Hey Friends,
If you compared index charts like the S&P (SPX) or Nasdaq (COMPQ) to biotech index symbols like IBB or XBI at a site like Stockcharts for the past 1 year or 2 year periods, you’d see that biotech has floundered while the overall market has soared. I have some thoughts as to why this has occurred.
Even the talk of socialized medicine (regardless of one’s politics) is a deterrent to private investment and the biotech sector performance reveals declining investment into the sector. I’ll provide some interesting readings below:
go here
and here
and here
to read about recent IPO (initial public offering) deals.
While not all IPO news is bad, it reflects problems.
Also, you can find many examples of floundering small biotechs that have had drugs approved by the FDA in the recent past. Drug approvals often invite big pharmaceuticals to do acquisitions at significant price premiums accruing to the acquired small companies sporting new drugs ready for commercialization. And if not acquired, at a minimum, FDA approval usually makes it easier for the small company to raise fresh equity capital. Yet small companies succeeding over recent times have gone bankrupt shortly after approvals or are barely hanging on at this time and in desperate need of raising money that just isn’t there. A couple of bankruptcy examples are Synergy Pharmaceuticals and Achaogen.
Go here to read about Synergy and here to read about Achaogen.
As a backdrop, go here to read about the proposed H.R. 3 bill and here for a layperson’s explanation. I think this kind of socialist medicine talk creates enough uncertainty to perhaps explain the hesitation of private equity monies to flow toward biotech. Any reprieve of such concern could see the sector see favor again.
The post today isn’t to promote the biotech sector (it’s a super risky one) but to share what I find to be interesting in light of the fact that our healthcare system relies upon research and development and requires the funding to persist. Investors have to see a reward out there for taking the risk to invest capital today. Price controls may sound great in one sense but the offset is what happens on the development side.
See you next time.
For the past two decades I have been investing in pharma drug companies that have proven records of being able to develop medicines that offer help to patients, can complete all phases of the FDA approval process, and have reasonable fundamentals. For example, earlier this Fall I purchased shares of BMY to go along with other positions in PFE (bought many years ago) and GSK (bought 2 years ago). These outfits have research wings that are focused on biotech issues, but they also offer less financial risk due to their pipeline of already existing drugs. Economically pharma companies have some legal advantages not enjoyed by many firms in other industries; (1) a drug company that produces an approved medication will have many years of patent protection (2) the pricing of the drug is not subject to much regulatory oversight even though for those who are sick, the company producing a drug beneficial to them has a virtual monopoly (until the patent runs out, but even in that instance the drug company may be able to introduce a slightly different formula and still retains patent status against a generic alternative) (3) the process of research development and testing can be costly and lengthy, however, these traditional companies have found ways to improve their development process (i.e., they have subsidiaries in other EU countries where they can run quicker drug trials that allow initial testing not permitted under US FDA rules). It is interesting that the UK, Canada, France, Switzerland, Germany all have an average per capital cost of healthcare substantially lower than in the US (we lead the world at around $10K per person). In those countries because they negotiate drug prices for an entire nation, they can reduce the cost of medicine for their citizens. So, who pays for these cost reductions? It’s US citizens, because under our free market system, the drug companies can charge differential prices to whom ever they wish. You may pay more for drugs under Plan A than your neighbor under Plan B. However, just as with airline ticket pricing, unless you take a survey and those you ask are willing to tell what they paid, you are not likely to know whether you pay more or less for what you are getting. It is a nice system for investors — you get good dividends (3.5% or higher depending) and decent capital appreciation long term for a total return far better than a lot of other investments. However, is it really a good deal for American patients, particularly if we are subsiding the research and development of drugs the rest of the world uses at far less cost? The pharma industry is second only to oil and gas in the amount of funds given to US political candidates. Under the circumstances, it does not appear likely we will be moving towards a sane system of drug pricing anytime soon. In our country we regulate utility rates because from an economic standpoint the argument is made that electricity is an inelastic good, and left unregulated a utility could charge monopolistic prices leaving some people out in the cold. I have yet to hear anyone make the argument that for a person with cancer, a drug that might help them overcome or prolong life is merely a need not a want. If a drug is a want, something you have to acquire in order to live, it would be classified as an inelastic good where monopolistic pricing would be a concern. Thanks for sharing your ideas about Biotech which allows everyone to think about and explore a different investment sector.
Thanks much for that well-stated reply. I hope that many who are reading the post will note your comment. Thanks again for taking the time to share your knowledge on this subject!