Blue Chip Buys in Biotechs

04/01/2015 10:00 am EST

Focus: STOCKS

Jim Powell

Principal Analyst, Global Changes & Opportunities

Jim Powell recommends a long-term focus when investing in biotechnology; he sees today's progress as an important step following 25 years of research and investment within the sector. The editor of Global Changes & Opportunities Report focuses on blue chips, including two highlighted here, both companies making progress in cancer treatment.

Steven Halpern:  Our guest today is international investing expert Jim Powell, editor of Global Changes & Opportunities Report.  How are you doing today, Jim?

Jim Powell:  I’m fine, Steven. How are you?

Steven Halpern:  Very good. Thank you so much for taking the time. Much of your investment focuses on long-term investment trends and one of your favorite sectors is biotechnology.  Would you point out how it’s been a developing market now for some 25 years? Could you share your views on the progress this sector has made and its long-term importance to both investors and the public now?

Jim Powell:  Well, the progress is really incredible.  When they first entered the scene 25, or so, years ago, there was a lot of promise about biotechnology that they really weren’t able to fulfill for quite a while.  

It takes a long time to develop these drugs. Genentech for example, estimates that it costs them about $800 million and takes ten or 15 years to bring just one drug to market, and when you have done that, there’s still no guarantee that it’s going to be a success.  

It takes a lot of research, a lot of money, and a lot of time in order to mature, but it is starting to do so. I’m speaking now of the industry and we’re seeing a lot of really wonderful drugs coming along and we see an acceleration in this process. I think what we’re going to see over the next few years is an explosion of new drugs that are making their way through the pipeline and are ready to go through the approval process and wind up on the market.  

Now, the importance, of course, for individuals is that—especially for people with one or another kind of cancer—is that some of these drugs will save their lives. There is no doubt in my mind that some of the people listening to this today will have their lives saved by some of the drugs that are coming out now.

Steven Halpern:  When selecting investments in the biotech area, you emphasize that size does matter and you believe the success in this area greatly favors the blue chips. Could you expand on that?

Jim Powell:  Yes, I really believe that that’s the way most investors should go.  If you have specialized knowledge in medicine or biotechnology, then perhaps you should be looking at some of the small companies and the drugs that they’re working on, but for most investors, you’re far better off with picking one of the majors.  

They have the deep pockets in order to fund the research.  They have the scientists. They have the R&D programs and they’re the ones with the most number of drugs that are coming out, so that’s the way to go for almost everyone is to stay with the majors.  

Steven Halpern:  Now, when you look at the sector right now, you’re particularly optimistic that biotechs are making significant progress against cancer and you highlight two ways to invest in this developing market.  First, you point to Celgene (CELG).  What’s the story here?

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Jim Powell:  Celgene is the third largest biotechnology company.  They’re doing really outstanding work in a variety of fields, of which oncology research is one of them. They have several drugs on the market already.  They are seeing their sales rise very, very steadily.  

It went up 19% last year and they’re expecting another 15% rise over the next five years. They also have a solid balance sheet with about $7.5 billion in cash, so I believe that Celgene is probably…well, I believe Celgene is the best biotech investment that people should make for the next several years.

Steven Halpern:  You also point to Roche Holdings (RHHBY), a Swiss pharmaceutical firm which trades in the US as an ADR.  What’s the attraction with this company?

Jim Powell:  Well, there are two attractions with Roche.  Number one, it has been beaten down because they’ve had some problems with restructuring and they have also seen their net income drop a bit.  The sales are up and that’s not surprising because in 2009, Roche purchased Genentech, which is one of the pioneers in the biotechnology industry.

Genentech has not only quite a number of successful drugs on the market, but when Roche purchased the company, they also got Genentech’s pipeline and they got Genentech’s proven R&D program along with its scientists.  

I think that Roche is also a takeover target, because when biotechnology companies start to become successful, their prices tend to go up by quite a lot and Roche is one of the few that has not had that happen just yet.

Steven Halpern:  Now, finally, on a slightly different topic, regarding your overall market assessment, in your newsletter commentary, you have been suggesting that deflation is an important development for investors to watch.  Is that a concern for biotech investors or do you believe the healthcare sector would be well-situated in a deflationary environment?

Jim Powell:  I think healthcare is going to be largely immune to the effects of the mild deflation that we’re seeing.  As an investor, I am certainly not worried about it. If I were in Europe, perhaps, where it’s a bigger problem, or in Japan I would be more concerned, but not here.

Steven Halpern:  In terms of these holdings, Celgene, Roche, other biotech companies, your view is that these are long-term holds, not something necessarily for traders but something people could own for years to come?

Jim Powell:  Yes, that would be my approach, and if Roche winds up getting taken over and you get a big spike in the price, then you know you’ll want to think about whether you want to take it or hold on for more and that would be depending upon, you know, who is buying it, but I think the approach to take is to look at the long-term growth of this industry.

Steven Halpern:  Again, our guest is Jim Powell, editor of Global Changes & Opportunities Report.  Thank you for taking the time today.  

Jim Powell:  Most appreciative. Thank you.

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