In the last two years, the hot money printed by the Fed has been looking for a big return. Much of that money has gone into the biotech industry.
After the big boom around 2000, biotechs have been flat as Big Pharma lost its patents and the hot money chased hard assets and housing.
But after another bust and boom, the fundamentals of biotechs picked up.
The last few years saw a marked improvement in FDA approvals and M&A deals.
In 2012, drug approvals by the FDA reached a 15-year high. 43 medicines were approved, marking a 30% increase from the year before. Among the leading type of drugs are those that deal with oncology, which accounted for 11 of the 43 from last year.
Prior to 2012, the FDA had typically approved approximately 23 drugs per year.
In 2013, the number of drugs approved dipped slightly to 34. That said, the sales value of those drugs is expected to be 14% higher in total than the ones approved in 2013
Advancing science in DNA is one reason for the surge in new drugs. Big data-processing supercomputers is another.
But perhaps the most important change comes down to the passing of the Prescription Drug User Fee Act (PDUFA), which — according to FDA spokeswoman Sandy Walsh — “has provided critical resources for improving the quality and timeliness of premarket drugs.”
Going Parabolic… Or Not
As you can tell by this iShares NASDAQ Biotechnology ETF (NYSE: IBB) chart, the market got ahead of itself.
Since the peak in late January, the market has sold off on bubble worries.
The index has fallen more than 11% back to support around $220 a share. Some 15% of the shares are now short. Yesterday, in what was perhaps a short squeeze, the ETF bounced and was up 3.65%.
In my service Technology and Opportunity, we saw outsized gains and locked in profits by selling stocks such as Prana Biotechnology (NASDAQ: PRAN) for 212.86% in just six months.
In our next issue due out next week, we are looking to use the current sell-off in biotech to add to our portfolio. We are specifically looking at medical device companies that are using robot-assisted surgery.
Cut Me
The idea of big incisions for operations like open-heart surgery will be looked on as barbaric in ten years. Small incisions, micro robotics, and catheters are the future. Many of these companies have high growth and P/Es in the mid-teens, which — on a valuation metric — doesn’t scream bubble.
As a contrarian, you have to look at the current sell-off as a healthy correction and a buying opportunity. We know the hot money isn’t going away. Yesterday’s Fed minutes stated that fears of hiking interest rates were overstated:
“Several participants noted that the increase in the median projection overstated the shift in the projections, could be misconstrued as indicating a move by the committee to a less accommodative reaction function.”
All the best,
Christian DeHaemer
Check us out on YouTube!Christian is the founder of Bull and Bust Report and an editor at Energy and Capital. For more on Christian, see his editor’s page.
