For the past few years, Wall Street has beaten down one of the most lucrative industries in the whole lot of them…biotechs.

Biotechs offer investors with opportunities to get in on breakthrough technologies, while they are still in the lab. Many times, they also offer average people with a way to invest in future cures and solutions to the world’s most dangerous diseases. That’s quite a one-two punch.

So why have investors stopped investing in these ground-floor companies?

As the leader of the free world said, “There’s no question about it. Wall Street got drunk…it got drunk and now it’s got a hangover.”

That’s really the only way to describe what has happened the past few years. If you have ever had a bit too many to drink in your life, you know that you sometimes get a little too focused on certain things, and forget about other things completely. That’s what Wall Street did with the biotech industry…

You see, investors have been too busy buying up investment banks and mortgage fiascos. Now that the dust is starting to settle (even though we expect that to take quite a while), more and more interest is being paid to technologies and biotechs. That hasn’t happened on any large scale since the tech bubble burst.

A few weeks ago, Big Pharma went head first into this recent breakout, when Switzerland-based Roche Holdings offered to buy up the other 44% of Genetech Inc. that it didn’t own. The news of this possible deal sent shares flying 15% overnight.

Just a few days ago, Bristol-Myers Squibb offered to buy ImClone Systems — a small $5 billion biotech — for $60 per share. While that one was instantly rejected it did send ImClone shares flying, giving investors a nice, one-day 40% gain.

These stories are starting to roll in now. There’s a perfectly reasonable explanation for it…

Big Pharma is struggling to keep up with shareholder demands of larger profits, while they are fighting generics and more competition. To combat falling margins, these mega companies are buying up biotechs that have a few promising products in their pipelines. These new products are the future of the industry, and Big Pharma knows it.

All these deals are also bringing new interest to the industry. Investors, who have previously forgotten about the pharmaceutical industry, are just now starting to jump back in. Over the past few weeks, biotechs have outperformed the rest of the market in a big way. This is only the start. Smart money says we have a long way to go from here:

But, if you want to try and call the bottom of the financials flop, or the mortgage bankers’ bankruptcy, be my guest. We’ll be busy looking for the best biotech to own as the industry starts its march north.

Sincerely,
Jim Nelson
August 6, 2008

Biotech Rally Just Beginning was originally featured in the Penny Sleuth.

We don’t have much interest in Big Pharma here. Big pharmaceutical companies simply don’t yield really dramatic returns. Usually, it takes a small-cap or start-up to do that. Until recently, the odds were stacked against small companies, due to the costs of drug approval, which have become enormous.

Regulators may have the right motives, but bureaucracies are necessarily risk averse. Approving a drug that ends up killing a few dozen people unexpectedly will end a career. Refusing to allow a drug onto the market that could save thousands of lives has little career risk. As a result, it has become increasingly difficult and expensive to get a drug to market.

In the last few months, however, we’ve seen a number of new drug treatments based on the convergence of nanotech and biotech. These drugs haven’t come from giant companies, however. They’ve come from small labs and companies thinking outside the traditional pharma box. This trend may help sidestep the FDA barrier while providing remarkable investment opportunities.

The basic strategy being exploited is to use a nanotech structure to increase the efficiency of an existing drug. Contrary to the common misperception, not all nanotech structures are complex or metallic. Many researchers, in fact, prefer the term “molecularly precise.”

One molecularly precise structure of interest is the polymeric micelle. Many of these molecularly precise structures are made of common, benign components that self-assemble under the right controlled conditions. Researchers have found ways to use them to enclose other drug molecules for a variety of purposes. These micelles are not pharmaceutically active themselves, so they offer little biological hazard.

Researchers at Children’s Hospital Boston have used the technique to resurrect TNP-470, one of the first drugs tested that blocks angiogenesis. Angiogenesis is the unnatural growth of blood vessels that enable, among other things, tumor growth. TNP-470 is known to be effective against a broad range of cancers. The problem with the drug is that the body breaks it down easily, requiring high doses that may cause neurological side effects.

New tests on mice of the drug encapsulated in polymeric micelles have shown extraordinary effectiveness. The nanoparticles protect the TNP-470, taken orally and absorbed intact. Once the nanoparticles reach the tumor, they break down, slowly releasing the drug. Because angiogenesis is also involved in macular degeneration and other diseases, the drug and basic technology is of serious interest. Currently, the rights to the convergent drug, lodamin, are held by SynDevRx Inc., which is not yet traded. We’ll be watching as it and similar ventures approach IPO.

Yours for transformational profits,

Patrick Cox
July 24, 2008

The Start to the Convergence Revolution was originally featured in the Penny Sleuth.