Why the $324 Billion Bioeconomy Deserves a Place in Your Portfolio
Image source: Getty Images.
It's a question that has been and always will be asked: What's the best way to keep the U.S. economy humming along? Investing in clean energy, lowering taxes, boosting the minimum wage, lowering repatriation taxes so corporations can move cash piles stored overseas back to the United States -- these ideas and many others have been presented and debated as ways to encourage economic growth. While each has merit in its own right, a new analysis of economic data suggests we're overlooking one crucial aspect of the American growth machine: the bioeconomy.
That's one way to interpret a report published by Dr. Rob Carlson, author of Biology Is Technology, namesake of the Carlson Curve, and managing director of the (aptly named) investment firm Bioeconomy Capital. He's been advocating for the government to officially track economic contributions from biotech -- "the bioeconomy" -- the importance of which is masked by attributing its value to broader categories. For instance, the government's economists make no distinctionbetween sales of biopharmaceuticals and synthetically manufactured pharmaceuticals, while biochemicals are counted alongside petrochemicals.
It's not just a plea for better organization. Words matter. Consider that, when counted as a unique sector, the bioeconomy accounted for at least $324 billion of American GDP in 2012, or more than 2% of the entire economy, and maintained an average annual growth rate exceeding 10% in the prior decade. The relatively tiny sector has grown so quickly that it accounted for more than 5% of the country's total GDP growth every year since 2007. It will demand the nation's attention regardless of whether we see it coming or not.
It seems highly possible that Carlson is ahead of the curve.His analysis lays an important framework for how we might begin to track these contributions at a national level, and presents questions, some unanswered, about how we might define and calculate value in a bioeconomy. While the macro trends hint at budding long-term opportunities for individual investors, narrowing the focus to the three broad components of the bioeconomy provides more direction for investors -- with AbbVie (NYSE: ABBV), Archer Daniels Midland (NYSE: ADM), and Monsanto (NYSE: MON) serving as timely examples.
What is included in the bioeconomy?
Carlson defines the bioeconomy as all revenue generated from three biotech subsectors:
- Biological drugs (what people typically think of when they hear or say the word "biotech")
- Industrial products
- Biotech crops and seeds
While that definition encompasses a seemingly broad swath of products, it's based on value created from genetically modified (GM) organisms. In fact, Carlson calls it GM domestic products, or GMDP.
So how do these subsectors stack up? Here's the breakdown of the $324 billion bioeconomy in 2012, according to Carlson's estimates.
Image source: Biodesic.
It's important to note that Carlson has made conservative estimates wherever possible. For instance, the analysis says biologics delivered $91 billion in revenue to the American economy in 2012, although broader estimates that include drugs produced from non-GM organisms are nearly twice as high. There's also some calculus involved for determining biofuels revenue (which excludes revenue from the GM corn fed into the process) and the value delivered by GM crops (which provide insect protection for non-GM crops nearby).
You can read the full report for the full details, but let's now consider how you can take advantage of opportunities in the bioeconomy.
How can your portfolio capitalize?
Biologics, industrial products, and biotech crops powered the industry to this point and should continue to provide the largest sources of growth for the foreseeable future. The future of biologics -- and biotech's overall contribution to healthcare -- looks particularly bright. The past two decades have been driven by the success of new autoimmune treatments such as AbbVie's Humira, which notched sales (mostly in the United States) of $9.26 billion in 2012. That figure soared past $14 billion in 2015, thanks in no small part to the drug's gaining approval to treat 10 diseases in the United States. The growth could soon be over for AbbVie as Humira begins losing patent protections and generic biologics arrive on the market, but it opened the door for new biology-based medications now on the market or in the industry's pipeline.
Industrial products may see the fastest growth and largest overall ceiling of the three subsectors. One company to watch in industrial biotechnology, or growing products from tiny microbial factories in large fermenters, is agricultural raw materials processor Archer Daniels Midland. A vast supply network and access to cheap feedstocks have allowed it to become one of the nation's largest ethanol producers, but it has also been one of the largest investors in industrial biotech platforms. To date, Archer Daniels Midland has invested in microalgae producing oil-drilling lubricants for the fracking industry, microalgae producing omega3 fat for fish and animal feed, and an organism-engineering platform aimed at producing food ingredients for human consumption.
The final category, GM crops and seeds, is also the largest of the three by Carlson's estimates. The first company that likely comes to mind is Monsanto, which has played an instrumental role in bringing biotech to agricultural markets. The company is a leading producer of corn, soybeans, and cotton seeds. GM varieties from all seed suppliers represented 88%, 93%, and 94% market penetration, respectively, on American farms in 2012. The high levels of saturation could explain the subsector's relatively slower growth rate, but there is plenty of room left for value-creating innovation. For instance, Monsanto is also a technology leader for next-generation agricultural platforms, including digital agriculture and yield-boosting seeds coated in soil microbes.
Zooming back out, it's fascinating to consider the broader markets that AbbVie, Archer Daniels Midland, and Monsanto live within. Moreover, individual investors don't need to get bogged down in the details to see the incredible growth of the bioeconomy:
Image source: Biodesic.
You can see from that graph that the data aren't always readily available, a point that becomes abundantly clear if you read the full report. Given the growing importance of biotech to the American economy, it's worth wondering aloud why we don't make an attempt to track these data at a national level.
What does it mean for investors?
You may not think that 2% of the overall economy sounds like much, but a contribution of $324 billion in 2012 was more than what was brought in by other sectors, such as mining and utilities, that figure more prominently into policy discussions. And that's just the beginning. In terms of economic contribution, the bioeconomy could eclipse important sectors including construction and the federal government by 2020, and could be one of a handful of sectors to contribute more than $1 trillion to GDP by 2025, if average annual growth rates are maintained. The law of large numbers says that will be difficult to do. Then again, if one considers that we're not even scratching the surface of what's possible with biology, it may not be a far-fetched scenario. Will your portfolio be structured to take advantage of the trend?
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Maxx Chatsko has no position in any stocks mentioned. Follow him on Twitterto keep up with developments in engineered biology and materials science.
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