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How to profit from Big Pharma falling off a ‘patent cliff’

pharma

Opportunities abound in the healthcare sector

When reviewing current investment opportunities in the healthcare sector (XLV), one should start by looking at the overall demographics of our society and the forces driving the need for innovation in the field of medicine altogether. Consider the following:

  • Increase in life expectancies
  • Aging population (more than 1.4 billion of the population will be over the age of 60 by the year 2030)
  • Given the aging population, it is noteworthy that half of all lifetime care expenditures occur from the age of 65 and upwards
  • Increase in the rate of chronic illnesses across the globe

Now combine these demographics and innovation drivers with the current state of the state for larger pharmaceutical companies (a.k.a. “Big Pharma”):

  • The current “patent cliff” that exists where many larger revenue producing drugs at big pharma are set to come off patent in the upcoming years
  • Lack of research & development (R&D) spending and/or pipeline of new drugs at big pharma
  • Amount of cash on the balance sheets of several big pharma companies

Curing the underlying disease itself

Historically, big pharma has delivered drugs to the market that target symptoms of certain diseases. Biotechnology companies (a.k.a. “biotech”), on the other hand, produce drugs that target the underlying disease itself.

Given the lack of R&D in this area, we would expect that big pharma’s approach to biotech, and medical innovations in general, in the short-intermediate term would be to acquire as opposed to develop. This creates what we feel is a compelling opportunity for certain biotech companies with drugs already in phase II or phase III clinical trials given their attractiveness to future revenue potential at larger pharmaceutical companies.

Investing in the biotech sector has its own unique set of risks that should be carefully reviewed before considering an investment. Understanding this, given the pullback that we have seen in the sector since June of last year, current levels could present an attractive entry point for investors looking for an allocation to a portfolio of biotech companies focused on medical innovations and breakthroughs in attacking or treating widely-recognized chronic diseases, such as lung cancer, Parkinson’s disease and ovarian cancer, that could be seen as potential takeover targets by big pharma.

Click here to watch the video at Yahoo! Finance.