Quick Tips on Investing in the Pharmaceutical and Medical Device Industry

Greetings GuruFocus Community,

As this is my first post with GuruFocus. I’d like to quickly introduce myself and attempt to help new investors navigate the complexities and pitfalls of investing within the pharmaceutical and medical device industries. My background was grounded in academics until recently; having completed a Ph.D. in Biophysics from SUNY Buffalo (2015), and a Bioscience Management degree from the Keck Graduate Institute (2016). After KGI I worked at Regeneron Pharmaceuticals for the past year before recently moving to Medtronic Diabetes in their Upstream Marketing department.

Investing in pharmaceuticals and medical devices is arguably one of (if not the most) difficult industries to understand and consistently do well in. Conducting clinical trials, adhering to FDA approval processes, increasing R&D budgets, recalls, crowded markets, access to drugs and devices post approval are some of the daily hurdles pharmaceutical and medical device companies need to overcome whether they are big or small.

To help illustrate just how fatal one bad day can be in the world of pharmaceuticals, I will point to Opthotech (OPHT, Financial). Opthotech announced results from two Pivotal Phase 3 Clinical trials that investigated if combining Fovista® (pegpleranib) anti-PDGF therapy with Lucentis® (ranibizumab) anti-VEGF therapy vs Lucentis® therapy alone showed any benefit to patients suffering from wet age-related macular degeneration.

No improvement was found and OPHT went from trading around $38 a share on Friday Dec. 9, 2016, to around $5 a share on Monday, Dec. 12. Shortly after this failed trial, OPHT was forced to cut about 80% of its staff and currently trades around $2.90 a share.

A similar story comes to mind when Eli Lilly (LLY, Financial) reported that its drug candidate Solanezumab failed to show any significant benefit to patients diagnosed with Alzheimer’s, dealing a major blow to not only patients, but the scientific community and Eli Lilly itself ,which traded around $76 a share on Nov. 22, and fell to around $68 a share on Nov 23. It took another month for Eli Lilly to recover from this hit, and it currently trades around $84 a share.

Having been active in pharmaceutical and medical device investing for years, I’d like to share a few tips and insights which may be valuable to newcomers.

No. 1 – I am sure to routinely look at “The FDA’s Calendar.” Recalls, Complete Response Letters (CRLs) and abrupt ending of clinical trials are unforeseen in nature. However, when approvals are expected to be decided by the FDA, these have approximate dates. Biopharm Catalyst and Valinv are great resources to know what drugs are due for approval or denial from the FDA and when. It is also important to understand that issues such as CRLs do not mean a drug is denied but rather the application for the drug’s approval cannot move forward for a decision due to any number of concerns such as manufacturing. Knowing when drugs are due to be approved is critical for timing. For example, Adamis (ADMP, Financial) recently got approval for selling pre-filled Epinephrine syringes. Epinephrine itself is not protected by any patent and the development of such syringes is considered generic. After approval, ADMP shares surged roughly 53% on June 14, and the approximate date of this approval was stated online before the FDA rendered its decision.

No. 2 – Just because a pharmaceutical company has the typical “buy signs” of other companies does not mean buy. Gilead (GILD, Financial) for example rose to fame for transforming how we treat AIDS/HIV and successfully marketed an effective cure for Hepatitis C. Gilead has also been profitable since 2003, has a current P/E ratio of under 8, an EPS of roughly 9.4, significant cash on hand, and the stock price is significantly lower than the reported Peter Lynch Value of around $236.

The short percentage of float is currently 0.83% and yet things have been pretty bad for Gilead despite a booming market. Gilead has gone from a high of roughly $119 per share in January 2016, to a current price of roughly $70 a share.

In other words, Gilead is shrinking as a company and will continue to do so unless its make another significant acquisition such as it did with Triangle Pharmaceuticals and Pharmasset to market its HIV and Hepatitis C drugs. I am not hedging my bets on Gilead for long-term growth at this time. Even after a significant acquisition is executed, it is best to remain cautious to determine if this acquisition can deliver revenues.

No. 3 – "Rare and unprofitable" does not mean "avoid."

This is admittedly counterintuitive especially in the world of value investing and identifying companies with long-term growth. For example, BioMarin (BMRN, Financial) has a solid pipeline of drugs in development, six marketed drugs and an exclusive focus on treating rare diseases. While it may seem impossible for a drug company to ever succeed by making drugs to treat a limited number of patients, BioMarin has done remarkably well and I believe will become profitable in the coming years. In addition to a revenue increase since 2003 (from approximately $12 million to approximately $1.1 billion) and debt to equity ratio essentially stable since 2010 (staying between 0.25 to 0.45), BioMarin is better positioned than many would have believed for long-term growth.

Last, BioMarin is also able to take advantage of the U.S. Orphan Drug act of 1983. This act provides incentives for drug companies to discover cures and treatments for diseases that would otherwise not gain any attention due to their rarity. One of the more interesting and potentially lucrative benefits of gaining approval of a drug which treats an Orphan Disease (and has a pediatric labeling) is receiving a voucher from the FDA which “fast tracks” the review of any drug of choice from around 10-6 months. These three-to-four months are incredibly valuable because all drug companies are racing against their patents to increase revenues before their drugs become generic drug candidates. These vouchers can also be sold to other companies at any price, and a summary of such sales is given below.

In summary, navigating the pharmaceutical and medical device landscape is challenging, and knowing enough and feeling confident enough to invest in this industry is even more difficult. I hope the above resources are of some value, and I welcome any criticisms or additional insights.

Disclosure: I do not own any stocks mentioned in the article.