I believe it is always worth looking at the most feared or despised sector in case there is an opportunity to average down into something, probably an ETF, which could work out in time.
First, I am, as always amazed at the pusillanimity of business leaders and how they crawl about on the floor, meekly silent in the face of authority. It is so in-American. Why are pharma. CEOs not tersely and robustly pointing out to big government how the collapse of their capitalization (stock price) and the threat of price-controls (partial nationalization) must directly affect their research budgets and therefore the earnings of one of the most successful American industries? (Which government can then tax.) But let it pass. I guess the modern bigtime CEO just wants to be part of big government. I notice some, where their prices were entirely justified by time-to-market, are now voluntarily reducing their prices. The corollaries are obvious.
So that is the risk: that something seriously socialist actually does happen, not to illegitimate price-gougers but to the whole space. I assume it is a very big risk, because I have not read a defense of the business anywhere. Only whining pre-compliance.
Where might opportunity lie if nothing too bad actually happens? In terms of ETFs, I do not share the acclaim for the one ETF which is always quoted: IBB. I think BBH looks much better, because you only have the big ones. You lose most of the still-unprofitable ones and the dross. I have started acquiring a holding in BBH.
In terms of a company, I am also looking seriously at CBPO. Now I know Saul’s views on Chinese companies and I completely share them! So I am breaking a rule, a habit all investors should cultivate.
CBPO is a bio-pharma. company in China, quoted here. The figures are splendid which is why it comes through my screens and DD. It looks cheap. I have been buying a few. My next marker to buy more is when IBB (which I am using as a helpful indicator) is at 250.
I hope I have not minimized the risk.
7 Likes
Too much risk for me. This is a sector that is very sensitive to the shifting political winds. The Mylan hearing in Congress last summer scared me off…
That said, Zacks ranks BBH #1
https://finance.yahoo.com/news/trump-effect-elevated-sector-…
Pharmbio is far too risky. I served that industry for 20+ years. I rate oil/gas less volatile (and I avoid that sector).
Good luck with your quest. Adding the “China factor” to an already volatile sector could be a ten-bagger — or drop precipitously to zero.
There is a new risk now that we had never sidered before. This sector is highly sensitive to the moods of the new President-Elect. One angry tweet from him and the ETF goes down 10% overnight.
I have no idea why biotech surged after the elections. The pharma sector is on Donald Trump hit list.
strelna,
I agree, and great use of the word pusillanimity!!
I have a few pharma/biotech that I have been adding a bit to. Most not applicable to this board, except Celgene, which I believe Saul had or at least followed for awhile.
These were pretty beaten down thru much of the whole election year, and I think now represents another opportunity to add a little. Yes, there are risks, but to me, not the extent the recent sector drop shows. Also, by adding a little, I mean a real little bit.
Kevin
I have no idea why biotech surged after the elections. The pharma sector is on Donald Trump hit list.
My understanding is that there had been concerns that Hillary Clinton, if elected, would have gone after pharma as well.
1 Like
Until mentioned in a Time Magazine interview that came out yesterday I don’t think that Trump had spoken out on the price of drugs.
Hillary had made that one of her targets.
Rob
Three points:
-
Big pharma always defends their high prices by the cost of R&D, but then if you look closely you’ll often find that sales and marketing exceeds R&D spending - sort of undercuts their arguments when the real driver is the cost of advertising, selling, etc. is the primary cost driver.
-
For mysterious reasons (to me anyway) US patent protection outlives patent protection almost everywhere else on the planet. They can continue to sell branded monopoly drugs in the US often for years after generics are available everywhere else on the planet. Why do these companies get patent extensions exclusively in the US long after the patents expire everywhere else?
-
As for Chinese companies, this is from a Reuters report in the Global Times (Chinese paper printed in English) March, 2016: “Analysts blamed a lax regulatory system for creating a brisk market in listed shell companies that could be acquired via reverse takeovers, and also for inflating average P/E ratios in China, despite widespread public concerns that insider trading, dishonest accounting practices and market manipulation were endemic among listed Chinese companies.”
Everything printed in the Global Times is vetted by the censors in Beijing. So this indictment stands as a clear statement, endorsed by the Chinese government that in general accounting practices and other vehicles of market manipulation are rampant among Chinese listed companies. Proceed with caution, many risks are unknown and immeasurable. Don’t be overly confident of the numbers reported by Chinese companies (even those with ADRs in the US markets and US accounting firms as auditors). Even if the company reports in GAAP, you are at risk in terms of the way the GAAP figures have been arrived at internally.
BTW, my wife is Chinese, I spend about 25% of my time in China every year. I have many Chinese friends and family members. They all consider “investing” in the stock market akin to playing mahjong for money, some skill is involved, but winning is more a matter of luck than anything else. Why do they do it? Culturally, the Chinese love to gamble. They are strong believers in omens of luck (and bad luck). But no one I know has their life savings in the markets, most retail investors in China dabble with a small amount of “pin” money. Their life savings are either in a jar hidden at home, or increasingly in interest earning savings accounts at one of the major national banks.
8 Likes
1) Big pharma always defends their high prices by the cost of R&D, but then if you look closely you’ll often find that sales and marketing exceeds R&D spending - sort of undercuts their arguments when the real driver is the cost of advertising, selling, etc. is the primary cost driver.
R&D is speculative. Sales and marketing isn’t.
2) For mysterious reasons (to me anyway) US patent protection outlives patent protection almost everywhere else on the planet. They can continue to sell branded monopoly drugs in the US often for years after generics are available everywhere else on the planet. Why do these companies get patent extensions exclusively in the US long after the patents expire everywhere else?
Patents are a legislative construct. For an answer to your question, ask Congress.
Denny Schlesinger
1 Like