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How Legos, Gold and My Second-Grade Son Will Help You Make 60% on This Biotech Stock

I recently finished a stretch as the coach of a team in the Junior First Lego League (JFLL).

JFLL is a pretty cool concept. It's an evening activity where kids work with the iconic plastic toy bricks. The league shows kids how to conceive and follow through on an idea, work in teams and compete. The end goal is to introduce kids to engineering and robotics – for school and maybe even as careers.

I've done this for two years now – mostly because Joey, my 8-year-old, loves Legos and spending time with me. And I've been surprised by the impact: Even now, six months after we displayed our project down at the University of Maryland, I'll see some of the kids or their parents at Joey's school, at Little League or even at the local Target and be greeted as "Coach Bill."

The project focus this year was on "simple machines" – the basic devices (like a lever or wheel and axle) that help us accomplish basic tasks and that serve as the "building blocks" of virtually every complex machine used on Earth.

This year's JFLL was a real learning experience for Joey and his second-grade teammates.

And for me, too.

Simple, you see, doesn't just work for machines.

It works for investing, too.

And we're going to prove it by using this strategy to identify a promising biotech stock – perhaps the toughest of all investments to analyze.

But today we're going to show you how this "simple is better" strategy let us zero in on a biotech investment we believe can roll up a gain of 60% or better over the next three years.

Ode to Sutter's Mill

It's a fascinating time to be a tech investor.

If you look around, you'll see a dozen or so "pools of innovation" in which companies are revolutionizing their businesses. You see these paradigm-altering technological advances in sectors like mobile communications, "miracle materials," genomics, cloud computing, the Internet of Everything (IoE) and Big Data.

As we've said many times here, these aren't just "pools of innovation." They're also pools of hyper-profits.

You see, unlike past tech surges – the "dot-com" explosion of 1999, for instance – these "pools of innovation" aren't discrete (standalone) pockets of development. Thanks to the development of a gigantic, sector-wide tech "ecosystem," we're in a period of high-tech "convergence" in which each of these pools of innovation connects with many or all of the others.

If you were to capture this in a picture, you'd draw a "matrix" with lines connecting each of these with all of their counterparts.

What this does is magnify the profit potential of any single innovation you can cite.

Here's why I'm telling you this.

This "convergence economy" has been created by some of the most sophisticated, mind-bending technology mankind has ever seen.

And that creates a potential trap that lots of investors fall into.

Because the technology itself is so complicated, investors feel like their profit strategies have to be just as complex.

But that's not the case.

In fact, simple is better.

And one of the simplest approaches of all is the "pick-and-shovel" strategy.

The term comes from history.

Back during the California Gold Rush of 1848 to 1855, an estimated 300,000 of the gold-seeking "Forty-Niners" went west to find their fortunes. But the folks who really struck it rich were the merchants and other suppliers who provided the picks, shovels and other tools and survival necessities to the panning-for-gold fortune-seekers.

That "pick and shovel" strategy can work well in the investing realm, too.

In fact, it helped us zero in on Cambrex Corp. (NYSE: CBM), a biopharma firm that makes the drugs other companies have rolled the dice to research and develop.

Big Pharma/Big Challenge

The Gilead Sciences Inc. (Nasdaq: GILD) hepatitis C drug Sovaldi debuted last year and notched $10.3 billion in sales – the third-best single-year result in biotech history.

If you add in the $2.1 billion Gilead reaped from Harvoni, a cousin to Sovaldi that hit the market late in the year, you're talking about $12.4 billion in sales from one drug family.

(For a little context, the Pfizer Inc. (NYSE: PFE) anticholesterol drug Lipitor did $13.7 billion in 2006, while the AbbVie Inc. (NYSE: ABBV) anti-inflammatory drug Humira did $12.5 billion last year.)

But there are risks associated with "blockbuster drug" stocks. Investors are worried about AbbVie because an expiring Humira patent could cause sales to plunge from a $16 billion peak in 2017 to as little as $6 billion in 2022.

