By Marc Lichtenfeld
Very few Wall Street analysts are calling for the healthcare or biotech sectors to be among the top performers this year.
And I love it.
Why? Two reasons…
- The contrarian in me knows that this usually spells a big opportunity.
- Because Wall Street analysts have a horrendous track record for picking stocks. In fact, The Wall Street Journal has noted that analysts’ least favorite stocks usually outperform their favorite ones by a wide margin.
For what it’s worth, Wall Street expects overall biotech sector revenue to climb by a fairly ho-hum 8% this year.
For starters, I suspect that figure is too conservative. And regardless of what Wall Street thinks, it’s no secret that I’m a big biotech fan, anyway.
And at the moment, it’s easy to see why. As I’ve mentioned, there are several big healthcare trends that bode very well for biotech companies… not the least of which is the big pharma “patent cliff.” Given the drug makers’ shallow pipelines, biotech companies should be attractive acquisition candidates in the near future…
For example, consider just a few companies with new breakthrough drugs that are expected to become blockbusters (among nearly a dozen others):
- Dendreon’s (Nasdaq: DNDN) prostate cancer drug, Provenge.
- Vertex Pharmaceuticals’ (Nasdaq: VRTX) hepatitis therapy, Telaprevir. The drug is expected to receive FDA approval in May and could generate as much as $4 billion in annual sales.
- Human Genome Sciences’ (Nasdaq: HGSI) treatment for lupus.
But these “hotshot” analysts are also overlooking what I think will be the biggest growth area for biotech in the coming months…
The Emerging Market Drug Explosion
I’m talking about emerging markets, such as Brazil, India, China, Russia, Mexico and South Korea.
Right off the bat, places like China, India and South America could see overall drug revenue growth rates as high as 15% per year, versus just 1% to 3% in the United States and Europe.
Drug sales in “pharmerging” markets are expected to hit $400 billion between 2006 and 2020, according to IMS – growth of more than 600%.
And it’s easy to see why…
More People… More Drugs… More Sales
Just like in the United States, emerging market populations are aging. For example, more than 200 million Chinese will be over 65 by 2020. And as people get older, they suffer more illnesses and chronic conditions – and therefore need more medicines and procedures.
Additionally, as the middle classes boom in emerging markets, unhealthy western-style diets become more popular, which leads to more diseases like diabetes. Already, more than 30% of Chinese adults are considered overweight – a figure that’s expected to rise to 50% in the coming years.
According to the International Diabetes Foundation, by 2025 there will be 80 million diabetics in India and 42 million in China. That compares to a forecast of 33 million in the United States by 2030.
Pfizer (NYSE: PFE) recently paid $200 million to partner with Biocon, in order to obtain worldwide rights to the Indian biotech company’s insulin products.
But zero in on the emerging markets’ healthcare growth trend a bit more and you’ll find that a large chunk of the expansion will come from the onset of “biosimilars” – i.e. generic copies of biotech drugs…
Why the Healthcare Heavyweights Are Embracing Emerging Markets
At the moment, there are no biosimilars in the United States and very few in Europe.
But don’t expect this to last long. In some cases, the big biotech and drug companies are even developing biosimilars of their own drugs because they know that their high-priced branded drugs won’t fly in emerging markets.
For example, Amgen (Nasdaq: AMGN) and Biogen Idec (Nasdaq: BIIB) are examining ways to create biosimilars. Merck (NYSE: MRK) and Parexel International (Nasdaq: PRXL) are working together on a similar initiative.
However, some emerging market companies are trying to beat the Americans and Europeans to the punch. In South Korea, for example, Samsung is investing 500 billion won (roughly $446 million) into biosimilars.
It’s easy to see why biotech companies are pouring money into programs outside of the United States and Europe, too. Emerging markets represent a nascent market for these firms.
And while very few have a meaningful presence, that’s starting to change. For example, Celgene (Nasdaq: CELG), which has operations in various emerging markets, should get approval for Revlimid in Russia and Turkey later this year.
Biotech: A Great Investment Now… and for a Long Time to Come
In short, the biotech sector should enjoy a strong year, based on new drug approvals and the growing popularity of therapies that are often more effective and less toxic than traditional pharmaceuticals.
But the move into emerging markets will be attractive for healthcare and biotech companies, due to the massive growth opportunities within them. And looking past 2011, the emerging market healthcare wave should be one that investors can ride for a decade or more.
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