Bubble? What Bubble? The BioScience Profit Outlook for the Rest of 2014


"Bioscience investors are putting their money into companies making good drugs with solid data that meet critical needs in the real world. They're helping fuel R&D into terrible and terrifying diseases, and they're funding the distribution of those products into a waiting market."


With just six months left on my 2014 bioscience "profit calendar," things are really starting to look promising for the second half of 2014. There are huge opportunities in several subsectors of the bioscience market in particular.

That said, some bioscience analysts are saying there's a bubble. And it's scaring a lot of bioscience investors out of great positions in the market.

That's why last week I shared my complete bioscience market outlook for the rest of 2014 with my paid members—to help them see the real market story.

Today I want to share with you some of my thinking, expectations, and predictions, as well as my strategy to get us tapped into a segment of the bioscience market we haven't even touched yet.

This segment has been tremendously profitable for some of the world's biggest drug companies, and I think there are going to be some killer profits for us there, too. . .

Outlook for Q3 and Q4/14

For the rest of this year, we have a number of great opportunities coming our way but, of course, a lot will depend on the overall health of the biosciences industry during that time. Over the past few months, some analysts have been rubbing their worry beads over the pullback in FDA approvals for 2013, the possibility that we might be experiencing a bioscience sector "bubble," and the market correction that took place a few months back.

My take? There's nothing but great sailing ahead. Here's why.

What We Mean When We Say "Bioscience Sector"

The "bioscience sector" is actually a group of subsectors that includes pharmaceuticals, biologics and biosimilars, generics, and medical devices. In brief:

Pharmaceuticals are bioactive "small molecule" drugs, designed and synthesized in laboratories. Often, they're based on brand new molecules engineered by researchers, although sometimes they're known substances combined in novel ways. The FDA requires that new pharmaceuticals undergo a rigorous series of preclinical (animal) and clinical (human) studies for safety and effectiveness, as well as ongoing and final assessments by the agency.

Much of our investment strategy in BioScience Millionaire is based around events in this "regulatory gauntlet," such as data releases and FDA reviews, which can cause dramatic changes in stock price.

Despite dire predictions from some analysts, R&D in new pharmaceuticals is robust. This type of drug currently represents about 80% of all medications, with biologics representing the other portion. Today, there are roughly thousands of new drugs under study in the U.S. alone.

Biologics are "large molecule" compounds created naturally by living organisms and are used in the same way as pharmaceuticals. Biosimilars are more or less the generic versions of biologics. Because biologics tend to be very complex, a biosimilar may not be an exact molecular copy of an originator drug, but it treats the same condition in a similar way. Also, biosimilars are not always the natural product of a living organism, but rather the result of recombinant DNA technology. These drugs undergo the same regulatory development process as pharmaceuticals.

The market for biologics is expanding vigorously. By 2016, they are predicted to account for 24% of sales in the world market, double that of 2004. These drugs are innovative medicine and are sign of great health in the industry.

Generics are knockoffs of brand-name drugs. According to the FDA, they must be ". . .the same as brand-name drugs in dosage form, safety, strength, route of administration, quality, performance characteristics, and intended use." Before a generics manufacturer can produce a copycat, all patent and other exclusivity protections for the original drug must expire. Generics do not have to undergo safety and effectiveness trials, and so are much, much cheaper to produce. The timing of their regulatory gauntlet is much less disciplined than that of pharmaceuticals and biologics, so it's impractical to base an investment strategy around catalysts in this subsector.

Over the past two years, many brand-name drugs have fallen off the so-called "patent cliff," making them available to generics manufacturers. This year, 2014, a number will lose protection. In 2015, however, that number will drop sharply, curbing the addition of new generics on the market.

Still, they represent an ever-growing portion of the market. Generics account for about 80% of all prescriptions written in the U.S., and they're extremely important in keeping medical costs under control.

They can also make a significant contribution to a bioscience portfolio, and we'll be taking a closer look at them in the second half of this year.

Medical devices, like everything else used to treat human illness, need to undergo a regulatory approval process before being allowed on the market in the U.S. and in most other parts of the world. The FDA approved just over 30 new devices in 2013, which included everything from surgical sealants to ceramic hips.

Thus far, in 2014, the agency is approving devices at approximately the same pace as 2013.

Medical devices represent a significant, if somewhat smaller part of the larger bioscience sector, and continue to attract the interest of both business and investors.

An Evolving Sector

So the industry is thriving. But it's also changing.

Where once, big multi-billion dollar pharmaceutical companies did the lion's share of the R&D, that job now falls more and more often to small cap, biotech R&D companies, while the big guys wait in the wings to do licensing deals or outright mergers/acquisitions as drugs reach the later stages of development.

