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When I earned my MBA from the Rochester Institute of Technology (RIT) back in the mid-1990s, my focus was finance and investing.
But it was a management professor who clued me in to some of the best ways to "look past the numbers" and understand what really makes a big company tick.
The professor, Janet C. Barnard, retired a few years back and, sadly, passed away in 2012.
The talks that she and I had were invigorating "mini-lessons" – which is why we were still having them years after I tacked my graduate-degree diploma to my office wall.
I often "shared" those lessons with my readers – quoting the management professor in stories I wrote back during my days at The Baltimore Sun, as well as in columns I've written for you folks here at Money Map Press.
Now those lessons will pay off again as we look at these huge biotech opportunities…
I even put her insights to use as an editor and manager. Prof. Barnard was always fascinated by what I did for a living. And in one particular "epiphany" conversation, she observed that my writers were very similar to the research-and-development (R&D) folks who work in Silicon Valley.
The way she saw it, the "creative" focus of my writers was almost the same as the "innovative" focus of a tech researcher, meaning both groups required a similar mentoring, nurturing environment to achieve maximum success.
Indeed, a hefty percentage of the many talks Prof. Barnard and I had focused on innovation – the process that, when effectively harnessed, can create such a windfall for a company's shareholders. Innovation is the "seed corn" of future sales and profits. Once you understand that – and can learn to spot it, as Prof. Barnard showed me – you can cash in, in a big way, over and over again.
Innovation is a topic we write about fairly regularly for Private Briefing. And it's a topic we understand – as evidenced by the eight biotechs that have given Private Briefing readers gains of 100% or better (among the 33 stocks that have doubled or more since launching this service three years ago).
In short, innovation – I'll call it the "I-Code" – is one of the best future profit indicators you'll find.
And two innovation-related stories that broke yesterday – both huge, albeit under-the-radar reports – caused me to recall the lessons of my late, great MBA mentor yet again.
I'm going to share both those stories with you here today. And I'm going to show you two ways to profit.
So let's get started by looking at the first news story – a revelation that could force investors to "value" Big Pharma players in a very different way.
A (Very) Costly Development Cycle
I covered biotech for three years at The Sun. But I learned the most important sector lesson of all on my very first day on the beat: It can take 10 years and more than $1 billion to create a new drug. The failure rate is stunning. So a true "blockbuster" drug can make or break a company – even a big one.
Yesterday, in the first of the two news stories I want to bring your way, the Tufts Center for the Study of Drug Development – which came up with that original $1 billion new-drug estimate – updated its figures and boosted that cost projection to a staggering $2.9 billion.
According to Tufts researchers, the average out-of-pocket R&D cost on a drug has hit $1.4 billion. They added in another $1.16 billion for "time costs" – the profits investors forego while a drug is in development. Add in an additional $312 million for post-approval research, and you're talking about $2.9 billion.
Some folks have argued this figure is bloated (they estimate the cost at $186 million, which is probably too far the other way). But when you consider that Tufts' original estimate back in 2003 was $802 million, that an "inflation adjustment" boosts that figure to $1 billion, and that more than a decade has passed since, I'm not so sure the number is out of line.
We saw how negatively Big Pharma stock prices were crimped by the "patent cliff" worries of a few years back – when scads of blockbuster drugs were coming off patent. And we regularly watch how investors badly savage a stock when a clinical trial goes awry or when a new drug application is denied by the U.S. Food and Drug Administration (FDA).
You can quibble a bit about the Tufts estimate. But to me, the message is clear: Innovation is more valuable than ever before – in biotech, information tech, and even in "boring" old consumer-focused and industrial companies.
And innovation has a greater impact on your investment returns than ever before. Effective, successful innovation will reward you with gains that far exceed the market averages. Wasted innovation – that is, money wasted on errant R&D or innovation that's never commercialized – will drown you in the red ink of stocks in a freefall.
And I guarantee that the "Spirit of Prof. Barnard" would agree with everything I've said here.
Top companies are employing creative strategies to innovate.
Just look at Abbott Laboratories (NYSE: ABT), the Big Pharma player whose shares have gained 42% (48% with dividends), since we recommended it back in June 2012.
About the Author
Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish... and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.