by leaps and bounds since the 1990s. The industry has spawned giant companies in the medical space such as Gilead Sciences, Amgen, Biogen Idec, and Celgene. At the other extreme are thousands of small, dynamic biotech companies, many of which are engaged in various areas of the medical industry, such as drug development, genomics, or proteomics while others are involved in areas like bioremediation, biofuels, and food products.

There also have been big product introductions in biopharma drugs. Some of the most frequently used biotechnology medical products recently introduced include the following:

  • AbbVie's Humira, which is used to treat arthritis, psoriasis, and Crohn's disease.
  • Roche's Rituxan, which is used to slow the growth of tumors in several types of cancer.
  • Amgen/Pfizer's Enbrel, which is used to treat several autoimmune diseases.

The top U.S.-based biotechnology firms in terms of market capitalization as of April 2021 were Johnson & Johnson ($437.19 billion), Roche ($304.60 billion), Pfizer ($218.11), and Novartis ($201.21).

During the COVID-19 pandemic, biotech companies raced to develop vaccines to fight the coronavirus. Biotech companies like Moderna and BioNTech rapidly researched, developed, produced, and administered COVID vaccines.

Investing in Biotech Companies

Biotech and pharmaceuticals are very different propositions for investors. Biotechnology companies typically have high operating costs because their extensive research, development, and testing takes years to complete. New products can hit regulatory roadblocks; for example, some countries ban the use of genetically modified plants, and gaining approval from the U.S. Food and Drug Administration (FDA) can be a lengthy and expensive proposition. In short, investing in biotech is risky.

According to The Motley Fool, some of the best biotech stocks are Axsome Therapeutics, Exelixis, Novavax, Regeneron Pharmaceuticals, and Vertex Pharmaceuticals.

Investors don't have to buy individual company stock to invest in biotechnology, however. One of the easiest ways is to invest in a biotech exchange-traded fund (ETF). These funds have holdings in many biotech companies, offering investors a well-diversified portfolio in a single trade.

Ten biotech ETFs trade in the United States. As of June 2021, the best-performing biotech ETF, based on performance over the past year, was the ARK Genomic Revolution ETF followed by Principal Healthcare Innovators Index ETF, and Global X Genomics & Biotechnology ETF.

How to Value Biotech Companies

It's not easy to value biotech companies because small companies can show no earnings yet have a pipeline of groundbreaking drugs in the works. In 2017, the biotech giant Gilead bought Kite Pharma for $12 billion. Kite was showing significant losses and had a deficit over $12 billion. Why did Gilead buy Kite? Kite was working on a pipeline of CAR-T cell therapies, which treat cancer. According to Raphael Rottgen, CFA FRM, of Toptal.com, what this shows is that a company's pipeline often determines its value.

Many biotech firms do not show revenues because they invest so much in R&D, and new drugs or products take a long time to reach the market, if they ever do. According to Rottgen, a new drug typically takes eight years to reach the market post regulatory approval, and total development time for a new drug is ten to fifteen years. At any time, a drug can fail in clinical trials, so the risk profile of a biotech firm is quite different compared to companies in other industries.

Measures for Biotech Company Valuation

Cash flows prior to the approval of a drug are often significantly negative. Therefore, typical valuation measurements like earnings before interest, taxes, depreciation, and amortization (EBITDA) or the price-to-earnings ratio (P/E) may not reflect the true value of a company that has breakthrough products in the pipeline.

According to Rottgen, two other measures that can be used are EV/invested R&D, which is essentially a cost-based valuation, and comparative value. Comparative value uses public market comparables or comparable M&A transactions.

The added risk associated with biotech investments must be considered in any value analysis. This calls for a discounted cash flow (DCF) using an appropriate discount rate. Rottgen recommends using risk-adjusted NPV and including projected cash flows and the likelihood of certain outcomes for various product scenarios.

Fundamentally, any valuation should consider the size of the asset pipeline, the development stage of the pipeline (e.g., Phase 1, NDA filing), and the company’s development stage (e.g., pre-revenue).

Biotech FAQs

How Do You Start a Biotech Company?

Starting a biotech company takes significant funding. A founder must have a commercially viable product. The founder should consider the size of the market and the competition. For example, does the product differ from existing therapies? The startup will also need patent protection, and the founder should consider how long the protection will last.

The founder should determine the time, resources, and strategy required to develop the product. How will costly mistakes be avoided? All of these aspects should be analyzed to determine how much funding will be required, for how long, and who will provide the funding? A comprehensive business plan would need to be developed for investors, and should include plans for fundraising.

What Can You Do With a Biotech Degree?

Biotech professionals typically perform research on advanced therapies; for example, stem cells, gene therapy, or biopharmaceuticals. Most people in the biotech profession have a graduate-level degree. Professionals with an undergraduate degree in the biotechnology field typically have entry-level roles in a research lab.

Biotechnology is a wide-reaching field. While pharmaceuticals and drug development are common paths, biotechnologists also work for government agencies, clinical labs, manufacturing, software engineering, R&D, and business management. Careers in biotechnology include biomedical engineers, biochemists, medical scientists, microbiologists, process development scientists, biomanufacturing specialists, business development managers, and directors of product strategy.

How Do I Get a Job in Biotech?

There are a number of entry-level positions that someone with a bachelor's degree can find. For example, working in a research lab. However, to advance, you will need a graduate degree and relevant experience in a specified field.

Because the field of biotech is so large, you should think about which field of study you want to pursue, whether it be gene splicing or cloning. The direction that you want to go in will dictate which master's or Ph.D. you select.

Other things to consider are your math and statistics skills. Biotechnology relies heavily on these skills combined with the use of software such as Excel, Minitab, JMP, and Design Expert. Lastly, a high-paying job in the pharmaceutical industry will require that you have experience with advanced lab functions and bioreactors. For advanced work in the pharmaceutical industry, try to combine an educational background and direct work experience.

How Much Can You Make Working in Biotech?

Biotech professionals can work in startups, large established companies, medical labs, or research institutions within the government. According to the Bureau of Labor Statistics, wage and job growth in this sector consistently outpace the national average. Salaries will vary greatly because it is such a diverse industry, and your salary will depend on your education, experience, where you work, and the area that you choose. Here's a rundown of average salaries as of 2020, according to the Bureau of Labor Statistics:

  • Entry-level biotechnician: $46,340
  • Microbiologist: $84,400
  • Agriculture and food scientist: $68,830
  • Molecular biologist $94,270
  • Biomedical Engineer: $92,620 
  • Quality Control Systems Manager: $108,790
  • Natural Sciences Managers: $137,940
  • Marketing or Business Development Manager: $141,490

The Bottom Line

Both pharmaceutical and biotech companies face a costly process that, when successful, can produce extremely profitable products. However, the process is extremely unpredictable, which for a small biotech firm can prove all too detrimental and unrecoverable.

Pharmaceutical companies, due to their larger size and diversified revenue base, are typically able to withstand setbacks and failures. Competition is more relevant and costly for biotech companies, creating a need for strong pipelines and non-organic revenues (such as through M&A or alliances). Consideration of these factors should be the basis for prudent investment in the biotechnology field.