by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, January 18, 2011: Issue #1689
The workers at the restaurants and bars around Union Square in San Francisco have likely just about caught their breath. The 10,000 or so businesspeople who descended on the neighborhood for the J.P. Morgan Healthcare Conference drank their fill of Patron, ate a few tons of filets and guzzled thousands of gallons of Starbucks coffee.
What makes the conference such a big deal is that it’s the largest and most important investor event of the year in the healthcare sector. There are other healthcare conferences put on by investment banks, but nothing comes close to the quality and number of companies and attendees at JPM.
There were two important takeaways that emerged from the conference – themes that I believe will make investors a lot of money in 2012.
The Future is Now
Huge advances are being made in the area of genetics every year. But last Tuesday, when Illumina (Nasdaq: ILMN) announced that it could now sequence an entire human genome in one day, the normally reserved audience started buzzing.
Remarkably, two hours later, Life Technologies (Nasdaq: LIFE) said the same thing, and added that soon it will be able to sequence a human genome in just a few hours.
Genome sequencing is a process that reads the DNA in an organism. It used to take weeks and cost millions of dollars. Today, as I mentioned, it now takes just one day and the cost has come all the way down to $1,000. Later this year, it will be done in hours and costs around $500. Maybe even less.
Understanding the DNA of an organism is like reading the code of a piece of software. It helps scientists understand the way the organism works.
There are many exciting uses for reading DNA. For example, during the E. coli outbreak in Germany last year, scientists were able to read the DNA of the bacterium in order to figure out which antibiotics would work against it and which would not.
In humans, there are several cancers with genetic mutations that doctors know will or will not respond to certain chemotherapies.
The ability to read DNA has outpaced our knowledge of what to do with the information. But as the time and, especially, the cost of reading the genome comes way down, there will be more opportunities for research and significant progress made.
For example, within the decade, every cancer patient will likely have his or her’s tumor’s genome sequenced, so that scientists can collect the data on which genetic mutations are in each kind of tumor.
As all of that information is processed and studied, more effective therapies will be prescribed and developed. Perhaps just as importantly, treatments that don’t work but can cause severe side effects will be avoided.
And cancer isn’t the only disease that will be researched. Practically every major (and probably many minor) health issues will be studied using this information, leading to revolutionary new medicines.
There was another theme at the conference – one that will have a more immediate impact on investors in 2012.
What’s the Deal?
Hear that beeping sound? That’s the sound of the money truck backing up with a delivery to biotech companies.
Large pharmaceutical companies have been on a shopping spree. First, there was the stunning announcement in November that Gilead Sciences (Nasdaq: GILD) would pay $11 billion, an 89% premium, for Pharmasset (Nasdaq: VRUS) in order to obtain its hepatitis C drug that’s still a few years away from being approved.
At the conference, all anyone wanted to ask Bristol-Myers Squibb (NYSE: BMY) CEO Lamberto Andreotti was about the deal his company announced just three days earlier to acquire Inhibitex (Nasdaq: INHX) for $2.5 billion, or an astonishing 163% premium, also to get the rights to a still-in-development hepatitis C drug.
When asked what he thought about the price tag, Andreotti quipped, “I feel much better about $2.5 billion than $11 billion.”
Bankers, analysts and portfolio managers were all talking about the resurgence in mergers and acquisitions in the sector and trying to figure out who would be next.
One hedge fund manager told me he believes Onyx Pharmaceuticals (Nasdaq: ONXX) will be bought this year. Of course, that’s not a total stretch, as the company’s CFO said Onyx’s kidney cancer drug Nexavar makes the company an attractive target.
There are some powerful forces brewing in the sector. The most important is that starting this year, 10,000 people turn 65 every day. The Baby Boomers are becoming seniors. And that’s going to result in a $4-trillion infusion into the healthcare sector over the coming years.
Companies are scrambling to get into position to capture as many of those dollars as they can. One way they’re going to do it is by acquiring smaller companies with great drugs, devices, technology and services.
I expect 2012 to be a game-changing year in healthcare – both in the technology that emerges as well as the corporate landscape as larger companies gobble up smaller ones, in order to keep their pipelines filled and their top and bottom lines growing.