The latest from our correspondent High Plateau Drifter,
1. I am always amazed at how difficult is is for people to see the obvious. Take for example Hillary's proclamation that she will cap individuals pharma costs at $250.00. Notice what she did not say. Not a hint that she would sponsor legislation to give medicare-medicaid the power to bargain with pharma companies over drug prices. Nor did she say anything that might lead one to believe she might want to lift the massive barrier to entry of FDA trials that take six to eight years by having the FDA finance trials for any development stage biotech that successfully completes a stage 2 trial of a compound that exploits a new biological mechanism or successfully treats a previously untreated malady. No professional politician is going to take away big pharma's grazing rights among biotech startups with high efficacy novel compounds but that have exhausted the resources of early round investors. Big pharma wastes most of its profits on developing "me too" drugs that are typically third to fifth to market allowing them to flex the expensive and wasteful muscle of their sales forces, competing only marginally on price, if at all.Stay tuned for Part Two tomorrow am!
OK, if that is all true, and nothing of substance will change under Hillary, then why tank the biotech indexes?
The truth is that Hillary was just a catalyst, and not a cause of the selling.
All sophisticated biotech investors know three things. First. the mature biotechs are momentum driven, and they are cyclical and volatile. Second, the mature biotechs will be lucky if their internal development programs will be able to maintain their current revenue streams going forward. There is no way in hell these companies will be able to triple or quadruple those revenue streams so as to justify their current lofty price/revenue ratios. (PE ratios are deceptive because ramping development costs will decrease the PE ratio while throttling back development will increase earnings temporarily.) And third, all biotech investors know that at some point over the next 5 to 10 years the government is going to have to cap its pharma expenditures choking off revenue for "me too" drug development, and capping industry growth and profits.The few companies that can develop compounds that exploit previously unexploited biological mechanisms or treat previously untreated maladies will be portfolio winners, but the industry as a whole will be littered with losers. The index ETFs will be in trouble.