Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The Best “Pick-and-Shovel” Play for the Online Grocery Boom - 18th July 19
Is the Stock Market Rally Floating on Thin Air? - 18th July 19
Biotech Stocks With Near Term Catalysts - 18th July 19
SPX Consolidating, GBP and CAD Could be in Focus - 18th July 19
UK House Building and Population Growth Analysis - 17th July 19
Financial Crisis Stocks Bear Market Is Scary Close - 17th July 19
Want to See What's Next for the US Economy? Try This. - 17th July 19
What to do if You Blow the Trading Account - 17th July 19
Bitcoin Is Far Too Risky for Most Investors - 17th July 19
Core Inflation Rises but Fed Is Going to Cut Rates. Will Gold Gain? - 17th July 19
Boost your Trading Results - FREE eBook - 17th July 19
This Needs To Happen Before Silver Really Takes Off - 17th July 19
NASDAQ Should Reach 8031 Before Topping - 17th July 19
US Housing Market Real Terms BUY / SELL Indicator - 16th July 19
Could Trump Really Win the 2020 US Presidential Election? - 16th July 19
Gold Stocks Forming Bullish Consolidation - 16th July 19
Will Fed Easing Turn Out Like 1995 or 2007? - 16th July 19
Red Rock Entertainment Investments: Around the world in a day with Supreme Jets - 16th July 19
Silver Has Already Gone from Weak to Strong Hands - 15th July 19
Top Equity Mutual Funds That Offer Best Returns - 15th July 19
Gold’s Breakout And The US Dollar - 15th July 19
Financial Markets, Iran, U.S. Global Hegemony - 15th July 19
U.S Bond Yields Point to a 40% Rise in SPX - 15th July 19
Corporate Earnings may Surprise the Stock Market – Watch Out! - 15th July 19
Stock Market Interest Rate Cut Prevails - 15th July 19
Dow Stock Market Trend Forecast Current State July 2019 Video - 15th July 19
Why Summer is the Best Time to be in the Entertainment Industry - 15th July 19
Mid-August Is A Critical Turning Point For US Stocks - 14th July 19
Fed’s Recessionary Indicators and Gold - 14th July 19
The Problem with Keynesian Economics - 14th July 19
Stocks Market Investors Worried About the Fed? Don't Be -- Here's Why - 13th July 19
Could Gold Launch Into A Parabolic Upside Rally? - 13th July 19
Stock Market SPX and Dow in BREAKOUT but this is the worrying part - 13th July 19
Key Stage 2 SATS Tests Results Grades and Scores GDS, EXS, WTS Explained - 13th July 19
INTEL Stock Investing in Qubits and AI Neural Network Processors - Video - 12th July 19
Gold Price Selloff Risk High - 12th July 19
State of the US Economy as Laffer Gets Laughable - 12th July 19
Dow Stock Market Trend Forecast Current State - 12th July 19
Stock Market Major Index Top In 3 to 5 Weeks? - 11th July 19
Platinum Price vs Gold Price - 11th July 19
What This Centi-Billionaire Fashion Magnate Can Teach You About Investing - 11th July 19
Stock Market Fundamentals are Weakening: 3000 on SPX Means Nothing - 11th July 19
This Tobacco Stock Is a Big Winner from E-Cigarette Bans - 11th July 19
Investing in Life Extending Pharma Stocks - 11th July 19
How to Pay for It All: An Option the Presidential Candidates Missed - 11th July 19
Mining Stocks Flash Powerful Signal for Gold and Silver Markets - 11th July 19
5 Surefire Ways to Get More Viewers for Your Video Series - 11th July 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Healthcare System Overhaul, Buy or Sell Biotechnology Stocks

Companies / Healthcare Sector Mar 11, 2009 - 07:28 PM GMT

By: Hans_Wagner

Companies Best Financial Markets Analysis ArticleThe tidal wave of changes driven by initiatives from the Obama administration and Congress is causing investors to abandon well thought out strategies. On Thursday, February 26, 2009, the Obama released more details of their 2010 budget proposal calling for access to cheaper generic versions of biotechnology drugs as a way to pay for an overhaul of healthcare. Investors reacted to the news by aggressively selling the biotechnology sector, with the S&P SPDR Biotechnology ETF (XBI) falling $5.07 from $51.35 to $46.28 in two days. Is this a sign of further weakness in the sector, or is it a buying opportunity for the biotechnology firms and the generic firms?


Budget Statements and Intentions

President Obama's 2010 budget seeks to accelerate the development of lower cost generic versions of biotechnology drugs by establishing a new regulatory pathway at the Food and Drug Administration. To speed development of generic drugs, the administration's budget requests $20 million in 2013 to create this pathway for FDA approval of generic versions of biologic drugs, which are made from living organisms. This plan, which must be passed by Congress, has key Democratic support. The budget document estimates that $9.2 billion over 10 years could be saved, helping to pay for expanded insurance coverage and improved care.

Henry Waxman, House Energy and Commerce Committee Chairman, said legislation to allow FDA approval of generic biologics “is one of my highest priorities this year.” Biologic drugs are more difficult to reproduce than traditional pharmaceuticals. Biologic drugs can cost patients tens of thousands of dollars a year.

Obama's budget seems to back a period “consistent with the principles in the Hatch-Waxman law” for chemical-based drugs. That law provides five years of exclusivity for new medicines, and three years for new formulations of existing drugs, according to Kathleen Jaeger, president of the Generic Pharmaceutical Association , a trade group. There are mentions in the budget proposal that the exclusive period should be seven years.

