April 28, 2014
- How prescription drug commercials have nearly killed Big Pharma
- The one thing Pfizer, Merck and the rest must do to save themselves… and how to position your portfolio in advance
- Ukraine jitters: Worst U.S.-Russia showdown since the Cuban missile crisis?
- Tracking China’s latest gold moves…. Why gold miners look good again
- Bank of America’s (latest) costly blunder… diving for gold 7,200 feet below the ocean surface… the gold standard’s Achilles’ heel?… and more!
As Monday morning rallies go, this one looks especially stupid.
Of course, that’s assuming “merger and acquisition activity in the pharmaceuticals sector” is what’s driving the rally, as Reuters reports. The media require a “why” for every blip on the big board, and usually reach for a convenient headline — in this case, Pfizer trying once again to buy its British rival AstraZeneca.
No matter: What’s happening in Big Pharma this morning serves to spotlight a type of “flaw” in the stock market that could make you a small fortune. Or even a big one.
Our story begins in 1997. “That’s when the FDA gave its blessing to Big Pharma companies to advertise prescription drugs on TV,” explains Agora Financial investment director Paul Mampilly, “as long as they gave you some basic risk information about the drug.”
At the time, late-night comedians poked fun at the endless side-effect disclaimers about headaches, nausea, vomiting and erections lasting longer than four hours. Who would possibly buy a drug based on a commercial with so many government-imposed downers, right?
Still, “these drug companies saw dollars in this opportunity,” says Paul. “They realized that if they spent their billions on TV advertising, they could make their drugs as well known as Coca-Cola. Then, when you and I went to our doctor, we’d demand drugs by brand. ‘Hey doc, can I have my Viagra please.’ And the pharmaceutical companies got the docs on board by plying them with gifts and speaking fees and trips to Hawaii.”
That first year, the industry spent a modest $220 million advertising prescription drugs on TV. By 2006, the total was $5.41 billion. Paul does the math: “That’s an increase of 2,359% in just nine years.” Yowza.
Because every man wants to live in Viagra’s blue-tinged world…
Clearly, the ads have been a phenomenal success. Too successful for Big Pharma’s own good.
“For 15 years, Pfizer, Merck and some of our most respected companies absconded from their duty to find drugs that we need desperately,” Paul explains. “You know, drugs for cancer. Or for Alzheimer’s and Parkinson’s disease. Or diabetes. No, instead they just went for the easy profits.”
In many cases, they just copied each other’s best-selling drugs. “If Merck developed a cholesterol-lowering drug, then Pfizer would make sure that its scientists created one to sell as well, even if it didn’t really work any better than Merck’s drug.”
But the easy money can’t last forever: “Because they did not invest in medical innovation but just pursued a me-too strategy of copying each other’s big sellers, the big pharmaceutical companies have few new drugs to sell now. Older drugs are steadily going off patent. And few new drugs are in the pipeline.”
Hence, stupid acquisitions like Pfizer going after AstraZeneca. “Pfizer has bought three huge companies like AstraZeneca over the last 14 years for a total of $238 billion,” says Paul. “But Pfizer’s stock market value is just $200 billion. Where did the rest of the value go? If you ask me, it was just wasted, burned up. Pfizer’s stock is still below its 1999 peak level.
“While the Big Pharma companies were splurging on TV ads, small, innovative biotechnology companies with tiny budgets were developing innovative, scientifically advanced drugs that you and I are going to need when we get sick.”
Big Pharma remains in denial right now. But it can’t stay there forever. Soon it’ll have to start bidding — aggressively — for the small fry doing the real innovation.
“This is an opportunity for you to get in cheap,” says Paul, “and buy biotechnology stocks before Pfizer comes to buy them. Then you get to sell your stock at a huge premium.”
Here’s an early sign of what’s to come: Onyx Pharmaceuticals, developer of a critically needed drug for kidney cancer. “On July 1, 2013,” says Paul, “Onyx stock soared by 51% when Amgen outbid Pfizer for the company.
“I believe we are going to see this happen again frequently and soon, and the bidding is going to get more furious next time. I believe this is the golden age for biotech investing because these companies have the drugs that we need. They have the pipelines with new drugs that are the drugs of the future, and finally, we have the cash-rich pharma companies who are desperate to buy them.”
It’s a perfect storm for Pfizer. But for you, it can be a huge opportunity to make big money.
Of course, no one can predict the precise timing of an acquisition. But in recent months, Paul has shown several of us around the office how it is possible to nail the timing of another driver that can power tiny biotech stocks to untold heights. We’re so impressed we’ve taken to calling it “the magic calendar.” If you missed our email about it earlier today, you can see exactly how it works when you click here.
Hey, what do you know? The morning rally is already fizzling.
The Dow industrials are still up about 60 points… because Pfizer is one of the 30 Dow stocks and it’s up 2.5%. Heh…
But the S&P is barely in the green, and the Nasdaq and the Russell are in the red. There’s a world of worry out there…
- The Federal Reserve’s Open Market Committee starts one of its two-day meetings tomorrow, with all the attendant drama
- Bank of America discovered an “error” in its capital planning; a previously announced dividend increase and share buyback have been shelved. Oops
- The U.S. government has imposed new sanctions on Russia, including limits on high-tech exports.
“This is the closest the U.S. and Russia have been to a nuclear confrontation since the 1962 Cuban missile crisis,” says the veteran foreign correspondent Eric Margolis — citing Russian diplomats he met with recently in Europe.
“The chances of an accidental war beginning are growing by the day,” he tells radio host Scott Horton — not least because U.S. special forces are on the ground in eastern Ukraine, according to Margolis’ sources in the U.S. military.