And Gilead's hepatitis C drugs are already seeing competition from other drugs (including one called Viekira Pak from AbbVie) and from revenue-collapsing price wars.

Price wars aside, just getting a new drug to market is a challenge unrivaled in all of technology.

For instance, for every 1,000 drug "compounds" that enter lab testing, only one makes it to human testing. Those that make it to market can face the pricing pressures we've described here. And then there's the limited period of profit-maximizing patent protection.

As a kind of "silent partner" to many of these big drug-makers, Cambrex benefits from the production work associated with these success stories – but is insulated from many of the risks.

A Contract Hit

Cambrex, based in East Rutherford, N.J., is a "contract manufacturing organization," or CMO – a company that provides drug-development and manufacturing services to the risk-takers like Gilead and AbbVie.

And that means, for investors, the pick-and-shovel Cambrex has a better shot at being a hit than the stocks of many of the companies it serves.

CMOs serve both big players like Gilead and smaller development-stage biotechs – helping those companies with everything from the development of new drugs to actual production in pharmaceutical-grade factories.

This is big business, and it's only going to get bigger.

During the early 2000s, when I was covering the biotech sector during my tenure at The Baltimore Sun, the Tufts Center for the Study of Drug Development said it took a decade and more than $1 billion to get a new drug to market. Just last year, Tufts boosted that estimate – to a staggering $2.9 billion.

Just the drug-development slice of the outsourcing is worth $17 billion, says U.K. market intelligence firm Visiongain. And you can bet that number is going to soar.

Right now, 40% of all drug development is outsourced, says Diane Palmquist, vice president of product management for GT Nexus. But she expects that percentage to double to 80% over the next few years.

Cambrex specializes in drugs in Phase II or Phase III clinical trials, the final two of the three key steps a company must take on the path toward U.S. Food and Drug Administration (FDA) approval, says Michael Robinson, editor of our Radical Technology Profits and Nova-X Report advisory services here at Money Map Press.

"Bill, by focusing on late-stage development, Cambrex is targeting drugs that have a higher chance of approval – and a higher chance of generating follow-on business," Michael says. "Custom manufacturing also is a growth market for Cambrex."

Forecasters at Visiongain say the worldwide market for custom drug-making will grow to $71 billion 2018.

Gilead ranks as the firm's single-biggest client, and industry analysts say Cambrex was a big factor in Sovaldi's record-smashing rollout.

But this behind-the-scenes biotech player has a client list that extends well beyond Gilead – a firm it continues to work with.

It has clients around the world that rely on the firm's six operating sites in the United States, Europe and India. Technically, these facilities are known as GMP-grade facilities – an acronym for good-manufacturing practices.

The FDA requires that any drugs used in Phase II and III clinical trials be produced at GMP facilities. So this gives Cambrex strong barriers to entry for its largest revenue segment – one that accounts for 60% of sales.

But Cambrex has plenty of range. It often partners with smaller, niche players that have cutting-edge science but need a partner that understands the complexities of drug trials and manufacturing.

That's why Cambrex has such a deep pipeline of in-development drugs. Right now, the company is working on 15 late-stage projects. And it usually has between 30 and 35 products under medium- or long-term-supply contracts.

In keeping with the "pick and shovel" aspect of this recommendation, we should also tell you that Cambrex is a player in the market for advanced pharmaceutical ingredients, or APIs.

APIs are the "active substances" that give a drug its intended effect in fighting a disease. As such, APIs cover a wide range of conditions – including cancer, heart disease, arthritis and hepatitis.

In other words, in this part of its business, Cambrex makes some of the ingredients Big Pharma and biotech firms need to produce new drugs. It produces more than 65 APIs a year, has 19 more under development and is ramping up to produce 10 new ones annually.

Doing It All

One last reason to like Cambrex's business model is the company's push into generic drugs. Thanks to the rising cost of medications – which helped fuel record spending on prescription drugs last year – healthcare agencies and insurers are pushing for cost savings, including in the area of drugs.