And that makes sense. Many of the big pharma firms have lost product to the patent cliff, and the cost of maintaining a big developmental pipeline is astronomical-from $4 to $11 billion to get a single drug to market. So they're turning to the little guys for new innovations.

Reign of the Orphans

Target markets are also undergoing transformation. Many drugs currently under study treat rare, so-called orphan diseases. In the U.S., that means illnesses that affect fewer than 200,000 people. Drugs to treat these diseases receive special treatment from regulators, including tax breaks and an extended period of market exclusivity. And because orphan diseases are often chronic, life-threatening, and affect few people, drug companies can—and really must—ask a very high price for them.

That's a very different model from drugs like Lipitor, which brought in more than $17 billion in total by selling large numbers of moderately priced pills to large numbers of people. But those big blockbusters are going the way of the patent cliff now, and orphan drugs are proving a very profitable substitute. By 2018, they're expected to account for well over $100 billion in sales—a whopping 16% of the total brand-name drug market.

The orphan model offers other advantages well:

• When a disease is rare, you don't need to test as many patients in clinical trials, which saves money.

• These diseases tend to respond better to experimental medications, so there's a higher chance of finding the pot of gold at the end of the rainbow: FDA approval.

• Better clinical outcomes make new drugs more valuable—a critical factor for insurance companies to consider when deciding on reimbursement.

FDA Approvals Are Back on Track

For drug approvals in the United States, 2012 was the best year since 1997, with 39 drugs passing FDA muster, five of which are forecast to become blockbusters by 2017. In 2013, however, that number plunged to 27 approvals, which caused some industry mandarins, such as Fierce Biotech's editor John Carroll, to start wringing their hands and predicting the end of the world for the sector.

So far in 2014, however, the agency has approved two dozen new drugs and devices, with 31 PDUFAs currently remaining on the schedule between now and the end of the year. To paraphrase Mark Twain, the news of bioscience's death has been greatly exaggerated.

What Bubble?

So now, what about the biotech bubble some analysts believe they have identified?

Those analysts are seeing monsters under the bed. And as we adults all know, there are no monsters under the bed.

The Nasdaq Biotechnology Index (NBI) gained 20% in January/February 2014, then plunged 24% over the next six weeks, only to regain 16% by early this month.

So what's going on? The market breathes in, and the market breathes out. After an overall gain of 130% over the past three years, an adjustment should come as no surprise to anyone. But that's all it is. There's no bursting bubble.

If there were, price per share (PPS) would now be too high, especially among large-cap pharmaceuticals—the stocks that lead the industry. But that's not what the numbers say. For those of you unfamiliar with technical indicators, a number called a price to earnings ratio (P/E) is often used to valuate PPS. But a more accurate indicator is a price-earnings-growth ratio (PEG), which also takes into account the expected future growth rate of a company or industry.

Currently, the PEG for the bioscience sector is around 1.0, where it's been since the market crash in 2008. If there were a bubble, by this time, that number would have reached 2.0 or higher.

The fact is, investors are not buying smoke and mirrors as they were during the dot-com bubble of 2001 and the housing bubble of 2001-2005. They're not driving up prices through speculation and purchasing Internet companies that are nothing more than a mailbox number or mortgages that aren't worth the paper they're written on.

Bioscience investors are putting their money into companies making good drugs with solid data that meet critical needs in the real world. They're helping fuel R&D into terrible and terrifying diseases, and they're funding the distribution of those products into a waiting market.

There is no bubble here. There is real value. And that value continues to increase.

Full Speed Ahead

According to the Evaluate Pharma annual report, brand-name prescription drug sales will grow globally at a rate of nearly 4% per year between now and 2018.

So the bioscience sector is healthy and full of potential for investors.

As I mentioned above, there has been a recent strong upward trend in the number of orphan drug approvals, and I expect that trend to continue. According to the FDA Office of Orphan Products Development (OOPD), 400 of these drugs have been approved since 1983 (by contrast, only 10 such drugs had been approved in the period 1973-1983).

We'll also look for opportunities in ophthalmology, pain management, neurological/psychiatric drugs, cancer (especially liquid tumors, breast cancer, and melanoma), and perhaps most of all, in diseases of old age, such as chronic kidney disease, osteoporosis, hypertension, cardiovascular disease, and type-2 diabetes.

Why diseases of aging? As the Baby Boom generation crosses retirement age, our older adult population is becoming the most rapidly expanding demographic in our society. According to the U.S. Administration on Aging, by 2030, the elderly population in this country will have doubled its size from the year 2000. And those people will be living longer, as average life expectancy continues to increase.

It's a simple equation: more elderly people living longer = vastly expanded medical needs. They will need more care, but also better medications to treat chronic and intractable conditions in order to give them more active years and greater enjoyment of life.

So all in all, it's a great time to invest in bioscience, and I anticipate we're going to find some great investment treasures going forward.

Ernie Tremblay
Money Morning

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