December is always a great time to look into our Biotech crystal ball for profitable investing opportunities. Which will be the hottest biotech stocks for 2020? Follow these four trends to find biotech equities that will outperform in the new year…
1. THE POLITICS OF HEALTHCARE
2020 will be an election year and at the moment nothing is a hotter topic on the debate stage than healthcare in America. How much should it cost? Who should pay for it? Should free healthcare be a right guaranteed by the Government?
In the early stages of the political process, “Medicare for All” has been a very hot topic amongst some of the more left-leaning candidates on the Democratic side of the aisle. Some more moderate Democratic candidates have instead suggested, “Medicare for All who Want It,” while others have advocated simply improving Obamacare.
Although the Democratic brand is most closely associated with radical healthcare overhauls, the Republicans have responded with their own ideas and initiatives. President Trump has recently moved forward regulation demanding that all hospitals in the United States publish the secret payment rates that they negotiate with insurance companies. Trump has also forced Big Pharma to disclose medication list prices in televised advertisements. His saber rattling regarding pharmaceutical price controls has been endless.
How does this all affect your biotech investments? The simple answer is, “it depends.” If anything, the single most powerful effect may be to create buying opportunities as the entire sector goes on sale; you may be willing to bet that the current whims of the political class will have no major effect on the long term value of your biotech holdings.
In general, “Medicare for All” is widely considered to be a disastrous idea for biotech companies. Why? Hours of complex debate and rhetoric can be distilled into a simple understanding.
“Medicare for All” would be mindbogglingly expensive for a Federal Government that already cannot pay its bills without borrowing billions of dollars. Estimates very widely, but the very lowest estimate is several TRILLION dollars per year. This would mean that Uncle Sam would instantly become the largest pharmaceutical purchaser in the world, giving the Government unprecedented leverage over pharmaceutical pricing. If Uncle Sam suddenly buys 80% of all pharmaceuticals in the United States, the Feds could effectively set pricing at whatever level they please. And if they are struggling to produce the trillions of dollars mentioned earlier, they will certainly set pharmaceutical prices low. This is what happens now in Europe and other socialized nations.
Systemically low prices set by the Federal Government would be a doomsday scenario for biotech innovation. The world of biotech investing is perhaps the riskiest of all stock market propositions; the vast majority of molecules die before they ever reach commercial viability. It can take a decade or more to pioneer a new medicine, and the process can easily consume billions of dollars of investors’ money. Would anyone bother to take these extreme risks if they thought that Uncle Sam was just going to set the price low anyhow?
So, many analysts and would be investors regard “Medicare for All” with trepidation. However, as I have pointed out previously, political promises are one thing, legislative reality is another thing entirely. A true, direct government take over of medicine in America is very unlikely. The greater this fear becomes, the better deal you may be able to get on those promising biotechs that you have had your eye on.
2. BIOLOGIST AS ARCHITECT
As our understanding of the human body grows and evolves, our scientific focus has landed squarely on the blueprint system that determines the precise nature and function of each human body: DNA and RNA. Throughout 5,000 years of recorded human history, our crude attempts at healing really focused on treating symptoms that were visible and measurable. If we could ameliorate the symptoms, our intervention would have been considered a success. But we rarely actually cured anyone. We simply didn’t have the technology to access the underlying root of disease. Suddenly, we understand that the root causes of many tragic conditions come from our underlying design. For the first time in human history, we are beginning to attack health problems on the genetic level. The result is a paradigm change; one time cures that last a lifetime, rather than chronic treatment that must be taken forever.
We are still in the early stages of this science; many conditions are so genetically complex that they still defy our greatest minds. However, some well known scourges of humanity are actually caused by just one or two genetic faults. Most of the genetic blueprint is just fine. The problem revolves around just .0001% of the patient’s genome. Examples would killers such as Cystic Fibrosis, Sickle Cell disease, or Duchane’s Syndrome. We now have several methods to realistically address these deadly genetic flaws.
On such technique is CRISPR gene editing. This is a method of directly editing an organism’s DNA. This would be the equivalent of examining a blueprint, noticing a flaw, and correcting the flaw on the blueprint itself with an eraser and pen. This technique has gained worldwide media attention due to its world changing potential. The same technique also holds potential peril because many of the changes that CRISPR enables are permanent. Any unknown side effects of a genetic edit are forever, and could potentially be passed down through the generations.
A less risky way of addressing flaws in the genetic blueprint is through a new science called RNA Modulation (Also called RNAi). If DNA is the blueprint for the building blocks of your body, think of the RNA as the general contractor who reads the blueprint and actually builds the building. RNA reads DNA and manufactures proteins; these proteins are the actual stuff that your body is made out of. Faulty proteins lead to illness.
