In the past few years, a strange new "defensive" asset has appeared in the market.
Investors use the "defensive" label to describe businesses that enjoy steady demand for their products – like food, cigarettes and electric utilities. The thinking goes, you want to own these sectors when the economy stinks. Their sales and cash flows should hold up better than retailers and hotel chains when consumers are broke.
Considering we've just had the worst credit crisis in 80 years, and one of the worst-ever bear markets in stocks, the new "defensiveness" shown by biotechnology stocks is extraordinary.
Biotech is typically a wild sector. Most people don't think of it as place to find safe stocks. But have a look at the accompanying chart, which tracks the SPDR S&P Biotech ETF () over the past two years. This fund has big holdings in the 10 or so large biotechnology companies that have viable products bringing cash in the door.
As the chart shows, the XBI ETF is actually higher today than it was back in 2007. You can't say that about oil, real estate, retail stocks, food stocks, tech stocks, gold stocks, or financial stocks.
The strength in biotech shares is confirmation of something I've been predicting for the past few months: We're due for huge rally in biotechnology stocks.
Biotech companies are much different than giant pharmaceutical companies like Pfizer Inc. (PFE) or Merck & Co. Inc. (MRK). Biotech firms make their drugs from living cells, rather than from mixtures of chemical compounds. Biotech drugs treat life-threatening diseases – so recessions barely dent sales growth. People can pass on the cholesterol-lowering effects of Lipitor for a while, but stopping a cancer treatment can kill a patient in weeks to months.
And because most biotech drugs are made from living cells, they're hard to copy. Right now, the U.S. Food and Drug Administration (FDA) has no approved pathway for generic biotech drugs. While Big Pharma is struggling with dwindling pipelines, big biotech companies are profitable, have growing sales, are generating tons of cash, and face no generic competition in the near term. Biotech bull markets are often good for gains of 300% to 500% – across the entire sector.
That's why I think you should become familiar with the sector immediately.
I recommend you start with three of the hottest areas of biotech. Each one has the potential to generate new "blockbuster" drugs (drugs with annual sales of more than $1 billion). Those three key areas are:
- Metabolic disorders: "Metabolic syndrome" is a politically correct term for patients who are obese, diabetic, and face increased risk of heart disease. There are good drugs to control diabetes and help prevent heart disease, but no good drugs to treat obesity. With half of the U.S. population technically obese or overweight, an effective diet pill is the Holy Grail of drugs. Right now, Americans spend more than $50 billion per year on over-the-counter diet remedies. An FDA-approved fat pill would be a monster seller.
- Vaccines: With new products to prevent cervical cancer, avian flu, and the common cold, vaccines are back in vogue. Big Pharma player Wyeth (WYE) has one of the biggest vaccines businesses in the drug world. It's part of the reason the company recently fetched a $68 billion buyout offer from Pfizer. Dutch biopharma player Crucell NV (ADR: CRXL) is the top remaining independent vaccine players in biotech. I predict it'll be acquired before 2009 is over.
- Infectious diseases: The transformation of HIV from a death sentence to a chronic disease has turned the infectious-disease-drug market into a multibillion-dollar industry. Gilead Sciences Inc. (GILD) is the top player in this space. The next frontier is an effective treatment for . Current drugs have terrible side effects and only "cure" 50% of patients. A handful of biotech companies – Vertex Pharmaceuticals Inc. (VRTX), Human Genome Sciences Inc. (HGSI), and Pharmasset Inc. (VRUS) – are nearing pivotal clinical data for next-generation Hepatitis C drugs.
There's never been a more exciting time to be a biotech investor. Big Pharma companies have nearly $100 billion in cash that will keep buyout offers large. We have plenty of "Holy Grail" areas to focus on. And, as you've seen, we have a strong trend on our side.
P.S. I expect the biggest opportunity in biotech (or the entire stock market for that matter) will arrive on March 30. By this day, one company will announce test results for a new drug that could create the single biggest return of any investment I've ever found. One drug expert calls the potential market for this drug the "biggest untapped goldmine in the industry" and speculates that it would be worth $10 billion per year. Click here for the full details of the situation.
News and Related Story Links:
- Money Morning News Analysis:
Hot Stocks: Pfizer-Wyeth Merger Underscores That Bigger isn't Better, Takeover Expert Basenese Says.
- Money Morning Market Analysis:
The $68 Billion Pfizer-Wyeth Deal Won't Revive the Moribund Merger Market.
- Money Morning Outlook 2009 Economic Forecasting Series:
The U.S. Market for Deals Remains in a Deep Freeze.
Wyeth withdraws from Crucell takeover talks.
Generic Biotech Dugs.
- Bloomberg News:
China's Drought May Make Birds More Susceptible to Avian Flu.
- U.S. News & World Report:
Health Buzz: Universal Flu Vaccine and Other Health News.
- CDC.gov: .