As someone who spent most of their career working in the biotechnology industry, I occasionally forget that my salary was paid by some unfortunate soul who had a pretty nasty disease.  Diseases like cancer, extreme hemophilia, or multiple sclerosis were used in everyday conversation, so after a while, you just became used to the burden of responsibility.

But around 3:30pm today as the market was tanking, I started searching for bargains in the pharma/biotech sector only to get sidetracked with the idea that my “former customers” were paying thousands of dollars a year just to stay alive.  Now that I’m an independent trader, I realized that I’m now sitting behind my screens trying to make money off of their misfortunes.

I felt a bit like a vulture, but in essence, these questions are the starting point when you’re hoping to make money by investing in the drug sector.

What drug companies make the best investments?

I had a few basic questions in my initial quest:

1. What diseases do we have today have the least likelihood of being cured?
2. What diseases will become more frequent around the globe (the U.S. isn’t enough anymore)?
3. Which companies dominate their niche, or have orphan drug status?
4. What upcoming drugs does a company have in their pipeline?
5. What products have made it to Phase III trials and nearing approval?

The Costs

Many of the drugs produced in the last few decades are generally more expensive due to their complexity.  Unfortunately, the expense of those drugs also goes up because of their difficulty in manufacturing and forwarding any profits into future research.  Problem is those costs get shuffled into the annual course of treatment, which can quickly add up to tens of thousands of dollars.

Notable examples:

1. Avastin – annual estimated cost ~ $50,000.  An anti-cancer drug produced by Genentech (NYSE: DNA).  Currently, the drug is approved to treat 3 different types of cancer, and is also included in several ongoing cancer related FDA drug trials.
2. Neupogen – annual estimated cost ~ $15,000 to $20,000.  A white blood cell production stimulator produced by Amgen (Nasdaq: AMGN).  It is generally prescribed to chemotherapy patients to prevent infection, or so their own WBCs can be collected, and eventually placed back into the patient.
3. Byetta – annual estimated cost ~ $1800 to $2200.  A type II diabetes treatment produced by Amylin Pharmaceuticals (Nasdaq: AMLN) and Eli Lilly (NYSE: LLY) to control blood glucose levels.

As you can see, getting sick in today’s world of modern medicine is no laughing matter.  We’ve become obsessed with longer living and maintaining a burden free lifestyle, yet some of us maintain the most unhealthy lifestyles (e.g. obesity epidemic) in human history.  Some diseases are preventable, others are not, but whatever the case, it won’t be cheap to maintain your health once you’ve been diagnosed with whatever ails you.

What medical trends make the best investment choices?

My theory on finding the best drug companies is fairly simple.  I’m basically looking for companies that solve an unmet medical need for a disease that is increasing at the worldwide level, and that disease has little to no chance of being cured in the next 10 – 20 years.

My top picks of increasing medical trends are:

1. Diabetes – without question, the greatest danger to the world (in my mind) is the increasing quality of life.  Why?  Because we are also witnessing an increase in obesity.  China and India are expected to see 50% increases in their diabetic population by 2025, and much of that will be the introduction of a western hemisphere high fat, high calorie diet accompanied with sedentary lifestyle.
2. HIV/AIDs – the HIV retrovirus continues to be one of the most deceptive organisms on the planet.  By constantly putting on a new mask (at least in the eyes of our immune system), it will be a number of years before scientists can create an effective vaccine.  Antiviral compounds are currently the best treatment option available.
3. Companies that make products for medical research – most of the people who got rich during a gold rush were the business owners who sold mining supplies, not the gold miners looking to get rich quick.  Using the same analogy, the safer bet is to find companies that sell the products that companies like the aforementioned rely upon to do their work.

Ethical or Not?

I’ll submit that I’m partially biased in this debate, but I do think there are positive advantages to investing in drug companies.  When a small biotech company lists shares on a stock exchange, they’re generally doing it to acquire capital to conduct research.

Most people give drug companies a hard time because they feel they are profiteering from the misery or misfortunes of others.  This may be true in some cases, but the profits that are made from a previously approved drug usually goes into funding new research for a different drug.

Since it takes an estimated $800 million over a 7.5 year time span to produce a new drug these days, I don’t have much of a problem handing over a few bucks if I think there is a better than average chance of getting it back plus interest.

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Got Comments?

Disclosure – I hold no equity positions in the companies mentioned in this article at the time of publishing.

Photo by BlueGoa??’s

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