The other day I met a doctor, a heart specialist from the John Radcliffe Hospital. He was a busy man, he said, and told me why. “Until recently,” he explained, “I saw people who had something wrong with them. Now I see people who just think that they may have something wrong with them.” This change, he said, was all down to genetics.
I guess most of us have heard of genetics. We would not want to have to pass an exam in it but we think we understand what it is all about. Basically we have a genetic make-up, some of which may be inherited, and this makes us prone to certain types of disease. If we can find out what these are and head them off early enough, then we can live to a ripe old age.
Given the pressure on the health service, the prospect of clinics filling up with those who want their heart checked just because dear old Uncle Albert keeled over 40 years ago is the last thing we need. But this is just one of the things that is happening in what is surely the most complex and challenging of all sectors of the economy – healthcare…
What makes healthcare such an attractive investment proposition
I spend a lot of my time trying to get my head around diseases, drug compounds, medical devices of all shapes and sizes and the ever-changing body of medical opinion.
I do this because I find it interesting, if at times hard to comprehend. But I also do it because I see the investment potential of the sector. In the last month alone we have seen gains of 41% from Minster Pharmaceuticals (MPM), 44% from Angel Biotechnology (ABH) and a whopping 166% from Reliance GeneMedix (GMX).
These shares have two things in common. They are pushing the boundaries of medicine and they are penny shares. They are little known, largely misunderstood companies. They are shunned by most investors and yet they are capable of making them far more money than pharmaceutical giants like GlaxoSmithKline (GSK) and AstraZeneca (AZN).
Both of these giants have reported results in the last fortnight. They are powerful players. They make a lot of money and pay nice dividends. But growth is a real struggle. As is well known, some of their most profitable drugs are losing patent protection and facing competition from cheaper copies.
Why advances in medical science will benefit pharmaceutical penny shares
The world of big pharma is facing massive upheaval. The crux of the matter is this. Its old business model, of seeking ‘blockbuster drugs’ and then milking them for all they are worth, no longer works. This is not only because patent protection may not be sufficient to allow the drug companies to recover the $1bn cost of bringing a new drug to market. It is also due to changes in medical research.
The unravelling of the human genome is just one extreme example of the way in which medical science has developed. Crudely I would describe it this way. Thanks to advances in imaging it is now possible to observe bodily tissue in the most minute, atomic, detail.
And thanks to advances in computer processing power it is possible to measure changes in the body, perhaps in reaction to the addition of some foreign compound, with great detail and accuracy. Thanks to this the pharmaceutical industry is on a journey from the old world of crude blockbusters to personal medicine.
One consequence of the industry’s structure today is that the pharmaceutical companies are not really interested in developing drugs unless they are capable of billion-dollar sales worldwide.
And so we get drugs that do a bit of good to lots of people, without having nasty side-effects. But essentially this is ‘a one size fits all’ approach which leaves many patients receiving imperfect treatment.
But today personalised medicine offers the prospect of developing very specific drugs for very specific complaints. These drugs are even tailored for each individual.
In other words, while two people may exhibit the same disease, their physical make-up may mean that they require subtly different remedies. The problem for big pharma is that these carefully concocted and targeted drugs may not sell in the sort of volumes necessary to pay those huge research bills.
So two things are happening in the industry. The first is a rapid advance, thanks to new technology, in the speed and efficiency of drug discovery. And the second is that big pharma is increasingly relying upon small research firms to do the painstaking work of discovery.
For those than can deliver efficiencies in the discovery process, or can find new drugs that the pharma giants can push into the market, the rewards are great.
This is a fascinating, if tough, area of the stock market. But it has the potential to throw up huge rewards when it comes good. Last year, for example, one of the very best performers was a little company called Verona Pharma (ticker: VRP), which went up 755% from low to high.
And in this month's issue of Red Hot Penny Shares, I've unearthed two more highly promising penny shares in this massive and exciting industry. If you want to know more, you need to sign up today.
You can do so by clicking here... Red Hot Penny Shares.
Good investing,
Tom Bulford
For The Penny Sleuth
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