One Way to Make a Fortune Investing in Healthcare
Stock-Markets / Healthcare Sector Apr 28, 2009 - 06:54 PM GMTBy: Q1_Publishing
Andrew Grove once said, “I'm a great believer in particularly being alert to changes that change something, anything, by an order of magnitude.”
Grove has been widely credited with Intel’s stunning growth over the years. His unwavering focus on “the next big thing” has allowed Intel to stay one step ahead of competitors for decades. In a period of rapid technological advancement between 1978 and 2004, that was no easy feat.
Needless to say, Grove knows a thing or two about change. And I agree with him completely about keeping a close eye on change too. After all, the rewards for catching onto a major sweeping change early on, and investing in it, are tremendous.
The change we’ll look at today is going to be a very big change. When I say big – mean big. We’ll be looking at a change which has the potential to turn the $500 billion pharmaceutical industry completely upside down.
So when we consider one of our mantras here at the Prosperity Dispatch, “the greater the change, the greater the opportunity,” this is going to be an amazing opportunity.
I feel completely comfortable in saying this is the type of change which will mint many new millionaires. Those who take the time to evaluate and anticipate this change will be handsomely rewarded.
The thing is though, I’m afraid a lot of investors are going to miss this change completely. The headlines are only focusing on the first step of this change. And if you focus all your effort here, you’ll miss out on the big prize.
Two Giant Leaps Away
Change doesn’t happen overnight. It’s especially slow in the world of Big Pharma. But we’re seeing the first giant step forward now.
It’s no secret there are a lot of factors which impede innovation in the drug industry. The time and money it takes to develop a new drug. The FDA approval process to prove a drug is safe and effective. The process of analyzing clinical trial results combined with potential market analysis to decide which drugs to take into the final (and most expensive) trial stages takes a lot of time and money too.
There’s a lot that goes into developing a new drug. Lately, Big Pharma has slowed down developing new drugs. Big Pharma’s drug pipelines are getting smaller. In other words, they have very few new drugs in development. To make matters worse, some of their key cash cow drugs are going “off patent” in the next few years.
Big Pharma’s in a bind. Big Pharma’s leading profit sources are going away soon. Meanwhile, they have very few new drugs to replace those. They’re revenues are about to start declining. They’ll be forced to cut back on research and development. So they’ll have fewer new drugs to increase cash flows, which means less to invest in R&D, and on and on. It’s a downward spiral that is tough to change.
And right now we’re seeing the results of this. We covered the situation back in 2008 in Expiring Patents Ignite Biotech Boom. We predicted a merger boom in the pharmaceutical industry. Big Pharma companies would have to merge just to stay alive. Now, we’re watching it all play out.
We’re seeing everything thing from multi-billion dollar mega –mergers to development deals with small biotech outfits. Merck is merging with Schering-Plough. Pfizer is taking over Wyeth. Roche has signed a merger deal with Genentech. Those are just three of the largest deals. There are dozens of other deals being cut with small biotech companies. And there will be many, many more in the months ahead. It’s the only way they can survive.
But this is only the first step in the process of this change. There will be a few profitable opportunities in this stage. You’ll find these mostly in small biotech companies. But the truly big profits will be reaped in the next development because very few people are watching this one yet.
Stepping Over Nickels to Pick Up Dollar Bills
The big mergers make great headlines. And if you’re in the right stock at the right time, you can get a 20% or 30% premium for your shares.
Also, it feels pretty good to own shares in a small biotech company which jumps up 50% or more after it announces a deal with a Big Pharma firm to help fund the development of its drug.
Don’t get me wrong. In a market like this, 20% to 50% gains are nothing to pass up. But those gains are nothing compared to what can be made in the next leg of the sweeping change hitting Big Pharma – personalized medicine.
Personalized medicine is one of the most interesting emerging technologies affecting the healthcare sector. The potential is practically unlimited.
Personalized Medicine 101
A few decades ago personalized medicine was nothing more than a pipe dream. The idea of having specialized drugs for individuals (more likely small groups of the population) seemed impossible.
How would we be able to categorize everyone? How would we be able to tell whether a particular drug or solution would work just for them? How would we be able to predict which side effects folks in each group would suffer from?
