Those were the words of Genentech’s CEO, Dr. Arthur Levinson, when interviewed recently by The Wall Street Journal.

Levinson says that money spent on the battle against cancer totals $15 billion per year. That means that thirteen-hundredths of one percent of the U.S. gross domestic product is spent fighting the leading killer of Americans under the age of 85.

He laughs at the notion that cancer drugs are putting a financial strain on the United States.

To put that $15 billion total in perspective, Italy spends $17 billion a year on defense. Australia and Brazil each spend about $13 billion. The U.S. defense budget, as you know, is near $500 billion. Fifteen billion dollars seems like an immaterial amount to fight our greatest killer.

You can make budget comparisons all day long, but the fact remains that a year’s worth of Avastin, a Genetech treatment for colon and lung cancer, runs more than $50,000 per year, per patient. That’s not immaterial.

And it’s high drug costs and the pressure coming from Capitol Hill to reduce them that led to one of our main investment themes of 2007…

It’s called the Medicare Prescription Drug Price Negotiation Act of 2007. It would make the Federal Government in charge of negotiating Medicare drug prices, rather than the current method of leaving that to pharmacy benefit managers.

The White House is against this change. Big Pharma is against it, as it’s another move to squeeze margins. And right now, the bill has been read twice in the Senate and referred to the Finance Committee.

The investment recommendation we’ve made on this theme for Small-Cap Strategy Report readers is already up 22.15% with more room to climb.

But who ultimately controls Medicare drug price negotiations is an overhang, or “black cloud” over the whole pharmaceutical industry. And in the last few months, the industry, as shown by the AMEX Index below, has been in a holding pattern, partially because it awaits an outcome…

The investment we recommended in SCSR is a way to profit no matter who gains control of drug pricing. But if you feel that the White House is likely to win this battle, as we do, then an investment to consider is the SPDR S&P Pharmaceuticals (XPH: AMEX) exchange traded fund. It essentially tracks the performance of the S&P Pharmaceuticals Select Industry Index, before expenses.

Look for this fund to appreciate as visibility on the fate of the Medicare Prescription Drug Price Negotiation Act of 2007 gets clearer…

Until next time,
Craig
June 14, 2007

P.S.: The Amex Pharmaceutical Index is a smart play on this trend — and I’ve also found one small pharmaceutical company set to show you big gains as the Medicare Prescription Drug Price Negotiation Act of 2007 takes shape.

Small-Cap Medicine Stocks was originally featured in the Penny Sleuth.