The biotechnology industry has been pushing for 14 years of exclusivity, indicating that is the time they need to help them recover the investment necessary to develop, test and produce the medicine. According to Jim Greenwood, president of the Biotechnology Industry Organization , the projected savings in Obama's plan appeared based on Congressional Budget Office calculations that were related to a Senate bill with 12 years of exclusivity.

Another part of Obama's plan prohibits biotech firms from “evergreening” drugs to protect them from competition for extended periods. Ever-greening adjusts the dosage or formulation to extend the patent protection. In addition, they are seeking to prevent drug companies from blocking generic drugs with anti-competitive agreements to keep the cheaper generics off the market.

Getting such legislation passed by the House will be relatively easy. However, the Senate will be more difficult, as the Democrats do not have sufficient votes to override a filibuster. Most likely, there will be some sort of compromise that will preserve much of the exclusivity sought by the biotechnology companies in return for not fighting other initiatives such as ever-greening and blocking generic firms from developing their version of the drugs as the patent expires. Moreover, the request to fund the pathway is 2013, four years away.

According to Mark McCellan, a former Food and Drug Administration commissioner, now with the Brookings Institution , the proposal sets an important starting point; however, there will be proposals for longer exclusivity leading to a negotiated settlement in Congress.

Implications for Generic Firms

According to the Congressional Budget Office , letting generic-drug companies manufacture their own versions of medicines produced by biotechnology companies like Genentech Inc. and Amgen Inc. could save $25 billion in the first decade they're on the market. Moreover, the legal pathway opens up the market to generic firms such as Teva Pharmaceuticals Ltd (TEVA), Watson Pharmaceuticals (WPI) and Mylan Inc. (MYL). Generic versions of biologics would be prohibited for periods “consistent with” current limits. This will create additional opportunities for generic firms to expand their market.

Manufacturing biologics, which are living proteins, is more difficult and costs more than molecular based drugs. It also requires new manufacturing facilities to be constructed, leading to additional investment by any generic firms that wish to produce their own biologics. Instead of building their own facilities, these firms might acquire one or more firms that already have approved biologics manufacturing capability. In any case, the generic firms must invest substantial amount of money to be able to manufacture biologics properly.

Should the pathway to FDA approval for generic biologics be passed and begin operation on or after 2013, it will create new opportunities for the generic firms. However, this opportunity is four years away, so a lot can happen in the mean time. Investing in generic firms, hoping that they will benefit from the move to generic biologics is a risky venture. The smarter play is to wait to see what happens in the Congress and the market before making a commitment. This does not mean the generic firms are not a good investment for other reasons.

Implications for Biotech Sector

The proposal to provide a pathway to the FDA for approval of generic versions of biologics will have a big impact on biotech companies like Amgen, Genentech and Gilead Sciences, as well as traditional drug makers like Merck that have said they want to get into biotech.

According to most analysts, the production of approved biologics is years away. First, the pathway is four years away, at least. Second, the generic firms must request approval to manufacture the drug, showing they know how to handle a living protein, which requires careful handling and a large investment. As a result, the threat from generic biologics is years away.
In addition, the pathway proposal will go through the legislative process where it is likely to face some compromise. Many of the biotech firms are located in democratic districts, so the passage of a law that meets everything the generic firms want is not a sure thing.

On Friday February 27, 2009 Deutsche Bank's biotech sector analyst, Mark Schoenebaum sent out a message to his clients titled:  "Mean 2010 Biotech PE Is Now Under 15x !!" the implication is the biotech sector is still a good place to invest and we should not panic. Rather, the sell off represents an opportunity to buy shares at a discount.

James Thomas co-founder of venture firm Thomas, McNerney & Partners believes that the drug industry should gain from health care reform even if there are pressures to lower prices. Drug prices have very high gross margins. Growth for biotech companies is driven more by the number of units sold then by price. Expanding health coverage will boost sales, offsetting price reductions.

The Bottom Line

The recent sell off in the biotechnology sector is an opportunity to buy into the sector rather than a signal to sell. First, the competitive impact of generic biologics is years away. Second, Congress must pass legislation to give the FDA the faster process for generic firms to produce biologic drugs. Like most legislation, there will be a compromise that is different from what was proposed. Of course, there can be no guarantee that the results will be a positive for biotechnology firms.

Third, the sell off is bringing down the share prices on all the biotechnology firms to historically low levels. The good firms are growing revenues at 30% or more, while their PE ratios are falling to 15. The threat from the pathway to the FDA is four years away. In addition, many biotechnology firms based in the U.S. receive half of their revenue from foreign sources, not subject to the U.S. generic pathway threat. For example, Gilead's foreign sales are 42% of antiviral sales, growing at 45%. The company's U.S. sales are 58% of antiviral sales, growing at 30%.

The risk to the biotechnology industry is now higher. With higher risk comes the possibility of higher rewards.

In summary, look to buy on dips in the price of quality companies in the sector as well as the sector's ETFs. Use proven risk management techniques to lower the down side risk. Capture profits by selling half of the position on any run up in the share price and protecting the rest from any loss.

By Hans Wagner
tradingonlinemarkets.com

My Name is Hans Wagner and as a long time investor, I was fortunate to retire at 55. I believe you can employ simple investment principles to find and evaluate companies before committing one's hard earned money. Recently, after my children and their friends graduated from college, I found my self helping them to learn about the stock market and investing in stocks. As a result I created a website that provides a growing set of information on many investing topics along with sample portfolios that consistently beat the market at http://www.tradingonlinemarkets.com/

Copyright © 2009 Hans Wagner

Hans Wagner Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules