Do you think the biotech sector will be hurt long term?

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Jfet
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Do you think the biotech sector will be hurt long term?

Post by Jfet »

I am not sure this is an acceptable topic so forgive me if it is against the rules. It *seems* ok if it does not stray political or personal. I do think there are so many doctors on here that one could gain a lot of insight by listening to them.

Recently Gilead (GILD) has come under fire for pricing what I would call a wonder drug cure for hep. C at $84,000 or thereabouts. Not only has Congress called on them to explain but drug company middle men are wanting them to reduce the price. It seems to have put a crimp on the whole biotech sector.

Is this just a bit of noise or do you think it has teeth and may be a reason to avoid investing in that sector for a time? I see a survivor bias in the drug industry (good drugs seem high priced but bad drugs that lost billions are taken out of the equation) but it seems this is being ignored.
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Re: Do you think the biotech sector will be hurt long term?

Post by livesoft »

I have worked in biotech for more than 35 years. Many of my friends have started companies and made millions. Most of my friends have not. It's fun to talk war stories, but what's the point?

I will say that I think the biotech sector is here to stay. People do not work in that sector in the hopes of losing money or pouring their money down the toilet. They work in that sector in the hopes of either (a) making a decent living or (b) winning big time and of course they do all this while trying to make a difference in the health of human beings. There is/are a lot of hype and false promises.

However, the biotech sector will not be hurt long-term, but that doesn't mean it will exceed expectations either.

I personally would not invest in any biotech company or a a biotech sector fund or ETF except through the broad market index funds such as Total US Stock Market, Total Int'l Stock Market, US small-cap value index, Foreign small-cap index … unless I had very inside information, which I don't.

As for the Hep C thing. Have you heard of Anchoring? I think there is a bit of that going on here.
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Re: Do you think the biotech sector will be hurt long term?

Post by ourbrooks »

It's hard to avoid speculating about how Gilead came up with their pricing. The market for $1,000 a day drugs can't be all that large for an illness often associated with intravenous drug use. My speculation is that it's because a number of Gilead's competitors are at work on Hepatitis C drugs of their own with a good chance of success. Gilead figured to make their money early and then drop the price when the competition appeared. If that's the case, then the future of the biotech sector is likely to be up rather than down because of new products coming into the market place.

There's no denying that there's much more stress on the cost effectiveness of drugs than there used to be. This may change who wins and who loses in the biotech industry; a company which came up with a n innovative way to reduce by 30% the cost of a treatment for a common ailment might actually do better than a company which pioneered a miracle cure which only 1 in a 100 patients could afford. Alas, I also lack insider information so I have no way of guessing which companies will win.

As for actually investing in the biotech sector, I agree with livesoft; there's no particular reason for thinking the biotech sector will outperform or underperform the broad market and your best bet is to diversify and hold the whole market.
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Re: Do you think the biotech sector will be hurt long term?

Post by DVMResident »

Jfet wrote:Recently Gilead (GILD) has come under fire for pricing what I would call a wonder drug cure for hep. C at $84,000 or thereabouts. Not only has Congress called on them to explain but drug company middle men are wanting them to reduce the price. It seems to have put a crimp on the whole biotech sector.
That's what happens when it costs an average of ~$4 billion to get a drug to market. But, everything goes off patent 20 years post-filling and a good chunk of that time is dead from marketing perspective. So really, the drug has to make the ~$4 billion back plus profit within 12~15 years. This drug will come down in price one way or the other.

Biotech is a tough space due to high risk, tough pre- and post-market regulations, and high competition. Biotech stocks have higher beta many other sectors. That being said, all sectors have their challenges and go through cycles of out-performing and under-performing.

I agree with livesoft: no reason to under- or over-weight biotech.
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Re: Do you think the biotech sector will be hurt long term?

Post by Aptenodytes »

I agree with what's been said. But the question is moot. Even if you thought biotech was going to underperform over the long term there's little practical you could do. Creating a TSM minus biotech portfolio would be more hassle than it could possibly be worth.

So you are blessed with a concern that just doesn't matter.
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Re: Do you think the biotech sector will be hurt long term?

Post by Ged »

The high cost of the new Hep C drugs have caused an international stir.

http://www.npr.org/blogs/health/2014/04 ... epatitis-c

Worldwide there are many millions of people with this disease.
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

In the case of Hep C, it does sound like a large market, but if the drug cost many billions to develop I can't see the company investors being very happy with selling it for $100. It sounds like they are adjust the price somewhat to markets ($900 in Egypt for example). Purely from an investing standpoint, if I spent, say 10B developing Sovaldi, I would want a 5x return on my investment over the next few years to compensate me for the extreme amount of risk I took plus the potential for future lawsuits should side effects appear. If you figure one company might capture 10% of the world market before competition and generics set in, that would be about 15 million treatments. To recapture 50B you need to charge an average of $3333 per treatment. If you are only charging $900 in Egypt, you must charge more elsewhere.
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Re: Do you think the biotech sector will be hurt long term?