The market forecasters at Espicom Business Intelligence project that the worldwide generic drug market will hit $221 billion next year. Of that, the U.S. market will account for nearly half – or about $104 billion.

Cambrex is taking advantage of the fact that generic drug companies outsource most of their active pharmaceutical ingredients. Generics account for nearly 25% of total sales.

The remainder of the firm's sales come from controlled substances. These include opiate-based pain medicines tightly regulated by the U.S. Drug Enforcement Administration (DEA), giving Cambrex barriers to entry and high profit margins.

A Record of Success

One reason we like this biotech-focused pick-and-shovel strategy is that it has paid off for us before.

Indeed, it's paid off big – so big, in fact, that we described it as "Biotech Gold."

This earlier "simple is better" stock pick was Repligen Corp. (Nasdaq: RGEN).

We first told you about Repligen back in June 2013 – and the stock has soared more than 400% since then.

With a market value of $1.31 billion, the Waltham, Mass.-based Repligen offers investors the high-growth potential of biotech – without the risks posed by clinical trials or FDA drug approvals.

Where Cambrex supplies the production assistance needed to make drugs, Repligen supplies some of the key "ingredients" required in biopharma "recipes."

Repligen manufactures Protein A, a critical reagent used to manufacture monoclonal antibody-based therapeutics. It also supplies several "growth factor" products that "biomanufacturers" use to boost cell-culture productivity, Michael told us when we first recommended the stock to you.

"Bill, Repligen is an important player because of its work separating and purifying the disease-fighters known as monoclonal antibodies," Michael said. "Protein A comes from bacteria that live in human respiratory tracts and on the skin. Repligen uses this protein because it has novel qualities that help it bind to antibodies. In turn, these are called 'monoclonals,' because they are replicated as exact clones of specific antibodies needed to help fight disease. By cloning different antibodies, scientists can create drugs that target a wide range of conditions."

As is the case with Cambrex, Repligen's position as a "pick and shovel" player means it gets to work on some of the biggest drug-development programs. It's also a player in the "biologics" market, which is projected to double in size to nearly $240 billion by the end of the decade.

The sector includes protein-based drugs like monoclonal antibodies and vaccines. Repligen is already a supplier for such leading drugs as:

  • Avastin used to treat colon cancer.
  • Herceptin, a treatment for breast cancer.
  • And the aforementioned Humira, prescribed for rheumatoid arthritis (RA) and several other conditions.

Granted, Repligen's shares have run up a lot since we first told you about the company. That's one reason we wanted to find another stock like it – which led us to Cambrex.

But Repligen, like Cambrex, has a great long-term outlook.

And Michael believes Cambrex will pay off even more quickly than that.

The Archimedes Effect

At a recent price of $43.70, the company had a market value of about $1.3 billion.

"For Cambrex, earnings have grown at an average annual rate of about 25% in each of the past three years," Michael said. "At that rate, profits could double in less than 36 months. Because share prices tend to follow earnings growth, we're looking at a stock with a lot of upside. I'm projecting price appreciation over the next three years of roughly 60%."

Given the contrary nature of stocks and the financial markets in general in recent weeks, Michael suggests breaking your position into two or three equal-sized tranches. Buy the first third or half of your intended position at current market prices. And add to your position on pullbacks.

It's a support-service type of stock. But don't let that deter you: It serves growing markets – and is growing itself.

And though this is a simple strategy, the profits can still be huge – as our Repligen recommendation proves.

Michael's talk about Cambrex – and our simple "pick and shovel" strategy – took me back to the Lego League and our focus on simple machines earlier this year.

With a simple machine – as with a simple investment strategy – remarkable results are possible.

As the Greek scientist Archimedes once said, given a long enough lever (one of the simplest of simple machines) – and a place to stand – it's possible to move the earth.

[Editor's Note: Unless otherwise directed, as we've done here, we recommend investors employ a 25% "trailing stop" on all holdings.]

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