Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Silver Springboards Higher – What’s Next? - 26th May 20
Stock Market Key Resistance Breakout Is Where the Rubber Meets the Road - 26th May 20
5 Ways To Amp Up Your CFD Trading Today - 26th May 20
The Anatomy of a Gold Stock Bull Market - 26th May 20
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

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