With the major pharmaceuticals companies facing up to a bloated cost structure and the legacy of two decades of underinvestment, the biotechnology industry is more or less guaranteed to outgrow the big drugs firms because of it structure.
Last year was awful for big pharma, with big US companies lagging the S&P500 by 28%. This has left the sector trading at the cheapest it has been relative to the market as a whole in 10 years. This is not a temporary affair. It is the result of big pharma focusing on marketing at the expense of developing new drugs. The number of new drugs approved in 2004 is about the same as in 1985. Yet the cost base has grown sharply over this time. The average big pharma company now spends about 32% of its budget on sales and marketing, roughly the same as companies selling soda or candy.
Luckily for biotech companies, the pressures on big pharma either have little effect or may even be beneficial for them. And the market's differing reactions to the two sectors last year reflects this. Big drugs stocks ended 2004 down 7%; biotech stocks rose by 12%.