“Any one of these clashes could develop into a major escalating situation, particularly if artillery and aircraft are involved.”
“Western politicians — certainly an entire generation of U.S. political honchos — are petrified of what’s happening,” says Byron King.
And he’s not speaking only of Russia and Ukraine. There’s also China’s rise as a regional power. Thus, the U.S. and the Philippines signed a treaty today; large numbers of U.S. troops will return to the Philippines for the first time since they were kicked out in 1991.
China’s reaction is little surprise: “Given that the Philippines is at a bitter territorial row with China, the move is particularly disturbing as it may embolden Manila in dealing with Beijing,” said the official Xinhua news agency.
“By background, training and temperament,” says Byron, “most elected U.S. politicians are not well versed in big-time international diplomacy. They’re not strategic thinkers in the Naval War College sort of way. At a personal level, they’re out of their comfort zone and have to rely on think tankers and subject matter experts for advice.
“The next few years ought to display entire new levels of budget programming for U.S. defense firms” — notwithstanding talk of tighter budgets in Washington right now. Consider the iShares Aerospace & Defense ETF: It marched in lock step with a rising S&P 500 during 2012 and the first half of 2013… and then broke away decisively last summer. It’s up 60% in two years.
“We’re on the cusp of a new, investable era in the defense sector,” says Byron, “while the ‘end of history’ touted at the end of the Cold War recedes into the distance.”
Gold traders are unimpressed by the geopolitical turmoil — for the moment, they’ve driven the Midas metal back below $1,300, to $1,296.
One of the most powerful trends in gold is starting to change… but we caution the change might not be meaningful.
China’s gold imports via Hong Kong totaled 105.8 metric tons in March. That’s now two months in a row in which the figure is lower than a year earlier…
The mainstream is all but declaring China’s gold grab the last two years to be over. “Chinese demand may be more price-sensitive than we had thought, taking a hit as gold prices climbed too fast,” one trader tells Bloomberg.
But as we’ve long said, China’s gold imports are a black box. Only the Hong Kong figures are disclosed. Imports via Shanghai and Shenzhen are a closely held secret. And as we told you last week, imports are now being allowed through Beijing, too.
“I like gold miners here,” says Matt Insley of our natural-resources team.
“We’ve found a sturdy floor for gold prices above $1,200,” he explains. “It’ll take a large force to push gold below $1,200 and keep it there.
“This chart is all-important,” Matt goes on, “because it tells the tale of the short- to medium-term gold market.
“After hitting a high of $1,900, gold prices marched lower and continued to fall until we found support at $1,200. That is, twice since mid-2013, gold prices tried to push below $1,200, and twice, prices sharply rebounded. The second time this happened, in December 2013, we can consider this ‘confirmation’ of that price support level.”
Not by coincidence, that was the moment the miners started to move. “The reason miners caught a bid is simple,” says Matt: “Up until that point, analysts simply couldn’t get a good read on where the price of gold was heading. Without a reliable commodity price, it was impossible for anyone to grade a miner.
“But with price support at $1,200, the calculators start humming.”
“This is the greatest lost treasure in United States history,” geologist and treasure hunter Bob Evans tells Bloomberg.
Evans set out last week with the crew of the Odyssey Explorer — owned by our friends at Odyssey Marine — to recover the lion’s share of the booty in the wreckage of the SS Central America.
As we mentioned six weeks ago, Odyssey won the contract to recover the coins and bullion from the “Ship of Gold” — which sank during a hurricane off South Carolina in 1857.
The wreckage was located in 1987, and Evans was part of the original salvage effort before it got tied up in two decades of litigation. Now at age 60, he hopes to help recover a haul of metal from the California gold rush that might be worth as much as $86 million. “It’s essentially a four-story collapsed building at the bottom of the sea,” he says.
7,200 feet deep, we hasten to add…
“Too many assumptions,” writes the fellow with whom we’ve been having a back-and-forth about the gold standard. On Friday, we described the guts of Lewis Lehrman’s contemporary gold-standard proposal — setting a price per ounce higher than the cost of production, but without letting nominal wages fall.
“The production cost of gold,” our reader writes, “varies with its location and difficulty of mining, even if equipment and labor costs remain constant, although they may fall due to deflation.
“The last gold standard failed because the defined unit, 1/35th ounce per dollar, was violated by Congress’ financing its overspending by printing more dollars than they had gold to back it. My question remains: Why would this not happen again?
“If we must rely on the discipline of Congress, then why would not a balanced budget amendment accomplish the same as a gold standard?”
“Any gold standard maintained by a government relies on trust in that government,” writes another reader, expanding on the point.
“That is why the only durable gold standard would have nothing to do with the state. It is also not dependent on the particular transaction technology like paper redemption notes, plastic wallet cards, electronic transactions or smartphone apps. That is all about the system of trust relationships with depositories of the underlying gold money (plus silver, platinum or whatever the market accepts).
“The U.S. had close to this standard for the later half of the 19th century, and it was accompanied by 3% unemployment and 6%-plus GNP growth. Your reader who challenged you may have to read a bit to understand the concept to his satisfaction. I know I did.
“What people don’t understand about a currency is that its strength relies on the fiscal prudence of the government, and governments are obviously the least prudent entities around.”
The 5: Well, no argument there.
“I always tell people who say we’re not on the gold standard that, in a way, we are,” Jim Rickards told us in an interview last summer. “You can put yourself on a personal gold standard just by buying gold. In other words, if you think that the value of paper money will be in some jeopardy or confidence in paper money may be lost, one way to protect yourself is by buying gold, and there’s nothing stopping you.”
The 5 Min. Forecast
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