It’s one of the major investment themes of the coming decade...
In America, President Obama is calling for rapid action to reform the healthcare system. He wants wider subsidised coverage but knows the cost implications. The US already spends some 17% of national income on healthcare and this is rising.
Meanwhile, the UK government has a dilemma of its own. The cost of the NHS is rising at a time of great pressure on government spending.
There are three main reasons health costs are rising. The first is that medical costs rise faster than inflation. The second is increasing longevity while the third is that new and expensive drugs and treatments are continually being invented. Plus, patients are demanding the best available treatment for their conditions.
There’s no escaping this. But there is a way that you can profit...
Two types of drugs... but only one that makes sense for investors
Drugs account for a large and very visible part of healthcare costs but there are two types - patented and generic drugs. Some companies specialise in patented pharmaceuticals while others specialise in generics.
Patented pharmaceuticals can be sold at high prices during the period of patent protection. The patent effectively grants the company a monopoly for a limited time in return for disclosing the details of its invention in a patent. The higher price is needed to cover the costs of R&D and the marketing campaign for a new product.
But we’re more interested in generic drugs.
Generic pharmaceutical companies specialise in drugs that are no longer covered by a patent. These drugs sell at lower prices but often sell in larger volumes. They certainly have much lower R&D and marketing costs. And they look like a better investment opportunity in the next few years than the patented drugs companies
Four trends that favour generic companies
There are four trends that are changing the balance of power between the patented and generic companies.
The first is the pressure on costs mentioned above. Generics account for 67% of total prescriptions in the US but only 20% of the costs. Given that some patented pharmaceuticals show only small benefits over the comparable generics, there is clear potential for cost savings.
The second trend is patent expiries. Many of the most profitable patented drugs are approaching the date on which their patents will expire. There will be an accelerating stream of patent expiries over the next six years. For example, the $53bn of sales affected by patent expiries in 2007-09 will rise to $114bn for 2010-12 and will be higher still for 2013-15.
The third trend is the increasing difficulty that pharmaceutical companies are having in discovering new ‘blockbuster’ drugs. This means that R&D costs per successful drug are rising.
Lastly, the larger generic companies are becoming ever more effective in challenging pharmaceutical patents. If a generic company can convince a court that a patent is invalid, the drug ceases to enjoy patent protection and the price falls. Generics are growing in importance in both developed and emerging economies.
In the US, the largest market for patented and generic drugs in the world, there are benefits to being first with a generic drug. In a recent case, the company that was first to file an ANDA (Abbreviated New Drug Application) for a generic version of Bayer’s oral contraceptive was rewarded by the FDA. The FDA gave them a six-month period of exclusivity for being first to file.
Healthcare is one of the essentials of life. As investors, we have to decide whether to go for a patented or generic company. When we look at the trends above, generic companies look the best choice... even if you also identify and invest in a patented company with a strong pipeline of new drugs and fewer patent expiries.
What to look for in a generic pharmaceutical company
For a start, it is easier to assess potential winners amongst the generic companies than it is amongst the patented companies where you need to be able to assess the quality of new drug pipelines.
But you can’t just buy any company. A successful generics company needs to be large, agile, have global coverage, the ability to mount strong challenges to existing patents and good in-house R&D. Quality R&D is important for mounting patent challenges, for getting new generics into production quickly and for adding some patented treatments for niche diseases to the portfolio.
In searching for quality generic companies, it is essential to include those with large operations in North America, the world’s largest market. Examples are Apotex, Mylan, Teva and Watson.
There are also Indian companies such as Ranbaxy which have operations in North America. Hikma is one of the only generic companies listed in London but it is much smaller than those mentioned above.
In assessing each company it is essential to use the criteria listed above. Size, presence in key markets, track record in challenging patents, R&D and the quality of its patented products for less common diseases (which have higher margins). Size and efficiency are important since margins are lower for generics. You should also ask if the company is well placed to serve emerging markets as these become more important.