Post by livesoft »

OK, sure, one can speculate all they want about how they come up with a price. Here's my speculation: A bunch of people at Gilead had some meetings, then some e-mail follow ups, then some more meetings. The attornies, marketing folks, scientists, and even C-level folks sat around and strategized. Throw in some outside counsel and board members. They even planned that their initial price would cause quite a stir and planned already what to do afterwards. Believe me, they are experts on this and don't just throw spaghetti on the wall and see what sticks. They are also laying the groundwork for the future. Other companies will look at what happens and do their own anchoring experiments like this.

As a shareholder one should hope they charge the mostest that people will pay.
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

Perhaps the answer to my question was yes for short term at least. Biotech down near 6% today. That has to be a RBD!
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Re: Do you think the biotech sector will be hurt long term?

Post by The Wizard »

I've already set up a modest transfer from my bond fund into my Extended Market fund for 4 PM to celebrate this situation!
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Re: Do you think the biotech sector will be hurt long term?

Post by Ged »

Not everyone believes the cost of developing a new drug is in the billions.

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2630351/
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Re: Do you think the biotech sector will be hurt long term?

Post by livesoft »

The Wizard wrote:I've already set up a modest transfer from my bond fund into my Extended Market fund for 4 PM to celebrate this situation!
IWM is now in RBD territory, but Extended Market is not at the moment, but there are a few minutes to go.
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Re: Do you think the biotech sector will be hurt long term?

Post by SecretAsianMan »

livesoft wrote:As a shareholder one should hope they charge the mostest that people will pay.
As a human, one should hope they try to maximize the number of people who are helped while still charging enough so as not to discourage further investment in future drugs. But maybe that's just me.

SAM
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

SecretAsianMan wrote:
livesoft wrote:As a shareholder one should hope they charge the mostest that people will pay.
As a human, one should hope they try to maximize the number of people who are helped while still charging enough so as not to discourage further investment in future drugs. But maybe that's just me.

SAM
Well dropping 6% certainly is not going to encourage a lot of investors who bought higher.
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Re: Do you think the biotech sector will be hurt long term?

Post by livesoft »

I liked this report about a certain flu drug:

"Millions wasted …"
http://www.bbc.com/news/health-26954482
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Re: Do you think the biotech sector will be hurt long term?

Post by The Wizard »

livesoft wrote:
The Wizard wrote:I've already set up a modest transfer from my bond fund into my Extended Market fund for 4 PM to celebrate this situation!
IWM is now in RBD territory, but Extended Market is not at the moment, but there are a few minutes to go.
OK, but VXF/VEXAX is one of my current holdings; I'm not up to opening a new Small Cap fund just for this event. But yes, I should make a note to work on this...
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

livesoft wrote:I liked this report about a certain flu drug:

"Millions wasted …"
http://www.bbc.com/news/health-26954482
I read that report and didn't understand the conclusion or if one side or the other was lying.
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Re: Do you think the biotech sector will be hurt long term?

Post by island »

livesoft wrote:....I personally would not invest in any biotech company or a a biotech sector fund or ETF except through the broad market index funds such as Total US Stock Market, Total Int'l Stock Market, US small-cap value index, Foreign small-cap index … unless I had very inside information, which I don't.....
Livesoft. Is it just the biotech sector you avoid, or not a sector investor overall? Thanks.
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Re: Do you think the biotech sector will be hurt long term?

Post by SecretAsianMan »

Jfet wrote:
SecretAsianMan wrote:
livesoft wrote:As a shareholder one should hope they charge the mostest that people will pay.
As a human, one should hope they try to maximize the number of people who are helped while still charging enough so as not to discourage further investment in future drugs. But maybe that's just me.

SAM
Well dropping 6% certainly is not going to encourage a lot of investors who bought higher.
I agree. A 6% drop in share price will undoubtedly discourage companies and investors from developing new drugs. That's also why nobody invests in tech companies anymore after the 2000-02 crash. After all, any fool can see there's no way for tech companies to make money considering market structures and with new disruptive technologies always just around the corner.

The threat of a drop in share price potentially scaring away potential investors should obviously be put at the top of the list of concerns when it comes to drug pricing.

SAM
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

SecretAsianMan wrote: I agree. A 6% drop in share price will undoubtedly discourage companies and investors from developing new drugs. That's also why nobody invests in tech companies anymore after the 2000-02 crash. After all, any fool can see there's no way for tech companies to make money considering market structures and with new disruptive technologies always just around the corner.

The threat of a drop in share price potentially scaring away potential investors should obviously be put at the top of the list of concerns when it comes to drug pricing.

SAM
Consider that a lot of these companies finance drug research by issuing more shares. It becomes hard to raise money if your share price is in the toilet.

