Saturday, August 27, 2016

Hillary vs Biotech

Hillary Clinton's campaign rhetoric has been wreaking havoc in the Biotechnology sector ever since she started speaking out against drug prices last year.  I agree that drug prices are way too high but so are a lot of other things like the cost of housing and food in general.  She has tried to paint Biotech companies as sinister organizations focused only on profit but I believe that characterization is far from the truth or misleading at best.

Biotech companies just like any other companies are only trying to survive from one year to the next.  If you've ever been a Biotech investor you know that it is not all rainbows and sunshine year over year.  Biotechnology is a brutal business where bankruptcies are not uncommon and profits are far from certain.  So when a company in this industry comes out with a drug that is profitable they need to make the most out of it because the next big failure is just around the corner.

If we are trying to be fair let's also lay some of the blame on regulators for creating a patent law structure and FDA approval process that turns the whole process of creating life saving medicine into some kind of Biotech hunger games.  There is nothing more expensive than hiring medical geniuses to invent miracles so it is not surprising to me how high drug prices have gotten.  Just as with any free functioning market the price will find itself somewhere in between supply and demand in the long run.  So if a company can raise the price of its product and still experience demand for that product the price is justified from a free market perspective.
 
History has shown us that when politics step in and interfere with the pricing mechanisms of the market that interference only tends to make things even more expensive.  If the government really wants less expensive drugs maybe it should spend more of its budget buying drugs at market prices and then selling them at below market prices.  Or, similar to what is done in the defense industry, it could front more of the research and development costs that these companies face thereby lowering their burden of profit.

So from an investing perspective...is there a way to make any money out of this mess?

My opinion is that this setback in Biotech is only temporary and will eventually work itself out over the next several years as the true value of these drugs prevail.  I like to express my perspective as an investment in the Biotechnology index rather than any individual company because the failure risk of a single company in this particular sector is way too high for my tastes.  Currently the largest Biotech related ETFs $XBI and $IBB are approximately 30% off of their highs reached last year which means that a profit of +40% could be had if the Biotech sector were to recover over the next several years.
 
Even better, a leveraged version of these ETFs $LABU is off a whopping 84% from its high which would mean a +500% return if the Biotech sector were to recover.  Sure there is volatility based lag embedded in any leveraged investment but if the Biotech sector were to recover to and exceed its highs the leveraged fund would not be very far behind.  Think of the leverage in these terms...if I invest $100 today and the entire Biotech industry goes bankrupt and never recovers then I lose my hundred bucks.  If the Biotech industry does recover someday I'll turn my hundred bucks into $600...nuff said.

This same strategy could also be used in the even broader Heathcare index by using $XLV and $CURE respectively.  The fact that the entire Healthcare industry has been hit this hard by political rhetoric when the demand for high quality heathcare has never been higher is in my opinion a screaming buy.  Remember, as always, don't over do it, stay diversified and think long term.

Finally, I would encourage the Clinton campaign to work with the Biotechnology industry instead of against it because the blame of high drug prices really belongs on both sides of the table and there are also some very amazing people that do amazing work in this industry that do not deserve to be painted with such broad brush.

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