Finally, it is important to look at financial strength and valuations to ensure that your chosen company has the potential to survive and rise in price. If a company can tick all these boxes, then you could be looking at a great way to play the important generic drugs trend.
Good investing,
Dr Michael Tubbs
For The Right Side
Publisher’s Recommendation: Dr Michael Tubbs is editor of Research Investments which specialises in recommending companies investing in R&D. It recommends companies in the health and pharmaceutical sectors amongst many others and has recently picked a generics company meeting its investment criteria. Click here to discover this company and see how Research Investments uses a ‘hidden link’, buried deep in the stock market, to find potentially profitable investment ideas.
Note: Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Seek independent financial advice if necessary.
MARKET NOTES
Platinum’s rally could lose steam
BY SHIVVY ARORA
Commodities have had a great run recently, helped by a weaker dollar and optimism on an imminent economic recovery. This has meant more demand for resources like oil and copper, but it’s also boosted the lure of precious metals as an inflation-hedge.
In early April, we looked at platinum’s flailing demand. While also used in jewellery, 60% of its demand comes from the auto industry (it’s used in catalytic converters for cars). And abysmal global car sales have greatly driven down demand for the metal.
But there’s been a ‘rally’ of sorts in platinum prices. Take a look at the chart below. It shows platinum’s spot prices for the past year. It’s currently trading at $1,262 per ounce - up 34% from the start of 2009.
But this has been caused more by a spillover of gold’s ‘safe haven effect’ rather than anything fundamental. Recent speculation on the possibility of a strike at a South African mine causing supply disruptions also pushed prices higher.
Platinum may not hold on to its gains from this year
Source: Kitco
All-round commodities strength may have given platinum a boost, but many analysts say the severe erosion of industrial demand could see it re-testing $950/oz (circled).
The outlook for car catalyst metals such as platinum remains uncertain. Commodity refiners and metals groups have been hastily rebuilding platinum stocks on hopes of a pick-up in demand. But they’re merely taking advantage of lower prices... and the actual surge in new orders has yet to happen.
When we see a real economic recovery, then a rising price for platinum will be entirely justified. But until then, this market is in the hands of speculators and is one to avoid. If you’re looking for a way to protect against inflation, here is a better solution.
The Daily Reckoning - Worldwide Economic Mud Wrestling
BY BILL BONNER
London, England
Thursday, 11 June 2009
It’s the Ultimate Fighting Event - Worldwide Economic Mud Wrestling! See it now!
First, the Honey Hun... German Chancellor Angela Merkel took on a whole pack of central bankers and economists, charging that they were going to make the situation worse by spending money they didn’t have... and causing inflation.
Then, historian Niall Ferguson - Professor Punchy - took a jab at the meddlers in the pages of the Financial Times. His point was simple enough - that the feds were spending trillions of dollars without really knowing what they were doing. If they borrow money to stimulate the economy they are just taking money out of the private economy and diverting it to public spending. There’s no gain in that, he said.
Watch out Niall! The Nobel Knucklehead - economist Paul Krugman - hit back.
We’ll return to this grapplefest. But first, let’s take a look at what is happening outside the arena...
Nothing!
Yesterday, for the third day in a row... not much happened in the markets. The Dow fell 24 points - hardly worth mentioning. Gold held steady at $955. Oil rose a dollar - to $71. And the dollar itself remained about where it was - at $1.39 per euro.
It is as if everyone was waiting to see what happens next. Let’s see...
We’ve seen the biggest stock crash in history...
... the biggest property crash in history...
... the biggest deficits in history (4 times the previous record!)...
... the biggest bailouts in history (we can’t even count that high)
... the biggest bankruptcies in history...
... the auto industry and the finance industry have been largely nationalized...
... the president of the United States of America is now making financial decisions for formerly private industries...
What’s left to see?
Oh yes... the depression... and hyperinflation.
But there’s more... Read on...
To read the Daily Reckoning in full, click here.
P.S. If you enjoyed this article you can find out more about our free email, The Right Side by clicking here.
