Make the FDA Pay You

Searching for ways to “make the empire pay”…

Since before the tech bust, the folks at the Daily Reckoning has been suggesting that while Americans “think” they’re getting richer… they’re actually heading in the other direction. Yes, that is right we are getting poorer. This proposition has been easier for folks to entertain since housing busted and the financial crisis reversed the “wealth effect” in 2007/2008. What surprises me is why we ignore the innumerable attempts at “wealth extraction” by our own governments.

Empires, to paraphrase economist Paul Craig Roberts, only stay empires because the value of the wealth they extract exceeds the value of extracting them. As long as they can gain from extracting wealth, they’ll nickel-and-dime you in one form or another.

For those with good memories we might remember the solution to this dilemma. I call it “making the empire pay.” The premise was simple….. follow the flow of government spending to a publicly traded company on the receiving end. That way, you could channel some of your tax dollars back into your own pocket.

Examples might be contractor’s on the take for contracting public buildings, hospitals, and municipal utilities.

Today, I look at another, less obvious, form of extraction…… the FDA approval process. According to Avik Roy of the Manhattan Institute, in 1975, the pharmaceutical industry spent $100 million in today’s dollars to properly research and develop a drug to be approved by the FDA.

Today, that cost — including sky-high fees and application costs — is $5 billion. That cost is not only passed on to you — a type of wealth extraction — but it also takes a toll on your health.

Think of all of the beneficial drugs that might have improved your health… but were killed in their crib because of the cost. That’s a form of extraction too.

For more on that, I turn to the much smarter Pete Coyne…

Peter Coyne, following the money and approvals…

“Nearly 70% of Americans are taking a prescription drug,” our biotech guru Stephen Petranek explained to us. “And more than 50% are taking two or more drugs, says a study from the Mayo Clinic.

Editor’s note: Take a gander at your own medicine cabinet….

“Drug sales are at least 10% of all health care dollars spent and a huge part of the U.S. economy. Americans spend more on prescription drugs than people in any other country.”

According to Stephen, in the third quarter of last year, at least eight pharmaceutical companies sold more than $1 billion from July 1-Sept. 30:

  • Abilify, a drug for depression, bipolar disorder and schizophrenia, $1.6 billion
  • Nexium, for acid reflux, $1.5 billion
  • Humira, an anti-inflammatory used to treat arthritis, $1.4 billion
  • Cymbalta, an antidepressant, $1.4 billion
  • Crestor, a statin used to reduce serum cholesterol, $1.3 billion
  • Advair Diskus, two medications used in combination to help asthma patients and to help with other lung disorders such as chronic obstructive pulmonary  disease, $1.2 billion
  • Enbrel, an anti-autoimmune drug used to treat psoriasis and arthritis, $1.2 billion
  • Remicade, used to treat arthritis, bowel diseases like Crohn’s and skin disorders like psoriasis, $1 billion.

The flow of resources to pharma R&D will only become stronger, too. Over the next 15 years, Chris Mayer explained in these pages on Wednesday, over 10,000 Americans will turn 65 years old every day. That means that the population over 65 will shift from 14% to nearly 20%. As more boomers enter retirement… it’s only logical they’ll be spending more and more money on prescription drugs.

Based on Stephen’s and Chris’ statistics, we have three words of advice: Follow the approvals. The strategy is just as lucrative as, say, monitoring Pentagon spending and investing in Northrop Grumman or Lockheed Martin, but more subtle.

Case in point: Chelsea Therapeutics. The company’s been developing a niche drug to treat a rare blood pressure ailment. On Wednesday, an independent panel recommended the drug for approval 16-1, and poof — the stock price more than doubled:

Follow the Approvals

Whether or not the drug actually has a viable future, we don’t know. We know that in March 2012, the FDA denied the same drug’s approval after a similar panel had given it a green light. That didn’t seem to matter, though. The buzz of this week’s news was all it took.

The same was true for yesterday’s example, Intercept Pharmaceuticals (NASDAQ: ICPT). Recall the 45-person firm’s stock exploded over 500% last week. It’s come back down to earth since… but the spike was caused by the unexpected success of its liver disease drug. Just being in the loop about the trial could’ve helped you carve out a piece of the largest one-day spike of its kind on the Nasdaq since 2012.

What Goes Up...

The list goes on… Oculus Innovative Sciences, which jumped 209% in one day after approval… Acadia Pharmaceuticals, with a 939% return… Isis Pharmaceuticals, with a 308% return. Being able to bag these types of big and fast returns means you have to be constantly monitoring biotech companies for breakout moves… announcements (of any kind) from the FDA… or any time that a drug trial has been overlooked.

There’s a lot that goes on during a drug’s journey from the petri dish to the pharmacy. Any little development could send a biotech company’s stock soaring in the blink of an eye. And the best part is that it’s all telegraphed beforehand if you’re keeping tabs on the FDA. The drug tests are scheduled… the applications and studies made public.

Peter Coyne

There will be certain biotech companies — one’s with truly disruptive discoveries — will be good bets in 2014 independent of the sectors short-term movement. They will be harder to find… but they’ll be there.

The FDA, for their part, will do its best to help their cronies and prevent even the simplest and safest drugs from hitting the market. There’s no getting around it.

But if you follow the FDA approvals and media buzz you might be able to capture the inevitable pops in select stocks’ prices… and negate the regulatory process’ negative effects.

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