I do not see biotech companies flush with cash like Google, Microsoft, Apple, Cisco. Only a few of them pay a dividend. Then there is that whole past history is not a guarantee of future performance and we do not know what would happen to research if price controls were placed on new drugs. I think it would become very likely that companies would focus on very easy to develop low cost drugs if they knew they would get a similar price for something they spent $10,000,000 developing vs something they spent $11,000,000,000.
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Re: Do you think the biotech sector will be hurt long term?

Post by livesoft »

island wrote:
livesoft wrote:....I personally would not invest in any biotech company or a a biotech sector fund or ETF except through the broad market index funds such as Total US Stock Market, Total Int'l Stock Market, US small-cap value index, Foreign small-cap index … unless I had very inside information, which I don't.....
Livesoft. Is it just the biotech sector you avoid, or not a sector investor overall? Thanks.
I am not a sector investor at all, unless you count a REIT fund as a sector. At the present time I do not own any REIT fund shares although I have some TIAA Real Estate Account.

And it appears that Vanguard extended market didn't quite make it today.
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Re: Do you think the biotech sector will be hurt long term?

Post by SecretAsianMan »

Jfet wrote:
SecretAsianMan wrote: I agree. A 6% drop in share price will undoubtedly discourage companies and investors from developing new drugs. That's also why nobody invests in tech companies anymore after the 2000-02 crash. After all, any fool can see there's no way for tech companies to make money considering market structures and with new disruptive technologies always just around the corner.

The threat of a drop in share price potentially scaring away potential investors should obviously be put at the top of the list of concerns when it comes to drug pricing.

SAM
Consider that a lot of these companies finance drug research by issuing more shares. It becomes hard to raise money if your share price is in the toilet.

I do not see biotech companies flush with cash like Google, Microsoft, Apple, Cisco. Only a few of them pay a dividend. Then there is that whole past history is not a guarantee of future performance and we do not know what would happen to research if price controls were placed on new drugs. I think it would become very likely that companies would focus on very easy to develop low cost drugs if they knew they would get a similar price for something they spent $10,000,000 developing vs something they spent $11,000,000,000.
Did I advocate price controls? Sorry, I must have missed that part of the show. I merely protested the idea that profit maximization should be the primary goal. And that taking a different path would inevitably lead to very negative consequences and significantly reduced investment, which you seem to believe. There are many avenues beside price controls to achieve this. After all, don't Bogleheads always say there are many roads to Dublin...

SAM
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

SecretAsianMan wrote:
Jfet wrote:
SecretAsianMan wrote: I agree. A 6% drop in share price will undoubtedly discourage companies and investors from developing new drugs. That's also why nobody invests in tech companies anymore after the 2000-02 crash. After all, any fool can see there's no way for tech companies to make money considering market structures and with new disruptive technologies always just around the corner.

The threat of a drop in share price potentially scaring away potential investors should obviously be put at the top of the list of concerns when it comes to drug pricing.

SAM
Consider that a lot of these companies finance drug research by issuing more shares. It becomes hard to raise money if your share price is in the toilet.

I do not see biotech companies flush with cash like Google, Microsoft, Apple, Cisco. Only a few of them pay a dividend. Then there is that whole past history is not a guarantee of future performance and we do not know what would happen to research if price controls were placed on new drugs. I think it would become very likely that companies would focus on very easy to develop low cost drugs if they knew they would get a similar price for something they spent $10,000,000 developing vs something they spent $11,000,000,000.
Did I advocate price controls? Sorry, I must have missed that part of the show. I merely protested the idea that profit maximization should be the primary goal. And that taking a different path would inevitably lead to very negative consequences and significantly reduced investment, which you seem to believe. There are many avenues beside price controls to achieve this. After all, don't Bogleheads always say there are many roads to Dublin...

SAM
I am sure there are other avenues that could be pursued. If you gave the same subsidy to a life saving drug that you give to a luxury electric sports car, that would help the price by $7500 or so...
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Re: Do you think the biotech sector will be hurt long term?

Post by Jack »

Jfet wrote:I am sure there are other avenues that could be pursued. If you gave the same subsidy to a life saving drug that you give to a luxury electric sports car, that would help the price by $7500 or so...
The pharmaceutical industry is already the most subsidized business in the world. Setting aside for the moment that they are given almost all of their basic research for free from government funded institutes, they are also the beneficiary of almost $1 trillion per year in government issued patent monopolies.

The government will haul away your competitors and put them in jail if they try to make a drug more cheaply than the patented drug. This amounts to a government collected sales tax of more than 10,000% on prescription drugs that is transferred to pharmaceutical makers. Whether tax payers are getting their money's worth for that government subsidy is an interesting question.
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Re: Do you think the biotech sector will be hurt long term?

Post by nisiprius »

Jfet wrote:I am not sure this is an acceptable topic so forgive me if it is against the rules. It *seems* ok if it does not stray political or personal. I do think there are so many doctors on here that one could gain a lot of insight by listening to them.

Recently Gilead (GILD) has come under fire for pricing what I would call a wonder drug cure for hep. C at $84,000 or thereabouts. Not only has Congress called on them to explain but drug company middle men are wanting them to reduce the price. It seems to have put a crimp on the whole biotech sector.

