Open Source Medicine

Earlier this week I spoke about the growth of industries catering to an ageing populationBiotechnology is one sector that seems disproportionately poised to benefit.

With the demographic trend firmly in place, the demand for drugs, combined with the expiration of important drug patents, will act as additional tailwinds behind the sector.

Drug patents have a 20-year lifespan. After that they’re open source. The expiring of patents in the pharmaceutical industry is going to cause an explosion in generic drugs (copies) hitting the market. It will drive the costs of prescription drugs through the floor; in fact, it’s already happening.

As soon as a patent is lodged and a blockbuster drug shoots onto the market, you immediately have generic drug producers working on replicating that drug. They don’t wait for patents to expire to begin this process. As such, upon the expiration of the patent(s), the generics hit the market in short order. It’s not like they need to go and start from scratch developing the drug. They’re primed and ready to hit the market with a product typically 80-90% cheaper than their branded, patented predecessor.

Companies such as Pfizer and GlaxoSmithKline are NOT where I would be putting my capital. These are the companies that are losing many of their patents right now. Each expiring, patented block buster drug takes large slices of current revenues out of their income streams. 

The large, well-capitalized Pharma companies will be on the hunt for takeover targets. Those with poor balance sheets are likely to get swallowed or at least struggle.

Many of these large companies have a built-in complacency that exists due to their political connections. They employ lobbying firms to maintain their position in the market place. This is an entrenched sector that is really, really going to struggle to deal with a brave new world where lobbying their buddies in congress becomes increasingly meaningless, and they actually have to produce value for their clientele. Yeah I know… strange business concept.

The FDA and their European counterparts have been fighting generic drugs and supplements (alternatives to drugs) with endless red tape; standard issue for entrenched interests. Ultimately the market demand should reverse this process, and I don’t believe we will have to wait too much longer.

We’re in the midst of a worldwide crisis in healthcare, and reducing costs is going to increasingly pressure the companies involved in the industry, and even the idiot cronies at the FDA and their counterparts globally.

The fact is that the generic drug market is booming, especially in places such as India where CAGR in this sector is running around 16%.

To get a glimpse at what I think is coming let’s take a look at Japan, who has recently moved in the opposite direction despite a deep long-running antipathy towards generic or even foreign drugs. Japan reportedly spends about 36 trillion yen (US$450 billion) a year on health care. This is expected to rise to 93 trillion yen by 2035, so we’re dealing with a pretty healthy-sized market.

I recently spoke about the demographic problems in Japan and how I’m playing the coming bond crisis there. The same demographic and income shifts that are set to tip the bond market are behind recent regulatory changes taking place in healthcare. Demand for, and costs of, healthcare are skyrocketing, and generic drugs are a means of helping to curb this.

Japanese regulators recently signed a free trade deal earlier this year with India, allowing more generic drugs to enter their markets. I expect similar regulatory changes in both the EU and US as pressures mount.

I have not the time, nor inclination to investigate all the companies in this sector, but for those interested to dig deeper, I have listed some easy to buy ETF’s just below. This is a good place to start your own due diligence.

  • iShares Nasdaq Biotech ETF (NYSEArca: IBB).
  • SPDR S&P Biotech ETF (NYSEArca: XBI).
  • First Trust NYSE Arca Biotechnology ETF (NYSEArca: FBT).
  • PowerShares Dynamic Biotechnology & Genome Portfolio (NYSEArca:PBE).
  • Biotech HOLDRs (NYSEArca: BBH).

I personally am focusing my resources and investment on private equity in the Asian aged care space (arbitraging income disparities and costs while delivering a much needed service). I may discuss it at a later stage.

Come what may, the health care and biotech sectors will almost certainly produce some outstanding returns for those who spend some time focusing their attention on them.

- Chris

“Will you still need me, will you still feed me… When I’m sixty-four?” – Paul McCartney