Biotech was the big outperformer for years up until mid 2015. After a big cool down, it looks to be reigniting.
There is a new medicine slowly taking hold over the years. To see it, you should be aware of the little project that, in 1990, the Department of Energy, The National Institutes of Health, and some international organizations began – The Human Genome Project. It was to be a 15 year globally coordinated effort that would map and sequence the human genome completely so that we could begin practicing this medicine.
And they did it. It was pretty much completed around 2003, two years ahead of the 15 year schedule and under budget. It was worth every penny of the roughly $3 billion the US government spent on it (in 1991 money). By the tabulations of FasterCures every $1 spent on the Project has triggered $178 in US economic activity. “An investment in knowledge always pays the best interest” they quote from Ben Franklin. They conclude that “As the largest, single undertaking in the history of life sciences, the Human Genome Project has paid back extraordinary dividends on the U.S. government’s investment.” That total investment of $3 billion has produced, in 2012 alone, genomic endeavors resulting in $31 billion in US GDP, $19 billion in personal income, at a cost of about $2 a year for each US resident. Now that’s a stimulus package.
The Project was pronounced done in 2003, and genomic medicine was eagerly anticipated. But practical, disease killing applications have not exactly been sprinkled on us like magical fairy dust. There is a kind of Moore’s Law at work in getting genomic medicine into our every day life. In the early 2000s it cost about $50 million to get your genome mapped. That has steadily declined to less than $1000 now – something akin to getting a tooth pulled, but less painful. Getting your genome mapped is rapidly becoming a common part of good healthcare.
Investing In Modern Medicine
The approach in “modern” medicine has been to introduce chemicals concocted for a mass audience into your particular body to stop some bad thing it is doing. Because we’re all different, that typically is done at the expense of upsetting the body’s intricate chemical balances, producing a new set of problems. The era of side effects has resulted. The old school drug industry profits, and it’s a whole new wing of the legal profession. Have you noticed that about every third commercial on TV now is a disclaimer that drones on ad nauseam about every bad thing some drug has ever done to anyone? From bleeding, pain with or without vomiting, to other unseemly discussions, it’s getting so you can’t even enjoy a meal while watching your TV. You don’t take two aspirin and call in the morning anymore, you call 1-800-BAD DRUG. A hundred years from now, all this will seem like applying leeches.
Genomic medicine has a basically new approach in that it seeks to fix problems by having our body just do what it was designed to do – genetically. And this can now be tailored to each of our individual genomes. It uses the body’s own processes to fix problems. “Immunotherapy” is all the rage now in biotech and it uses the body’s own immune system to search and destroy disease. A genetically correct body would never get most of our debilitating disorders. It is only when genes are damaged or not working right that we are programmed to problems. As they say in this science, we will stop endlessly treating symptoms, and simply fix the programs.
Unless you’re a doctor, probably the best way is to analyze, not these stocks, but the insiders buying the stocks. There are, of course, the officers of the company; and a sudden rash of buying or selling by them is often a good tell. But I like to focus on another type of buyer – the cross company career buyer. These are the very few who are often highly educated in the medical field and also are 10% owners and/or sit on the boards of several of these companies, and do massive, informed buying.
They also like to run biotech hedge funds and, because they know not only medicine, but the business of medicine, they tend to have dazzling track records of performance. There funds are not for everyone as the downdrafts are huge and the sector risk is extreme. But the buying by these very smart people should command your attention. Kevin Tang is one of those people. He founded Tang Capital Management in 2002. My personal favorite for medical insiders to watch is the Fabulous Baker Brothers (no relation to the 1989 musical). Felix Baker has a Phd in Immunology and is the most massive inside buyer I know of. Julian Baker holds an A.B. Magna Cum Laude from Harvard (social studies) and this blend of intelligence founded Baker Brothers Investments in 2000, which offers their hedge fund, Baker Brothers Advisors, among a family of funds for institutional investing. Together, they are on the boards of several medical companies.
The Bakers’ fund tends to run just a handful of heavy-weighted positions although they spread the money out over nearly a hundred names. What strikes me about the names they buy heavily is the high buyout rate. For example, as tabulated by J3 Information Services, the fund’s holdings, in heavy positions at the end of 2013 were: ACAD, SLXP, XOMA, GHDX, SGEN, PCYC, INCY, and GEVA. Of those eight, four have been bought out at fat premiums. That’s a .500 batting average for takeout home runs in just three years.
The Bakers’ Personal Shopping
These funds do well, but I find it more helpful to look at the yearly progression of the personal buying by the Bakers as they seem to not only know what to buy but when to buy it. When total yearly buying goes over around $20 million, the Bakers tend to do massive personal buying of select stocks, and very big climbs tend to start within three years or so. This only happens with about a half dozen stocks, but when it does, you should pay attention. As an example, let’s look at Incyte Corp (INCY). (click images to view)
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