Is this just a bit of noise or do you think it has teeth and may be a reason to avoid investing in that sector for a time? I see a survivor bias in the drug industry (good drugs seem high priced but bad drugs that lost billions are taken out of the equation) but it seems this is being ignored.
I heard on the radio that biotech tumbled today. Maybe this is the day it got priced in. Maybe at the new lower price it is just about as good an investment was it was before. What do you think you know about the economics of the biotech business that is different from the market, and why do you think you are right and the market is wrong? I suspect that the place you learned about the pricing issue with Gilead Sciences is some perfectly ordinary financial news outlet that other investors read, too.
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

Jack wrote:
Jfet wrote:I am sure there are other avenues that could be pursued. If you gave the same subsidy to a life saving drug that you give to a luxury electric sports car, that would help the price by $7500 or so...
The pharmaceutical industry is already the most subsidized business in the world. Setting aside for the moment that they are given almost all of their basic research for free from government funded institutes, they are also the beneficiary of almost $1 trillion per year in government issued patent monopolies.

The government will haul away your competitors and put them in jail if they try to make a drug more cheaply than the patented drug. This amounts to a government collected sales tax of more than 10,000% on prescription drugs that is transferred to pharmaceutical makers. Whether tax payers are getting their money's worth for that government subsidy is an interesting question.
If this is all true then we are incredibly foolish for not specifically investing in the biotech sector, or overweighting it in our portfolio. With trillions in monopolies and subsidies it should be a cash cow that almost guarantees good returns.
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Re: Do you think the biotech sector will be hurt long term?

Post by Ged »

Jfet wrote: If this is all true then we are incredibly foolish for not specifically investing in the biotech sector, or overweighting it in our portfolio. With trillions in monopolies and subsidies it should be a cash cow that almost guarantees good returns.
You forget how the Efficient Market works. These factors are already baked in to the stock prices.
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

Ged wrote:
Jfet wrote: If this is all true then we are incredibly foolish for not specifically investing in the biotech sector, or overweighting it in our portfolio. With trillions in monopolies and subsidies it should be a cash cow that almost guarantees good returns.
You forget how the Efficient Market works. These factors are already baked in to the stock prices.
Yes, I am still a little fuzzy on the efficient market thing. I don't think any of the trillions of dollars of subsidies changed overnight and yet the whole biotech sector dropped around 6%. It rather seems like an efficient movement of people from one side of an overloaded ferry to the other side.
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Re: Do you think the biotech sector will be hurt long term?

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And today everyone runs to the other side of the boat (GILD up 5%, sector up 1%)

Starting to get seasick. Those dang efficient market people must really process news a lot faster than I can read, because I haven't read anything today that seems a lot different than what I read yesterday or the day before.
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Re: Do you think the biotech sector will be hurt long term?

Post by Jack »

livesoft wrote:I liked this report about a certain flu drug:

"Millions wasted …"
http://www.bbc.com/news/health-26954482
Turns out that Gilead was the developer of Tamiflu and receives royalties from Roche. The royalties for Tamiflu amounted to more than half of Gilead's revenue in some years.
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Re: Do you think the biotech sector will be hurt long term?

Post by patrick »

The risk of loss due to adverse government actions always exists for every sector. If you want to move out of biotech specifically right now due to such risks, just ask yourself: do you know something important that everyone else doesn't? For instance, is the concern over the price you mentioned something special that you know about but other market participants haven't heard of?
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Re: Do you think the biotech sector will be hurt long term?

Post by hiddensee »

ourbrooks wrote:It's hard to avoid speculating about how Gilead came up with their pricing. The market for $1,000 a day drugs can't be all that large for an illness often associated with intravenous drug use. My speculation is that it's because a number of Gilead's competitors are at work on Hepatitis C drugs of their own with a good chance of success. Gilead figured to make their money early and then drop the price when the competition appeared. If that's the case, then the future of the biotech sector is likely to be up rather than down because of new products coming into the market place.

There's no denying that there's much more stress on the cost effectiveness of drugs than there used to be. This may change who wins and who loses in the biotech industry; a company which came up with a n innovative way to reduce by 30% the cost of a treatment for a common ailment might actually do better than a company which pioneered a miracle cure which only 1 in a 100 patients could afford.
The pricing is largely based on costs. Most medical improvements of the last 30 years have been very marginal in terms of cost versus benefit, especially for early adopters. It's difficult to disentangle regulatory factors from unavoidable costs, but the era of discovering wonder drugs on a moldy petri dish is over.

It's a structural weakness in the whole biotech sector. It will almost certainly be bigger in 50 years than it is now, but there's good reason not to expect windfall profits.
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Re: Do you think the biotech sector will be hurt long term?

Post by logos »

Its just like a cure for a terrible life long contagious illness. Why should they get to make any money off of that? I think GILD deserves to get get paid and congratulated.