If your general contractor were to read a blueprint, and detect an obvious flaw, another way of correcting the flaw would be to simply ignore the bad construction orders. With RNai, scientists seek to “silence” bad genes. Let’s say your otherwise perfect DNA profile currently contains one flaw that results in overproduction of a bad protein. RNA can now be programmed to simply ignore the bad instructions, resulting in less of the bad protein. RNA modulation still attacks the root cause of a sickness (over, or under production of certain proteins) but, unlike CRISPR, it need not be permanent. In many ways, RNA modulation is considered to be less risky.
RNA modulation is also less risky from a business perspective. The few RNA related medicines that have already come out follow more traditional pharma pricing formats. Meanwhile, DNA related cures have made headlines, often in a bad way. Because DNA fixes are a one time treatment, small biotechs have attempted to charge up to $1,000,000 for a single dose. This has caused quite a bit of controversy.
With new medical approaches, will come new financial paradigms. Follow this story closely if you want to invest in the cutting edge…
3. ADVENTURES IN IMMUNOTHERAPY
Did you know that, right now, there is a cancer growing somewhere inside your body? Don’t panic! There is a 99.9% chance that your own immune system is currently attacking that same cancer. Almost always your own immune system will win this battle within your body, without you ever knowing or caring.
Over the last decade it has become increasingly clear to the scientific community that many common and deadly diseases are actually the result of underactive, or overactive, immune systems. Cancer’s uncanny ability to evade the human immune system has been revealed to be the trick that has tormented human beings for milenia. Conversely, many common maladies such as rheumatoid arthritis, Crohn’s disease, and lupus are now closely linked with a beserk immune system that won’t stop attacking.
If you think of scientific progress as a wave, you could think of 2020 as the year that wave crests for therapies related to the human immune system. Pharma giant Merck has a once in a lifetime mega blockbuster on its hands with Keytruda, an immunotherapy for cancer. Keytruda’s runaway success has inspired hundreds of other biotechs to pursue immunotherapy as a treatment for dozens of types of cancers.
On the other side of the spectrum, Humira, the largest selling drug in the world, is coming to the end of its patent life. Humira is used to stave off a panoply of immune related diseases, and it’s maker, Abbvie, is desperate to replace it with next generation therapies that can calm an overactive immune system. Of course, everyone is gunning for Abbvie’s immuno crown….
In 2020 immunotherapy is a category ready to produce healthy profits for investors.
4. SHOW ME THE MONEY
You wouldn’t think that empty, unprofitable office space would have anything to do with biotech. But in the world of highflying Wall Street Finance, everything is connected.
The collapse of the office space unicorn startup WeWork in late 2019 has been a seminal moment for all start up companies that feed at the Wall Street Trough. Simply put, WeWork wasn’t just a start up business, WeWork was a concept.
The idea was to grow no matter what, with profit a non-consideration. The concept was inspired by world beating investments such as Facebook and Google; each achieved early dominance in a “winner take all” niche, locking in boku bucks for decades to come. From this success, many Wall Street and Silicon Valley types arrived at the conclusion that market dominance was far more important that positive cash flow.
This generally permissive atmosphere also spilled over into the world of high octane biotechs. 2018 and 2019 saw some of the largest biotech IPOs in world history, despite the fact that many of these enterprises had very young technology, with no clear path to profitability.
It’s all fun and games until somebody incinerates $45 Billion. With the epic failure of the attempted WeWork IPO, the winds of Wall Street have suddenly shifted. These very same biotech mega start ups may have a much harder time raising huge quantities of money whenever their bank accounts run low. They may need to demonstrate concrete progress towards profitability in the form of positive, published studies. They will probably also be forced to license out, or abandon outright, non-core research projects that burn cash. Finding Big Pharma partners with deep pockets may become a key priority for these formerly free wheeling operations. Look for executive ranks to be shuffled accordingly; out with the PhDs with their heads in the clouds; in with the MBA’s with their feet on the ground.
Simply put, 2020, will be a “show me” year. Find a credible path to profitability, backed up with spreadsheets and studies, or go back to the research university where you came from…..
The challenge for today’s biotech investor is to separate short term noise from solid, long term trends. The most successful players in the biotech market are not short term traders who buy and sell on a whim; the people who become truly wealthy in biotech are long term investors who do their research and stick to their guns, even when the sector has fallen out of favor. Remember, in 2020 those who grow their knowledge will also grow their brokerage accounts…