There were just too many questions and not nearly enough answers.
That all changed in 1990. The answers to all those questions were on the way once the U.S. Human Genome Project (HGP) kicked off. The HGP set out to map the entire genome. It was completed in 2003.
The HGP has unlocked all kinds of doors. One of those doors is personalized medicine.
Personalized medicine is basically the ability of drug and therapy developers to create tailored treatments for you. They base your prescription on your specific genetic code. In essence, it really is that simple (for a bit more detailed explanation – follow this link)
Although it may sound like the system would become even more complicated, there are actually many, many benefits to this. According to the Personalized Medicine Coalition, there are three key benefits to personalized medicine:
- Better diagnoses and earlier interventions
- More efficient drug development
- More effective therapies
Those benefits alone would go a long way to helping Big Pharma work through their current predicament.
The End of an Era
Although personalized medicine would help Big Pharma in many ways, it will also force these bloated bureaucratic companies to change. That is something large organizations don’t do well at all.
Frankly, I believe personalized medicine will bring an end to the “Blockbuster Drug” era. We will no longer see the days of drugs which sell more than $1 billion a year in annual sales.
Now, there will be some blockbusters. They will be for diseases the world doesn’t know relatively much about (i.e. Alzheimer’s disease). But the era when Big Pharma companies need to successfully create the drugs for the masses is coming to an end.
The era of “mass marketed” drugs is coming to a close. It’s not going to happen overnight, but it’s going to happen. That’s why when the mainstream media blasts Big Pharma companies for being terribly managed and failing to keep their pipelines full of new drugs, there’s one question that’s always in the back of my mind…
Maybe – just maybe – the Big Pharma companies are seeing the wave of personalized medicine coming their way and they’re getting preparing for it.
Remember, ExxonMobil barely upped its capital investment budget during the oil bubble. So it is possible for the most experienced people in an industry to see something most other people don’t.
That may or may not be correct. Regardless of it all though, personalized medicine is coming and for those of us looking into this now and making the right moves, it’s tough to imagine a situation where we’re not well rewarded in the end.
A Bumpy Road Ahead
The road to riches is not without potholes. The growth in personalized medicine will be no different. There will be a lot of bumps along the way. The way everything is shaping up to this point, the payoff should be worth the bumps though. But that doesn’t mean we shouldn’t start looking at them now.
By identifying the bumps now, we’ll be able to anticipate them, judge how the market will react, and always stay one step ahead of the market.
One of the biggest hurdles will be ethics. Now, overall it will be better for everyone. However, there will be a few ethical dilemmas. For instance, if there is a certain personalized therapy responding to white males over 50 – the largest and most affluent part of the population – does that mean it should be developed more aggressively? Or should it be developed at the same rate as treatments for everyone?
I’m not going to weigh in here, just trying to pose the question which will come up.
Another big hurdle will be the regulators and lawmakers. We’ve already seen what they’re willing to do to please constituents in the short-term, so how will they handle continued public backlash against Big Pharma?
While researching the healthcare sector over the past few months, I came across the Al Gore/Michael Moore-esque documentary Big Bucks, Big Pharma. (Remember: if it’s a documentary, the things said in it must be true – the more boring, the truer it is)
In it, Marcia Angell, former editor of the New England Journal of Medicine, says, “What the big drug companies are doing now are concentrating on lifestyle drugs that can be marketed to vast numbers of people and the market can be easily expanded.”
Angell identified drug companies were making drugs for baby boomers (lifestyle drugs which reduced effects of allergies, pain, etc) because they are their largest target market. Somehow she made this seem unethical. But I could see how it would sway a lot of people who aren’t in the “target market.”
So there’s another potential issue: politics and regulation.
Despite all that though, this is just too big to prevent some tough decisions to get in the way. The benefits to the medical community will be great. The benefits to patients will be great. The benefits to investors will be great. It’s a win/win/win type of situation we always look out for at the Prosperity Dispatch.
In the end, global healthcare system will be facing a lot of problems in the years ahead. Personalized medicine is a technological innovation which will help alleviate or solve some of those problems. To turn back to the words of Andrew Grove, “Not all problems have a technological answer, but when they do, that is the more lasting solution.”
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.
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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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