Instead maybe they should have made it a chronic treatment so that people have to keep taking it for life, that way they slowly get paid even more.

I think there will still be a market. There are lots of former drug users as well as a crop of people from the 1980s who got it from blood transfusions. Also exposed healthcare professionals. Also lots of iv drug users who can get it via medicaid. HIV meds are expensive yet they get paid for. In the long run this will still save money down the road when these people avoid liver transplant, multiple admissions for hepatic encephalopathy, ICU admits for bleeding varices etc. Liver disease is a terrible way to die and they usually are in and out of the hospital constantly as they slowly decompensate towards the end.
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

So yeah, Gilead just blew the lid off of earnings...I think the high estimate was $1 a share and they earned $1.48 and they almost doubled revenues YoY.

Probably will be ok.
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Re: Do you think the biotech sector will be hurt long term?

Post by abuss368 »

Most investors on the forum have a strategy of total market index investing. This often excludes sector funds but you may want to start a new thread with a poll inquiring about sector funds in general.

Typically the only sector fund you most commonly read about on the forum is REITs/Real Estate which is often considered a separate asset class.

To answer your question, I would not invest in a sector fund for many of the reasons noted above. A position in a sector fund is speculation and a bet.

Best.
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Re: Do you think the biotech sector will be hurt long term?

Post by abuss368 »

I should have added: "Keep investing simple"!
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Re: Do you think the biotech sector will be hurt long term?

Post by livesoft »

abuss368 wrote:Most investors on the forum have a strategy of total market index investing.
Actually, polls on the forum show that most investors on the forum have a strategy of small-cap and value-tilt slice-and-dice investing. The total market index investing folks are a minority.
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Re: Do you think the biotech sector will be hurt long term?

Post by Valuethinker »

logos wrote:Its just like a cure for a terrible life long contagious illness. Why should they get to make any money off of that? I think GILD deserves to get get paid and congratulated.

Instead maybe they should have made it a chronic treatment so that people have to keep taking it for life, that way they slowly get paid even more.

I think there will still be a market. There are lots of former drug users as well as a crop of people from the 1980s who got it from blood transfusions. Also exposed healthcare professionals. Also lots of iv drug users who can get it via medicaid. HIV meds are expensive yet they get paid for. In the long run this will still save money down the road when these people avoid liver transplant, multiple admissions for hepatic encephalopathy, ICU admits for bleeding varices etc. Liver disease is a terrible way to die and they usually are in and out of the hospital constantly as they slowly decompensate towards the end.
A more difficult question is whether Gilead should be paid more for the drug in the USA than in Canada, UK or Europe. *that* is the difficult question.

I don't have the source to hand but I believe the quoted price in other countries is $50k pa.
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Re: Do you think the biotech sector will be hurt long term?

Post by Valuethinker »

ourbrooks wrote:It's hard to avoid speculating about how Gilead came up with their pricing. The market for $1,000 a day drugs can't be all that large for an illness often associated with intravenous drug use. My speculation is that it's because a number of Gilead's competitors are at work on Hepatitis C drugs of their own with a good chance of success.
Actually the quoted number of sufferers in the US was over 1 million, I believe. This is a *major* disease with serious healthcare and societal costs.

By no means were all the sufferers infected by bad needles in abusing illegal drugs.
As for actually investing in the biotech sector, I agree with livesoft; there's no particular reason for thinking the biotech sector will outperform or underperform the broad market and your best bet is to diversify and hold the whole market.
Actually from personal experience and, I believe, empirical data, it's a classic 'skew' distribution. A small number of biotech stocks do very well, but the average biotech stock significantly underperforms-- it's a left skew.

Larry Swedroe has made the analogy to lottery tickets and that's my impression of biotech investing-- an example of why small cap growth stocks underperform (because there's the chance of the really big win out there).
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Re: Do you think the biotech sector will be hurt long term?

Post by leonard »

You want to time an entire sector because of "news" that applies to one company's, one drug, on one point (pricing). A piece of news that is publicly available. Plus, that price, after discounts and negotiations with insurance companies, etc. etc. will probably not hold up. So, one could argue the pricing amounts to non-news.

Now, how does one go about timing the entire sector based on this "news".
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Re: Do you think the biotech sector will be hurt long term?

Post by Valuethinker »

Jfet wrote:
SecretAsianMan wrote: I agree. A 6% drop in share price will undoubtedly discourage companies and investors from developing new drugs. That's also why nobody invests in tech companies anymore after the 2000-02 crash. After all, any fool can see there's no way for tech companies to make money considering market structures and with new disruptive technologies always just around the corner.

The threat of a drop in share price potentially scaring away potential investors should obviously be put at the top of the list of concerns when it comes to drug pricing.

SAM
Consider that a lot of these companies finance drug research by issuing more shares. It becomes hard to raise money if your share price is in the toilet.

