The biotech industry is poised for a breakout in 2017 after a disastrous 2016. Here’s what you need to know:
2016 was a year marred by political pressure and uncertainty within the biotech industry. Headed by poster boy Martin Shkreli, the biotech industry took a bad fall after Shkreli, the CEO of Turing Pharmaceuticals, upped the price of a malaria medication 5000%. Eventually, Shkreli made his way to congress where even more bad publicity was heaped upon biotech as certain news outlets called Shkreli, “the most hated man in America”
With the Obama administration alleging that certain large biotech firms were involved in price fixing, the whole industry took a tumble. The NASDAQ Biotechnology Index took a hit of 19.6% in 2016. Evidently, there is such thing as bad publicity and the biotech industry felt the brunt of it. Teva Pharmaceutical Industries, a global leader in manufacturing and marketing generic drugs, saw their stock nosedive by 37.2% in 2016.
After the Martin Shkreli goes to congress fiasco, lawmakers on both sides of the aisle pushed hard to pressure these biotech companies to reduce drug prices. The proposed regulations saw investors flock to drop biotech stock.
2017 has been a rebirth for the biotech industry as it rises from the ashes of 2016. Already, the NASDAQ Biotechnology Index is up 9.4%. Investors have already forgotten about the drug scandals that scarred biotech last year.
The new Trump administration has made it clear that they will find ways to deregulate the industry, making it easier for these giant pharmaceutical companies to make a profit. These companies won’t be the subject of investigations from the Department of Justice as President Trump’s pro-business administration pushes through laws.
One of Trump’s proposed changes is to streamline the process that a drug company can get new drugs approved by the FDA. Only 22 new drugs were approved in 2016 amid all the controversy, the lowest total since 2010. You can expect much higher numbers under Trump.
Find the Game Changers
The future looks bright for the biotech industry. In 2015, 88% of all prescriptions were generic drug prescriptions, and that number looks to grow to around 92% by 2020. There is a lot of room to grow within this sector. How does one find the individual stocks that should see a rise in the coming years? You have to find the game changers.
This is what’s known in the industry as “disruption”. When a company finds a way to make your phone smaller, that’s disruption. A company that makes a more effective vaccine, that’s disruption within the biotech industry. A revolutionary idea or product that makes others before it obsolete.
Look for companies that are close to getting a product approved by the FDA. A company like Rigel Pharmaceuticals, Inc. has a new drug candidate that is close to being approved. The stock is low enough now that it will soar if this new drug for chronic ITP (immune thrombocytopenic purpura) is approved.
You can also look to the established players. As noted above, Teva Pharmaceuticals saw its stock plummet during some uneasy months in 2016. They lost a key drug patent, had a CEO resign and had to deal with the aforementioned price fixing scandal. This could be a chance to pick Teva up for a discount. Let’s not forget, this is still the world’s largest generic drug manufacturer.
Generally, the healthcare sector has trended upwards over the last 10 years, outperforming the overall U.S. economy.
*Both series indexed to 100 at January 2012
This graph shows the performance of the overall U.S. economy versus just the healthcare sector. Healthcare, in blue, clearly outpaces the S&P 500. There’s no reason to think 2017 will be different.