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Creates Biotech Opportunities
By Ray Blanco
February 28, 2011
Dear Penny Sleuther,
To borrow a phrase from those who think the world is running out of oil, Big Pharma is facing the consequences of “peak discovery.”
The large players are all succumbing to a similar disease: patent expirations. At the same time, shrinking in-house pipelines mean that the Big Pharmas are without sufficient new products to replace the ones they will lose to generics. It is notable that only a fraction of FDA decisions for 2011 will go to the behemoths.
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Too big to be nimble, too bureaucratic to coordinate effectively, large pharmaceutical companies are slashing their lifeline to future profits: research and development.
For example, in order to cut costs in the face of falling revenues, Roche has taken its internal RNAi therapeutics program to the chopping block. RNAi is a huge emerging drug platform that acts by blocking the expression of undesired genes... and holds the key to stopping many untreatable diseases in their tracks. Pfizer and Merck are following in Roche’s footsteps with their own cuts, and in this week’s earnings report, Sanofi-Aventis reveals it is taking a similar course in reducing R&D spending.
My colleague, Patrick Cox, is pretty happy about this. His Breakthrough Technology Alert portfolio has the world’s best RNAi pure plays. His great concern was that Big Pharma would get its own RNAi intellectual property. Now that they have given up, they will have to buy it from the companies in that portfolio.
Disappointing reports from the Big Pharmas have hit the sector’s share prices hard in 2011, despite strong market gains in the headline indexes. While the S&P 500 is hitting 5% gains for the year, the health care sector is down nearly 4%. Clearly, investors are digesting the bad news and looking elsewhere to invest their money.
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Needless to say, slashing R&D is no way to grow a business based on drug discovery. Biotech discoveries are not slowing down; they are actually accelerating. Pharmaceutical innovation has not died — it is just coming from a different place.
The smaller, more innovative biotechnology companies like Technology Profits Confidential recommendations will have the lion’s share of new products in the years ahead.
These — and others — are sitting on the intellectual property estates that will mint the millionaires of the coming years. A rational market would recognize this. We can, however, exploit nearsightedness for long-term gains. The fact that the sector as a whole is beaten down by the big players’ lackluster performance actually creates golden opportunities for long-term investors to pick up gems on the cheap.
The large pharmaceutical players see this too. Increasingly, they are turning toward either licensing deals with the emerging biotechs or outright acquisitions.
Pfizer, for example, built its late 20th-century success on the medicinal chemistry breakthroughs of that century. Pfizer shareholders saw price gains on the order of 5,000% between 1980-1999, and we haven’t even mentioned the dividends.
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If you load the Pfizer website on your browser, the title bar says it is the world’s largest research-based pharmaceuticals company. It is now, however, shutting down what was its premier research facility in Kent, England, and cutting over a billion dollars from its research budget. In the meantime, it is increasing its partnerships with smaller, more innovative biotechs.
The leading edge in therapeutic drugs is in biotechnology, and the Pfizers of tomorrow are the biotechs of today.
For the Big Pharmas, this is actually a rational response if they aren’t able to innovate on their own. It wouldn’t have made much sense for a big horse buggy manufacturer to invest big money in developing the world’s greatest horse-drawn carriage in 1903, either. It would have made much more sense to invest in an emerging automobile manufacturer like Ford Motor Co.
As investors, to look at slumping Big Pharma earnings and stay out of the health care sector is like an investor in 1910 looking at slumping buggy sales and thinking the era of personalized transportation is coming to a close. That was not the case then, and it is not the case now. The fact is, with aging populations in the developed countries and a growing middle class in the emerging world demanding better health care, overall drug sales are going to increase.
This is a sector that investors should have their eye on.
Sincerely,
Ray Blanco
P.S.: As I mentioned, I have a few of these small pharmaceutical companies in my Technology Profits Confidential portfolio and have even more on my radar for the future.
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Creative Destruction in Pharmaceuticals Creates Biotech Opportunities is featured at Penny Sleuth.
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