I do not see biotech companies flush with cash like Google, Microsoft, Apple, Cisco. Only a few of them pay a dividend. Then there is that whole past history is not a guarantee of future performance and we do not know what would happen to research if price controls were placed on new drugs. I think it would become very likely that companies would focus on very easy to develop low cost drugs if they knew they would get a similar price for something they spent $10,000,000 developing vs something they spent $11,000,000,000.
A little bit of background.

New drugs *are* price controlled, in most countries. The national health authorities bargain with the drug companies as to the price they are willing to pay for new formulations. In the UK that's called National Institute for Clinical Evidence (NICE). It makes a decision whether to allow a drug based on quality years of life added vs cost. It's brutal in a way, but it leads to consistent economics. It is both highly criticized domestically and widely admired internationally.

If there were new cheap drugs to develop out there, drug companies would do so. Largely, there are not. Or they would develop them-- they'd be hugely lucrative if they could.

Where there *is* low hanging fruit is in drugs for maladies common in the third world, which are almost unknown in the first. The economics favour expensive drugs for the latter *not* cheap drugs for the former. That's the gaping hole in the market, the billions out there in the Third World that are not properly treated, because the market doesn't create the incentives so to do. In the case of Gilead they have addressed that-- I believe they are charging the Egyptian government something like $900 pa per hepatitis C victim. It will be interesting to see what happens in China which has, I believe, one of the worst hepatitis rates in the world (all forms).

The other market hole is in rare conditions and maladies in the first world (morphan's syndrome comes to mind) where the actual markets aren't large enough to justify the necessary testing.
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Re: Do you think the biotech sector will be hurt long term?

Post by pshonore »

Gilead reported Q1 earnings today after the market closed. A real blow out. Sales of Sovaldi were $2.3 BILLION for the quarter and are projected at roughly $10 Billion for the year.
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Re: Do you think the biotech sector will be hurt long term?

Post by abuss368 »

livesoft wrote:
abuss368 wrote:Most investors on the forum have a strategy of total market index investing.
Actually, polls on the forum show that most investors on the forum have a strategy of small-cap and value-tilt slice-and-dice investing. The total market index investing folks are a minority.
We should run an updated poll. That is interesting.

Thanks.
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Re: Do you think the biotech sector will be hurt long term?

Post by hiddensee »

Valuethinker wrote:A little bit of background.

New drugs *are* price controlled, in most countries. The national health authorities bargain with the drug companies as to the price they are willing to pay for new formulations. In the UK that's called National Institute for Clinical Evidence (NICE). It makes a decision whether to allow a drug based on quality years of life added vs cost. It's brutal in a way, but it leads to consistent economics. It is both highly criticized domestically and widely admired internationally.
US has the same thing: the medicaid and medicare price boards which control over 50% of US medical spending. Insurance companies have similar boards.
If there were new cheap drugs to develop out there, drug companies would do so. Largely, there are not. Or they would develop them-- they'd be hugely lucrative if they could.
That may or may not be true. One of the biggest costs, not borne by earlier discoveries like vaccinations and antibiotics, is the enormous regulatory burden. Biotech is a license and patent raj, so investing in it means assuming a lot of political risk. Political risk is generally my least favourite type of risk, since it responds to largely irrational incentives and selection pressures, but YMMV.
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Re: Do you think the biotech sector will be hurt long term?

Post by Valuethinker »

hiddensee wrote:
Valuethinker wrote:A little bit of background.

New drugs *are* price controlled, in most countries. The national health authorities bargain with the drug companies as to the price they are willing to pay for new formulations. In the UK that's called National Institute for Clinical Evidence (NICE). It makes a decision whether to allow a drug based on quality years of life added vs cost. It's brutal in a way, but it leads to consistent economics. It is both highly criticized domestically and widely admired internationally.
US has the same thing: the medicaid and medicare price boards which control over 50% of US medical spending. Insurance companies have similar boards.
So jfet's point that drugs shouldn't be price controlled is one you disagree with? Ie you agree with me? They already *are*?
If there were new cheap drugs to develop out there, drug companies would do so. Largely, there are not. Or they would develop them-- they'd be hugely lucrative if they could.
That may or may not be true. One of the biggest costs, not borne by earlier discoveries like vaccinations and antibiotics, is the enormous regulatory burden. Biotech is a license and patent raj, so investing in it means assuming a lot of political risk. Political risk is generally my least favourite type of risk, since it responds to largely irrational incentives and selection pressures, but YMMV.
It's an interesting question whether the cost of new drugs is in the regulatory burden *alone* or whether there are other factors. Something like antibiotics, which are needed desperately, there are not the returns for drug companies-- a new formulation will have a limited market, and its efficacy will generally be short lived.

The world is full of regulated oligopolies. Banking comes to mind. So lots of industries bear political risk.
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Re: Do you think the biotech sector will be hurt long term?

Post by hiddensee »

Valuethinker wrote:
hiddensee wrote:
Valuethinker wrote:A little bit of background.

