As an investor, I’m willing to bet you’ve read everything you can get your hands on about the stock market.
I’m also willing to bet you’ve seen all sorts of articles embellishing just how overvalued sectors – most notably biotechnology – have truly become…
But it’s just not true.
“Valuation metrics in some sectors do appear substantially stretched – particularly those for smaller firms in the social media and biotechnology industries,” warned Federal Reserve chairwoman, Janet Yellen in July 2014.
The warning couldn’t have been more wrong.
In fact, since that fateful day, the iShares NASDAQ Biotechnology Index (IBB) has soared 51%.
Along the way, weak handed investors – doing their best to maintain their equilibrium in an industry fraught with notorious thrill rides – have been scared into believing the sector has topped out.
They’ve been welcomed into a world labeled the top most confusing, ulcerative world of biotechnology.
But that’s just not the case…
In early May 2015, for example, renewed fears of a biotech bubble reemerged as the sector challenged all-time highs. Terrified investors sent the iShares NASDAQ Biotechnology Index from near-$370 highs to $330 in days.
There was no reason for it…
Investors ignored three of the most important biotech catalysts, long-term.
One, new healthcare options are welcoming in folks that never had insurance.
Two, new treatments and technologies have become wildly exciting.
And three, for the next 20 years, 10,000 baby boomers are retiring by the day, driving a need for new healthcare advancements, technologies, and drugs.
As of October 15, 2007, 80 million baby boomers moved into retirement age, retiring 10,000 by the day, on average. As the generation rushes into old age like a colony of ants, healthcare spending and the desire for new drugs is expected to rocket.
In fact, baby boomers are – in large part – responsible for the Hepatitis-C drug stock gains.
The Secret Behind the Hepatitis C Boom
Over the last few years, the Centers for Disease Control and Prevention (CDC) has strongly urged baby boomers to get tested for the virus. More than three millions boomers are thought to be carriers… and not even know.
As a matter of fact, Boomers are five times more likely to be a carrier.
It’s a horrible viral infection that slowly destroys the liver… and can lead to death.
Thankfully, treatment options have been revolutionized thanks to new, better performing therapies that can be taken orally, with shorter treatment periods.
Given that more than 140 million people are infected globally, there’s a reason investors are pouring gobs of cash into related investments.
One of the most successful drugs to hit the market has been Gilead Sciences’ (NASDAQ:GILD) Sovaldi, which did $10.3 billion in sales in its first year on market. The drug – which won FDA approval in December 2013 – has a reported cure rate of more than 90%.
That brings it close to the best selling drug in history with only one year of sales.
Lipitor has held the top position with peak year sales of $13 billion.
Analysts believe Sovaldi sales would have been higher if not for the introduction of GILD’s hepatitis C drug, Harvoni, which produced $2.1 billion in sales since October 2014 approval.
Comparatively, Abbvie (ABBV:NYSE) expects to see first year sales of more than $3 billion in 2015 with cure rates as high as 95% to 100%. Vertex Pharmaceuticals (VRTX:NASDAQ) hepatitis C treatment, Incivek had $1.56 billion in sales in its first year of sales.
Ironically, despite high cure rates, these are some of the most controversial drugs of the last decade because of cost…
Sovaldi costs about $84,000 for a 12-week course of treatment, or $1,000 a day.
Health insurance and government programs are up in arms over that. Even Congress – with all its financial restraint – questioned the price tag.
And why not…
That’s a lot of money for necessary treatment.
But we have to consider that for the first time history, 140 million people chronically infected can be treated and cured up to 100% of the time.
We also have to consider that older drug regimens cost just as much with only 75% cure rates, requiring 24 or 48 weeks of treatment with horrible side effects. Congress also forgets that the last wave of hepatitis treatments cost well over $100,000, cured fewer patients, and had horrible side effects.
While Sovaldi costs $84,000, it’s a guaranteed cure, which reduces the eventual economic burdens of liver transplants, liver cancer threats, hospital stays, doctor costs, and eventual death…
But there’s something interesting you must understand about this controversial drug from GILD.
It wouldn’t have been possible without the help of a little known company that specializes in producing drugs for other firms.
That’s where Cambrex comes into play.
The Reveal: Cambrex Corporation (CBM:NYSE)
There’s no doubt the pharmaceutical space is undergoing dramatic changes.
Price wars, pipeline challenges, the FDA, and emerging global markets are forcing companies to shape up or ship out.
Providers to the industry have to transform, too, differentiating offerings to retain long-term customers just to stay afloat.
Those able to adapt quickly are positioning themselves as market leaders.
One of those companies is Cambrex.
As a manufacturing partner with some of the biggest names of Big Phama, CBM stands out as a major player in the biotech space, helping companies big and small develop processes and manufacture clinical and commercial quantities of drugs.
It provides the small molecules to speed development and commercialization of drugs, specializing in what’s known as active pharmaceutical ingredients (APIs), or the parts of drugs that are “active,” or the central ingredient of a drug.
The other part of a drug is known as the excipient, or the substance insider the drug. If the drug were syrup, for example, the excipient would be the liquid used. The API is the chemically active substance created to have an intended effect on the body.
Just to give you an idea of just how explosive the API market is, consider this.
The global market has a current compound annual growth rate (CAGR) of 6.5% up to 2020. That means we’re looking at a $190 billion by the time 2020 rolls around…
That market will be driven by drug patent expirations, biologics, and generic medications.
But I digress…
One of CBM’s biggest clients just happens to be GILD, and the production of GILD hepatitis C drugs, its biggest order to date.
The relationship has – in a single word – been explosive.
GILD has helped CBM deliver double and triple digit gains in most of the last seven quarters. Earnings rocketed more than 600% year over year in Q1 2015 to 29 cents a share. Sales were up 18% to more than $77.5 million. Better yet, the company expects full-year 2015 sales to increase 16% to 20% year over year.
Of course, there’s more to get excited about.
The company is widely expected to see strong growth moving forward. Analysts expect full year 2015 EPS to grow 29% to $1.72. They also see 23% growth for 2016, and a 30% increase in 2017.
With 15 active late-stage clinical projects, the company believes that four of them have an ability to generate well over $10 million in annual API revenue. Another eight could generate between $5 million and $10 million.
The opportunity is endless.