New drugs *are* price controlled, in most countries. The national health authorities bargain with the drug companies as to the price they are willing to pay for new formulations. In the UK that's called National Institute for Clinical Evidence (NICE). It makes a decision whether to allow a drug based on quality years of life added vs cost. It's brutal in a way, but it leads to consistent economics. It is both highly criticized domestically and widely admired internationally.
US has the same thing: the medicaid and medicare price boards which control over 50% of US medical spending. Insurance companies have similar boards.
So jfet's point that drugs shouldn't be price controlled is one you disagree with? Ie you agree with me? They already *are*?
I am not making a "should" (political) argument, and the fact that something happens now does not mean that I agree with it. I am just pointing out that NICE isn't substantially different to similar US boards.

Personally I would not interpret this as meaning that drugs are currently price controlled. A price control is a legal compulsion not to sell something for more than a certain amount. These arrangements are, at worst, cartels, and clearly there are enough of these cartels that they are at the very least in competition with one another, and in both countries one can also pay out of pocket, so they're implicitly competing with private individuals for business too. So these cartels aren't even monopolies, they're analogous to just any large buyer in a consolidated industry. Again, this is only a comment on the world as it is and not as I think it should or shouldn't be.
If there were new cheap drugs to develop out there, drug companies would do so. Largely, there are not. Or they would develop them-- they'd be hugely lucrative if they could.
That may or may not be true. One of the biggest costs, not borne by earlier discoveries like vaccinations and antibiotics, is the enormous regulatory burden. Biotech is a license and patent raj, so investing in it means assuming a lot of political risk. Political risk is generally my least favourite type of risk, since it responds to largely irrational incentives and selection pressures, but YMMV.
It's an interesting question whether the cost of new drugs is in the regulatory burden *alone* or whether there are other factors. Something like antibiotics, which are needed desperately, there are not the returns for drug companies-- a new formulation will have a limited market, and its efficacy will generally be short lived.

The world is full of regulated oligopolies. Banking comes to mind. So lots of industries bear political risk.
I agree that banking is also dangerous, but it's probably the only big one that is as heavily invested in political favour as biotech. Record/film publishing perhaps. There are some smaller ones as bad or worse, like renewable energy, Tesla, etc. I think people who overweight these types of stocks are playing a very dangerous game. In most countries government bonds belong in the same category. Maybe not in the US, for now.

Bear in mind also that political factors can cut both ways. In the case of biotech, drug licenses limit companies' range of products and drive up development costs, but patents drive up prices and increase returns. From a pure investment (rather than human welfare) point of view it's not clear whether the net effect of government is positive or negative in this sector, despite the fact that all these interventions decrease the availability of medicine.
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Re: Do you think the biotech sector will be hurt long term?

Post by Valuethinker »

hiddensee wrote:
Valuethinker wrote:
hiddensee wrote:
Valuethinker wrote:A little bit of background.

New drugs *are* price controlled, in most countries. The national health authorities bargain with the drug companies as to the price they are willing to pay for new formulations. In the UK that's called National Institute for Clinical Evidence (NICE). It makes a decision whether to allow a drug based on quality years of life added vs cost. It's brutal in a way, but it leads to consistent economics. It is both highly criticized domestically and widely admired internationally.
US has the same thing: the medicaid and medicare price boards which control over 50% of US medical spending. Insurance companies have similar boards.
So jfet's point that drugs shouldn't be price controlled is one you disagree with? Ie you agree with me? They already *are*?
I am not making a "should" (political) argument, and the fact that something happens now does not mean that I agree with it. I am just pointing out that NICE isn't substantially different to similar US boards.
OK. I think we are agreed there are price controls?

If you have one buyer, and they tell you what your price is, that's a price control is in my book.
Personally I would not interpret this as meaning that drugs are currently price controlled. A price control is a legal compulsion not to sell something for more than a certain amount.
Which is, in fact, what goes on. The difficult question is why US consumers should pay more for drugs than consumers in other developed countries. We can't answer that here, and, in fact, it's not a simple question.
I agree that banking is also dangerous, but it's probably the only big one that is as heavily invested in political favour as biotech. Record/film publishing perhaps. There are some smaller ones as bad or worse, like renewable energy, Tesla, etc. I think people who overweight these types of stocks are playing a very dangerous game. In most countries government bonds belong in the same category. Maybe not in the US, for now.
Well. Media it's all about copywrite laws, and franchises (eg broadcast licenses). So that's political risk.

Banking we agree. Insurance would fall into the same category.

Energy is all about subsidies, production licences, pipeline licenses, fracking licenses, relationships in third world countries etc. So that's a highly political industry (ignoring renewables).

Energy utilities of course.

Telecommunications is quite highly regulated, most places. Technology has operated outside that, for a while, but is now big enough, and oligopolistic enough, that the political issues come to the fray. You can write 'don't be evil' but that doesn't mean you can avoid being evil.

Government bonds? In all countries they have some political risk-- recent US government shutdown a point. On the other hand, most countries, most of the time, borrow money and pay it back. That's unlikely to change, bar a repeat of the 1930s or World War II.

Bear in mind also that political factors can cut both ways. In the case of biotech, drug licenses limit companies' range of products and drive up development costs, but patents drive up prices and increase returns. From a pure investment (rather than human welfare) point of view it's not clear whether the net effect of government is positive or negative in this sector, despite the fact that all these interventions decrease the availability of medicine.
I don't take it as a given that they reduce the availability of medicine. Patents? Well the industry couldn't exist without them.
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Re: Do you think the biotech sector will be hurt long term?

Post by hiddensee »

Valuethinker wrote:OK. I think we are agreed there are price controls?

If you have one buyer, and they tell you what your price is, that's a price control is in my book.

...

Which is, in fact, what goes on. The difficult question is why US consumers should pay more for drugs than consumers in other developed countries. We can't answer that here, and, in fact, it's not a simple question.
You've simply cut out my argument that the existence of various drug-buying blocs does not constitute a price control. I can only conclude one of the following: you couldn't respond to it, didn't read it, or considered it so obviously wrong you didn't think it warranted a response. Assuming the latter, it is not obvious to me, so I would appreciate seeing the explanation.
I agree that banking is also dangerous, but it's probably the only big one that is as heavily invested in political favour as biotech. Record/film publishing perhaps. There are some smaller ones as bad orworse, like renewable energy, Tesla, etc. I think people who overweight these types of stocks are playing a very dangerous game. In most countries government bonds belong in the same category. Maybe not in the US, for now.
Well. Media it's all about copywrite laws, and franchises (eg broadcast licenses). So that's political risk.
Media content is worthless (and forgotten) within hours if not minutes. I don't think they depend at all on copyright. They depend on broadcast licenses to some extent, but when are those ever withdrawn? This may be a threat to editorial independence but not the underlying profitability of the companies. It's maybe an important issue for a voter, but probably not for an investor. And I'm not sure I'd characterise TV news as a big sector to start with; I doubt it's more than 1% of a total stock market fund.
Energy is all about subsidies, production licences, pipeline licenses, fracking licenses, relationships in third world countries etc. So that's a highly political industry (ignoring renewables).

Energy utilities of course.

Telecommunications is quite highly regulated, most places. Technology has operated outside that, for a while, but is now big enough, and oligopolistic enough, that the political issues come to the fray. You can write 'don't be evil' but that doesn't mean you can avoid being evil.
Energy isn't "all about subsidies"; this is a myth fed to you by lobbyists. Conventional energy production strongly follows market incentives. Pipelines (and to a lesser extent, exploration companies) have some political dependency, but it's heavily constrained by practical reality. If the alternative is the oil stops, the pipelines are going to be built, whoever is in power and whatever they otherwise believe.

Utilities and telecoms I'll grant in the US; not so much in my country though.
Government bonds? In all countries they have some political risk-- recent US government shutdown a point. On the other hand, most countries, most of the time, borrow money and pay it back. That's unlikely to change, bar a repeat of the 1930s or World War II.
How many countries can you think of that never defaulted, inflated away their liabilities, were catastrophically defeated in war, had revolutions, etc.? Sure US and other Anglosphere ones, Switzerland, Sweden... that's about it. There are "government bonds" and there are US bonds; I'd consider "government bonds" to be close to a junk asset class.
Bear in mind also that political factors can cut both ways. In the case of biotech, drug licenses limit companies' range of products and drive up development costs, but patents drive up prices and increase returns. From a pure investment (rather than human welfare) point of view it's not clear whether the net effect of government is positive or negative in this sector, despite the fact that all these interventions decrease the availability of medicine.
I don't take it as a given that they reduce the availability of medicine. Patents? Well the industry couldn't exist without them.
That's the first order market effect: patents are monopolies, so they allow companies to charge more and thereby internalise monopoly profits with lower sales volume. This is the problem you were talking about earlier, of companies not manufacturing drugs for the third world despite them being affordable at marginal cost of production.

I agree higher order effects could go the other way. On the other hand it must be conceded that a lot of drug R&D is just paying regulatory costs imposed by governments, so it's not really clear whether drugs would be expensive absent interventions.
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Re: Do you think the biotech sector will be hurt long term?

Post by richard »

Valuethinker wrote:I don't take it as a given that they reduce the availability of medicine. Patents? Well the industry couldn't exist without them.
I'd phrase that as: the US drug industry couldn't exist in its current form without patents, but that's not the same as the industry couldn't exist without them.

Look at the generic drug industry. It seems fine without government granted patent monopolies.

There are ways to finance drug development other than the current patent system.
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Re: Do you think the biotech sector will be hurt long term?

Post by Jfet »

richard wrote:
Valuethinker wrote:
There are ways to finance drug development other than the current patent system.
Somehow I don't think you are going to raise 4B to 6B on kickstarter to fund your own cure for Hep C. And what would you offer contributors? A T-shirt?
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